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Investors Turn on KeyCorp

The bank is hit by light revenue growth.


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dropped 5% after the Cleveland-based bank's first quarter came up light on the revenue line.

Key reported first-quarter income from continuing operations of $358 million, or 89 cents a share, up from the year-ago $274 million, or 66 cents a share, for the first quarter last year.

But factoring the sale of McDonald Investments branches and the Champion Mortgage loan origination platform, earnings were 68 cents a share -- 3 cents below Thomson Financial consensus estimate.

CEO Henry Meyer said in a statement that he expects the sales of those businesses to "improve our risk profile and focus on the company's core relationship business."

Still, analysts were disappointed at the bank's thin margins and soft new loan growth. Key said its net interest margin slipped to 3.5% this quarter from 3.72% for the first three months of 2006.

"During the quarter, we also repositioned the securities portfolio to respond to the changing market conditions," Meyer said. "We expect this change to enhance the company's future performance, particularly in the event of decline in interest rates."

During the company's earnings call, CFO Jeff Weeden said Key has been particularly hampered by the inverted yield curve, in which short-term rates are higher than long-term ones. "As we continue to see tight spreads overall and consumer preferences continue to shift to CDs, as what they perceive to be higher rates, that has had an impact on us," he noted.

The rocky lending environment has caused Key to lower EPS guidance for 2007 to $2.80-$2.95 per share from a previous $3.

Nonperforming assets increased 29% to $353 million in the first quarter. Nonperforming assets represented 54 basis points of total loans in the quarter compared with 44 basis points in quarter prior.

Adding to the company's troubles was weak activity in its residential business. "If you look at the volume we have talked about for the last 18 months, we've slowed in certain areas, specifically the condo and homebuilder business," explained Tom Bunn, president of Key investment banking and head of national banking. Weeden added that the company has reduced its exposure in condo lending.

Key is still positive about the outlook for business in the future. "We're seeing a little bit of negative migration on the homebuilder side but feel pretty good about the quality and our ability to manage that portfolio," commented Chuck Hyle, chief risk officer.

Shares fell $2.08 to $36.50.