KeyCorp Unlocks Upside

Midwestern lender KeyCorp ( KEY) reported a 9% drop in fourth-quarter profit, but operating earnings surpassed Wall Street expectations by a wide margin.

The stock added $1.05, or 3.3%, to $32.75.

In the quarter, the Cleveland bank earned $213 million, or 51 cents a share, compared with $234 million, or 55 cents a share, a year ago.

On an operating basis, which excluded a loss sustained on the sale of a home equity loan portfolio, Key earned $290 million, or 70 cents a share. By that earnings metric, the bank surpassed the Thomson Financial consensus estimate by 8 cents.

The bank's total revenue of $1.14 billion, which rose 6.4% from a year ago, was in line with analyst expectations.

Net interest income, the profit from the bank's lending operation, rose 4.1% to $708 million.

Key also offered 2005 earnings guidance that's slightly higher than the current Wall Street consensus of 61 cents a share for the first quarter and $2.54 a share for the full year. The bank now expects to earn between 60 cents to 63 cents a share in the first quarter, and between $2.55 to $2.65 a share for the full-year.

The bank says it does not expect a rise in interest rates to pressure its operating margins.

"We have successfully repositioned our balance sheet in anticipation of rising interest rates and significantly improved our risk profile," said Chairman and CEO Henry Meyer in a prepared statement.

Prudential Equity Group bank analyst Mike Mayo, in a research note, called the quarter a "decent" one for Key. But he's skeptical about Key's ability to again post double-digit growth in commercial lending, a feat that alluded most major banks in 2004.

"We need to gain more confidence that the pace and quality of this growth is sustainable," Mayo said.

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