Key Shares Dip on Loan Worries

KeyCorp(KEY Quote) shares slid more than 11% Wednesday after the bank said it expects to charge off more debt than it previously expected due to soured loans to homebuilders.

The Cleveland-based bank said in a Securities and Exchange Commission filing late Tuesday that it expects net loan charge-offs this year to be in the range of 1% to 1.30% of average loans, up from a previous estimate of 0.65% to 0.90% of loans. Key said in the filing that charge-offs in the second quarter and possibly the third quarter would run "above this range as [Key] deals aggressively with reducing exposures in the residential homebuilder portfolio."

Key also expects "elevated" net loan charge-offs in its education and home equity loan portfolios.

As the economy worsens, banks with exposure to hard-hit housing areas such as the Midwest, California and Florida have been struggling with their residential and commercial real estate exposures. Two other Midwest banks, National City(NCC Quote) and Fifth Third(FITB Quote), have also been hard hit by the housing downturn.

Key announced in December that it would cease conducting business with "out of footprint" homebuilders, after recording additional reserves to address continued weakness in the housing market. It also said it was exiting "dealer-originated home improvement lending activities," which involve prime loans but are largely out-of-footprint, Key says.

Several equity analysts slashed their earnings estimates for this year and next year on Key.

"Management indicated that while the company is being more aggressive in reducing its exposure to residential homebuilders and the related problem areas, it is also seeing a more recent decline in the housing market," according to Peter Winters, an analyst at BMO Capital Markets, a unit of Bank of Montreal.