Key Takes a Charge, Raises Capital

KeyCorp shares plunged on the news, dropping 17% to $13.03, a loss of $2.67.

On a positive note, Moody's(MCO Quote) affirmed its ratings and stable outlook on KeyCorp. The holding company is rated A2 for senior debt and the company's lead bank, KeyBank National Association, is rated B- for bank financial strength and A1 for deposits.

Moody's noted that Key has considerable construction and commercial real estate exposure, and its consumer book includes a sizable marine portfolio and a large, though currently well-performing, directly originated home equity portfolio. In addition to its robust capital position, Key's ratings continue to be supported by a healthy parent company liquidity profile and good geographic and business line diversity.

Key isn't the only bank to face lease-related tax problems. In April, Wachovia(WB Quote) said that it expected to record a charge of between $800 million and $1 billion in the second quarter after a similar adverse ruling.

On Wednesday, before Key's announcement, Goldman Sachs analyst Lori Appelbaum had noted that banks have been losing these types of cases. She said she expected Key to cut its dividend and raise capital, lowering her 12-month target price to $22 from $25.

Regional banks have faced many challenges due to nonperforming loans and writedowns. Credit has tightened and loan issuance, a major source of income for banks, has dropped tremendously. Banks like National City (NCC Quote), Fifth Third Bancorp(FITB Quote) and Huntington Bancshares(HBAN Quote) have experienced large stock-price declines, and the S&P 1500 Regional Banks Index decreased 13.3% year to date.