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KeyCorp's (KEY) Q2 Earnings Miss on High Costs, Provisions
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Higher expenses and provisions led KeyCorp.’s (KEY - Free Report) second-quarter 2016 adjusted earnings from continuing operations of 27 cents per share to miss the Zacks Consensus Estimate by a penny. The company had reported the same earnings per share a year ago.
In addition to a significant rise in provision for credit losses and operating expenses, a decline in non-interest income was there to dampen the results. These negatives were partially offset by an increase in net interest income. Also, a steady rise in loans and deposit balances as well as strong capital ratios were the positives.
Including non-recurring merger-related charges of $45 million, Keycorp’s net income from continuing operations came in at $193 million, down 16.1% from the prior-year quarter.
Revenues Declined and Expenses Increased
Total revenue decreased 0.1% year over year to $1.08 billion. This compared unfavorably with the Zacks Consensus Estimate of $1.09 billion.
Tax-equivalent net interest income grew 2.4% year over year to $605 million. The rise was driven by higher earning asset balances and a rise in earning asset yields. However, taxable-equivalent net interest margin from continuing operations fell 12 basis points (bps) year over year to 2.76%.
Non-interest income was $473 million, down 3.1% from the year-ago quarter. The fall was mainly due to investment banking and debt placement fees (down 30.5%), consumer mortgage income (25.0%), operating leasing income and other leasing gains (25.0%) and corporate-owned life insurance income (6.7%).
Non-interest expense jumped 5.6% year over year to $751 million, due to rise in both personnel as well as non-personnel expenses.
Healthy Balance Sheet
As of Jun 30, 2016, average total deposits came in at $73.9 billion, up 3.2% from the prior quarter. Further, average total loans were $61.1 billion, up 1.6% from Mar 31, 2016.
Credit Quality Deteriorated
Provision for credit losses increased to $52 million from $41 million in the prior-year quarter.
Additionally, net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.28%. Also, KeyCorp’s allowance for loan and lease losses was $854 million, up 7.3% year over year.
Further, nonperforming assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 1.03%, up 28 bps year over year.
Capital Ratios Show Improvement
KeyCorp's tangible common equity to tangible assets ratio was 9.95% as of Jun 30, 2016, up from 9.86% as of Jun 30, 2015. In addition, Tier 1 risk-based capital ratio was 11.43% versus 11.11% as of Jun 30, 2015.
The company’s estimated Basel III Tier 1 common ratio was 11.12% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.
Our Take
Persistent decline in KeyCorp’s net interest margin remains a major concern. Moreover, increased dependence on home equity and commercial real estate loans increases the exposure of the company’s profits to these avenues. Further, we remain concerned about the impact of stringent regulations in the near term.
However, restructuring initiatives being undertaken by the company will be supported by a robust balance sheet position. Further, an efficient organic growth strategy should work in its favor.
Keycorp currently carries a Zacks Rank #4 (Sell).
Performance of Other Major Banks
Comerica Incorporated’s (CMA - Free Report) second-quarter 2016 earnings per share of 77 cents surpassed the Zacks Consensus Estimate of 68 cents. Elevated net interest income and non-interest income were the upsides. However, higher expenses and increased provisions acted as headwinds.
U.S. Bancorp’s (USB - Free Report) reported second-quarter 2016 earnings per share of 83 cents beat the Zacks Consensus Estimate by 2 cents. Organic growth was driven by higher revenues along with elevated average loans and deposits. However, increase in expenses and provisions were a major drag.
SunTrust Banks, Inc. (STI - Free Report) posted second-quarter 2016 adjusted earnings of 89 cents per share, which outpaced the Zacks Consensus Estimate of 87 cents. Results reflected an improvement in net interest income and a rise in non-interest income. However, a jump in provision for credit losses and marginal rise in operating expenses were the downsides.
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KeyCorp's (KEY) Q2 Earnings Miss on High Costs, Provisions
Higher expenses and provisions led KeyCorp.’s (KEY - Free Report) second-quarter 2016 adjusted earnings from continuing operations of 27 cents per share to miss the Zacks Consensus Estimate by a penny. The company had reported the same earnings per share a year ago.
In addition to a significant rise in provision for credit losses and operating expenses, a decline in non-interest income was there to dampen the results. These negatives were partially offset by an increase in net interest income. Also, a steady rise in loans and deposit balances as well as strong capital ratios were the positives.
Including non-recurring merger-related charges of $45 million, Keycorp’s net income from continuing operations came in at $193 million, down 16.1% from the prior-year quarter.
Revenues Declined and Expenses Increased
Total revenue decreased 0.1% year over year to $1.08 billion. This compared unfavorably with the Zacks Consensus Estimate of $1.09 billion.
Tax-equivalent net interest income grew 2.4% year over year to $605 million. The rise was driven by higher earning asset balances and a rise in earning asset yields. However, taxable-equivalent net interest margin from continuing operations fell 12 basis points (bps) year over year to 2.76%.
Non-interest income was $473 million, down 3.1% from the year-ago quarter. The fall was mainly due to investment banking and debt placement fees (down 30.5%), consumer mortgage income (25.0%), operating leasing income and other leasing gains (25.0%) and corporate-owned life insurance income (6.7%).
Non-interest expense jumped 5.6% year over year to $751 million, due to rise in both personnel as well as non-personnel expenses.
Healthy Balance Sheet
As of Jun 30, 2016, average total deposits came in at $73.9 billion, up 3.2% from the prior quarter. Further, average total loans were $61.1 billion, up 1.6% from Mar 31, 2016.
Credit Quality Deteriorated
Provision for credit losses increased to $52 million from $41 million in the prior-year quarter.
Additionally, net loan charge-offs, as a percentage of average loans, increased 3 bps year over year to 0.28%. Also, KeyCorp’s allowance for loan and lease losses was $854 million, up 7.3% year over year.
Further, nonperforming assets, as a percentage of period-end portfolio loans, other real estate owned properties assets and other nonperforming assets were 1.03%, up 28 bps year over year.
Capital Ratios Show Improvement
KeyCorp's tangible common equity to tangible assets ratio was 9.95% as of Jun 30, 2016, up from 9.86% as of Jun 30, 2015. In addition, Tier 1 risk-based capital ratio was 11.43% versus 11.11% as of Jun 30, 2015.
The company’s estimated Basel III Tier 1 common ratio was 11.12% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.
Our Take
Persistent decline in KeyCorp’s net interest margin remains a major concern. Moreover, increased dependence on home equity and commercial real estate loans increases the exposure of the company’s profits to these avenues. Further, we remain concerned about the impact of stringent regulations in the near term.
However, restructuring initiatives being undertaken by the company will be supported by a robust balance sheet position. Further, an efficient organic growth strategy should work in its favor.
Keycorp currently carries a Zacks Rank #4 (Sell).
Performance of Other Major Banks
Comerica Incorporated’s (CMA - Free Report) second-quarter 2016 earnings per share of 77 cents surpassed the Zacks Consensus Estimate of 68 cents. Elevated net interest income and non-interest income were the upsides. However, higher expenses and increased provisions acted as headwinds.
U.S. Bancorp’s (USB - Free Report) reported second-quarter 2016 earnings per share of 83 cents beat the Zacks Consensus Estimate by 2 cents. Organic growth was driven by higher revenues along with elevated average loans and deposits. However, increase in expenses and provisions were a major drag.
SunTrust Banks, Inc. (STI - Free Report) posted second-quarter 2016 adjusted earnings of 89 cents per share, which outpaced the Zacks Consensus Estimate of 87 cents. Results reflected an improvement in net interest income and a rise in non-interest income. However, a jump in provision for credit losses and marginal rise in operating expenses were the downsides.
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