(Adds credit rating activity, branch network, details, updated stock price, paragraphs 1-2, 8, 10, 15)
By Jonathan Stempel
BANGALORE, June 12 (Reuters) - KeyCorp (KEY.N), a large U.S. Midwest regional bank, said it plans to raise $1.5 billion in equity capital and cut its dividend in half after losing a federal tax case over leases, causing its shares to plummet.
Shares of KeyCorp were down $2.96, or 18.8 percent, at $12.75 in afternoon trading on the New York Stock Exchange, after touching their lowest level, $12.69, since 1995.
The Cleveland-based bank said the ruling will result in a $1.1 billion to $1.2 billion second-quarter charge, covering all leveraged lease transactions it is contesting.
It plans to cut its quarterly dividend per share to 18.75 cents per share from 37.5 cents to save $200 million a year, reflecting what Chief Executive Henry Meyer called “current economic realities.” The bank had raised its dividend for 43 straight years.
KeyCorp also announced plans to boost loan reserves by about $600 million in the second quarter, and said full-year net charge-offs should be $750 million to $1 billion.
On May 27, it had said charge-offs might be twice as high as it had forecast, citing exposure to residential homebuilders, and in its education and home improvement loan portfolios.
KeyCorp joins a growing number of rivals raising equity capital and lowering their dividends this year as loan losses mount.
The bank said it plans to raise capital by offering common stock and convertible preferred shares, diluting the holdings of existing shareholders. Its market value was about $6.8 billion on Wednesday, Reuters data show.
“KeyCorp stubbed its toe,” said Terry McEvoy, an analyst at Oppenheimer & Co in Portland, Maine, who has a “perform” rating on the bank. “To have to cut the dividend after raising it for multiple decades reflects poorly on management, especially coming just two weeks after boosting the charge-off outlook.”
A KeyCorp spokesman declined further immediate comment. KeyCorp operates roughly 985 branches, including many in New York and the Pacific Northwest.
The bank said the projected charge follows a May 28 ruling by Judge James Gwin of the U.S. District Court in the Northern District of Ohio in the so-called AWG Leasing Litigation.
KeyCorp said it may appeal this ruling, which concerned taxes owed from 1999 to 2003.
Had the court ruling been favorable, “we probably would not have considered the capital-raising actions,” Meyer said in a statement. “The ruling forced our hand.”
Another large bank, Wachovia Corp WB.N, in April said it might take a $1 billion charge because of another federal court decision over taxation of leveraged leases.
Credit agencies affirmed KeyCorp’s medium investment-grade ratings. Moody’s Investors Service said the bank’s capital, including the sum being raised, should suffice to cover further pressure on asset quality from a weak housing market or economy.
KeyCorp said its preferred securities may carry a 7.25 percent to 7.75 percent dividend yield and a 20 percent to 25 percent premium, and be priced later Thursday.
Citigroup Global Markets Inc is arranging the offerings, with KeyBanc Capital Markets Inc, Merrill Lynch & Co, Morgan Stanley and UBS Securities LLC serving as joint lead managers.
KeyCorp had long been considered a possible buyer of other banks, but Oppenheimer’s McEvoy said the stock decline may put that on hold. He also said KeyCorp may be a less attractive takeover target.
“This could delay Key being a buyer of other banks, especially if its stock falls below tangible book value,” which may be $12.63 per share at the end of June, McEvoy said. “It’s (also) very difficult for any buyer doing due diligence on any bank’s loan portfolio to pay a premium.”
Shares of KeyCorp closed Wednesday about 58 percent below their 52-week high set last July, Reuters data show. (Editing by Gerald E. McCormick and Derek Caney)