Updated from 11:25 a.m. EST
As Midwestern banks release their fourth-quarter earnings statements, investor reactions appear to have less to do with bottom-line results than with companies' ability to set aside loss provisions fast enough to compensate for deterioration in their loan portfolios.
both recorded fourth-quarter losses on Thursday. While KeyCorp posted a loss from continuing operations of $524 million, or $1.13 a share, vs. a profit of $22 million, or 6 cents a share, a year ago, shares closed up 5.3% to $7.04.
Fifth Third swung to a loss of $2.2 billion, or $3.82 a share, from a profit of $16 million, or 3 cents a share, in the year ago quarter. Shares plummeted 28.6% to $2.85.
The relative magnitude of the losses certainly explains some of the disparity in price action. However, several key measures of the companies' balance sheets reveal additional reasons why the market took Key's results in stride, while hammering Fifth Third for its results.
KeyCorp reported an annualized ratio of net charge-offs to average loans for the fourth quarter of 1.77%, and its ratio of loan-loss reserves to total loans was 2.36%. Fifth Third, on the other hand, said its annualized ratio of net charge-offs to average loans was a hefty 7.5% in the fourth quarter. Its ratio of loan-loss reserves to total loans was 3.31%.
So although KeyCorp provided itself with less of a cushion for losses -- 2.36% vs. Fifth Third's 3.31% -- the rate at which it was charging off bad loans was far lower. In part because Fifth Third's loan portfolio was deteriorating much faster than Key's, it had to provision more money against further losses.
The rapid decline in Fifth Third's portfolio could signal heightened vigilance and aggressive balance-sheet actions in a tough environment. However, it could also signal that if Fifth Third's assets continue to deteriorate at such a rapid pace, its rate of provision may not be enough. By comparison, KeyCorp looks to be in better shape.
Another way to measure the banks' performance is to compare the increase in total charge-offs from their loan portfolios to the amount of money it has received from the government. Under the Treasury Department's Troubled Asset Relief Program (TARP), Fifth Third received $3.4 billion in government funds in the fourth quarter, while charging off $1.63 billion from its loan portfolio. KeyCorp, meanwhile, got $2.5 billion in TARP funds, and charged off $342 million.
In other words, Fifth Third's charge-offs amounted to 47% of the money it got from TARP, while Key charged off 14%. By that measure, Fifth Third is burning through its TARP much faster than Key is.
"Economic conditions have deteriorated across our footprint and have placed both our consumer and commercial loans under significant stress," Fifth Third CEO Kevin Kabat said in a statement. The company's fourth-quarter observations also were not particularly heartening: "Loss experience overall continues to be primarily associated with commercial residential builder and developer loans and consumer residential real estate loans, and to be disproportionately concentrated in Michigan and Florida."
As the housing market continues to sink and the economy worsens, investors are interested in how banks are able to shore up their balance sheets and absorb additional potential losses. Although profitability is nice, focus has shifted to how companies' loans are doing and how much money they can allocate to stem additional pain.
The change in focus was apparent as other regional banks reported fourth-quarter results Thursday.
was getting hammered, down 25% in early trading after the company said it lost $417.3 million, or $1.20 a share, in the fourth quarter. A year ago, the company had made a profit of $75.1 million, or 17 cents a share. Analysts surveyed by Thomson Reuters were expecting a profit of 20 cents a share.
Huntington registered an annualized charge-off rate of 5.4%, while increasing its allowance for credit losses to 2.3% of total loans. It charged off $560.6 million from its loan portfolio in the fourth quarter, while receiving $1.4 billion in TARP capital.
, meanwhile, reported net income of $20 million for the fourth quarter, compared to $28 million in the third quarter and $119 million in the fourth quarter of 2007.
Nonperforming assets, including nonaccrual loans, accruing loans past due 90 days or more and repossessed real estate totaled $1.1 billion as of Dec. 31, or 1.68% of total assets, increasing from 1.51% the previous quarter and 0.79% at the end of 2007.
The $192 million provision for loan losses exceeded Comerica's $133 million in net loan charge-offs during the fourth quarter. The annualized ratio of net charge-offs to average loans for the quarter was 1.04% and loan loss reserves covered 1.52% of total loans.
Comerica received $2.25 billion in TARP funds in the fourth quarter, and recorded net loan charge-offs of $133 million.
Huntington shares closed down 30.6% to $3.20, while Comerica added 9.4% to $15.16.
Philip van Doorn contributed information to this report.