STT State Street Corporation

KeyCorp’s (KEY) first quarter 2011 net income from continuing operations of 27 cents per share substantially outpaced the Zacks Consensus Estimate of 15 cents.

Net income from continuing operations for the reported quarter leaves out accelerated amortization of the discount on the repurchased preferred shares from the U.S. Treasury of $49 million. Considering this one-time charge, KeyCorp reported net income from continuing operations of $184 million or 21 cents per share compared with a net loss from continuing operations of $98 million or 11 cents per share in the prior-year quarter.

During the quarter, KeyCorp repaid its outstanding $2.5 billion Troubled Asset Relief Program (TARP) funds. The company repurchased all 25,000 shares of its Fixed-Rate Perpetual Preferred Stock, Series B, which were originally issued in December 2008 as part of its participation in TARP.

Results primarily benefited from growth in non-interest income, lower non-interest expense and improvement in provision from credit losses. Furthermore, with the repayment of TARP, KeyCorp has been able to remove extra financial burden of preferred dividends that it used to pay to the U.S. Treasury. However, lower net interest income and average earning assets were among the negatives.

Including discontinued operations, KeyCorp’s net income for the reported quarter came in at $173 million compared with a loss of $96 million in the year-ago quarter.

Quarter in Detail

Total revenue for the reported quarter came in at $1.061 billion, down 1.9% from $1.082 billion in the prior-year quarter. Total revenue also missed the Zacks Consensus Estimate of $1.082 billion.

Tax-equivalent net interest income decreased to $604 million from $632 million in the year-ago quarter. However, net interest margin (NIM) improved 6 basis points (bps) year over year to 3.25%, primarily due to reduced funding costs. The benefit of improved NIM was partially offset by a decrease in average earning assets.

Non-interest income for the quarter rose 1.5% year over year to $457 million. The year-over-year growth primarily reflects a $34 million increase in investment banking and capital markets income.

Non-interest expense for the quarter dropped 10.7% year over year to $701 million. Decline in other real estate owned (OREO) expense, operating lease expense, and FDIC deposit insurance premiums primarily kept overall expense lower than the year-ago quarter.

Credit Quality

Credit quality continued show improvement during the quarter. Non-performing assets as a percentage of portfolio loans, OREO assets as well as other non-performing assets decreased 43 bps sequentially to 2.23%. Also, net charge-offs as a percentage of average loans from continuing operations fell 41 bps sequentially to 1.59%.

KeyCorp’s allowance for loan losses was $1.4 billion, or 2.83% of total loans, as of March 31, 2011 compared with $2.5 billion, or 4.34% of total loans, as of March 31, 2010. Provision for loan losses in the reported quarter was a credit of $40 million compared with a charge of $413 million in the prior-year quarter.

Capital Ratios

Capital ratios continued to improve during the first quarter. KeyCorp originated approximately $6.9 billion in new or renewed lending commitments to consumers and businesses during the quarter.

KeyCorp's tangible common equity to tangible assets ratio was 9.16% as of March 31, 2011 compared with 8.19% at the end of the prior quarter and 7.37% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 13.44% in comparison with 15.16% at the end of the prior quarter and 12.92% at the end of the prior-year quarter.

Our Viewpoint

We expect that KeyCorp’s business restructuring actions will continue to fuel its credit quality, capital position and liquidity, although the company’s results are likely to be affected by the volatile operating environment and added costs of maintaining Basel III norms. Moreover, KeyCorp is anticipated to benefit from its focus on community banking expansion.

KeyCorp currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, based on fundamentals, we maintain a long-term “Neutral” recommendation on the shares.

Of KeyCorp's close competitors, State Street Corp. (STT) is scheduled to report its first quarter 2011 earnings on April 19 and Fifth Third Bancorp (FITB) on April 21.

 
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