Oct 18 - Standard & Poor's Ratings Services today said its ratings on
KeyCorp (Key; BBB+/Positive/A-2) are unaffected by the bank's good
third-quarter results, which were generally in line with our expectations.
Keycorp's net income for the quarter was $219 million, down 7.2% from the
prior quarter and up slightly year over year. Net interest income rose 6% from
the previous quarter, partially as the result of the redemption of $707
million in trust preferred securities (TRUPs) and lower funding costs, as
lower-cost deposits from Keycorp's recent acquisition of 37 branches in
Western New York replaced maturing debt and high-rate certificates of deposit.
The net interest margin for the consolidated entity rose by 15 basis points
(bps) quarter over quarter to 3.14% because of these factors, but the early
termination of leveraged leases partially offset this (by 7 bps). Noninterest
income rose 12% from the previous quarter, largely because of a $54 million
gain associated with the redemption of TRUPs and gains related to the early
termination of leveraged leases. Key's noninterest expense rose to $734
million from $714 million quarter over quarter and $692 million year over
year. This increase is the result of expenses associated with Keycorp's recent
branch and credit card portfolio acquisitions. We believe the company remains
on track to reduce expenses by $30 million to $50 million this year as part of
their expense management program that will reduce expenses by $150 million to
$200 million by December 2013.
The bank's balance sheet expanded slightly from the second quarter, with total
assets growing .5% to $87.0 billion. Keycorp's loan portfolio (excluding
discontinued assets) grew 2.5% quarter over quarter and 6.9% year over year,
with commercial and industrial, residential mortgages, home equity loans, and
a newly acquired credit card portfolio contributing to that growth. We expect
that Key's loan portfolio will continue to slowly grow over the next few
quarters, reflecting increased lending opportunities and the gradually
decreasing impact of exit portfolio run-off. Total deposits increased 3.3%,
primarily as a result of Keycorp's recent branch acquisition.
As we expected, credit continues to improve at a decelerating rate. Net
charge-offs (NCOs) from continuing operations increased by 23 bps from the
previous quarter to .86% of average loans; however, 35 bps of this was the
result of updated regulatory requirements. (Loans discharged through Chapter 7
bankruptcy and not reaffirmed by the borrower now have to be charged off to
the collateral's fair value less selling costs and classified as nonaccrual
regardless of delinquency status.) Excluding this, NCOs decreased 19% quarter
over quarter and 43% year over year, to .51% of average loans. Standard and
Poor's adjusted nonperforming assets (NPAs), including all restructured loans,
NPAs from discontinued operations, and accruing loans 90 days or more past
due, were down 7.5% from the previous quarter and 18.9% from the third quarter
of 2011. We expect NCOs to continue to decline in 2013, albeit at a much more
moderate pace than 2012.
Key's capital ratios remained strong, declining slightly quarter over quarter:
the tangible common equity-to-tangible assets ratio fell 5 bps to 10.39%, the
Tier 1 common ratio fell 20 bps to 11.43%, and Tier 1 risk-based capital fell
21 bps to 12.24%. Keycorp's estimated Basel III Tier 1 common ratio is strong
at 10.5%. Key repurchased 9.6 million shares in the third quarter after
repurchasing 10.5 million shares in the second quarter.
Our outlook on Keycorp is positive, given we continue to see improvements in
profitability, loan performance, and capital ratios over the next two years.
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