KeyCorp (KEY)

Q3 2011 Earnings Call

October 20, 2011 9:00 am ET


Jeffrey B. Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council

William R. Koehler - President of Key Community Bank

Beth E. Mooney - Chairman, Chief Executive Officer, President, Chief Operating Officer and Member of Executive Council

Christopher Marrott Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association


Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Jeff K. Davis - Guggenheim Securities, LLC, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Michael Turner - Compass Point Research & Trading, LLC

Bryan Batory - Jefferies & Company, Inc., Research Division

Russell Gunther

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Kevin Barker - FBR Capital Markets & Co., Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Eric B. Anderson - Hartford Financial Management, Inc.



Good morning, and welcome to KeyCorp's 2011 Third Quarter Earnings Results Conference Call. This call is being recorded. At this time, I'd like to turn the call over to the Chairman and Chief Executive Officer, Ms. Beth Mooney. Please go ahead, ma'am.

Beth E. Mooney

Thank you, operator. Good morning, and welcome to KeyCorp's Third Quarter 2011 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer, and available for the Q&A portion of the call are the leaders of our key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler. Also joining us for the Q&A discussion are our Chief Risk Officer, Chuck Hyle; and our Treasurer, Joe Vayda.

Slide 2 is our forward-looking disclosure statement. It covers our presentation materials and comments, as well as the question and answer segment of our call today. Now, if you would, please turn to Slide 3.

This morning, we announced third quarter net income from continuing operations, attributable to common shareholders of $229 million or $0.24 per common share. Our results reflect continued improvement in credit quality, good expense control and the ongoing execution of our business plan. Key's favorable credit quality trends have benefited from the actions taken to improve our risk profile and our early recognition and resolution of problem credits.

Key's net charge-offs to average loans declined to 90 basis points which is our seventh consecutive quarterly improvement and the first time that it has been below 1% since the first quarter of 2008. Nonperforming assets continue to decline during the third quarter, representing the eighth consecutive quarterly decline.

We also reached an inflection point in our loan portfolio. Period-end loan balances increased in the third quarter, reflecting the progress we've made in repositioning our business and a 5.7% increase in our commercial, financial and agricultural portfolio. This increase in our CF&A loans was driven by continued activity in the industrial sector, as well as increases in middle market lending in all 3 of our geographic regions.

The increase in loan balances also reflects our ability to leverage the alignment of our organization across business lines to deliver value to our clients, as well as identify, share and convert new opportunities. We remain focused on our targeted client segments and in supporting small and medium-size businesses. To that end, Key recently announced that it will provide $5 billion in loans to qualified small business owners over the next 3 years. We believe that this is an important initiatives to foster growth and expansion which are critical to job creation.

We are also focusing on sustaining and building noninterest income which is critically important given the headwinds from regulatory changes. As Jeff will discuss in our financial review, consistent with general industry trends, we saw a reduction in the third quarter in some of our market-sensitive businesses, including investment banking and capital markets. This was offset by higher net gains in our principal investing business for the quarter.

We have been active in implementing strategies to impact -- mitigate the impact of the new debit card rule. These strategies are focused on retaining and expanding our engaged client relationships by offering client choices, aligned with their needs and preferences, and we are in the process of reviewing how to reduce the cost structure of our Consumer Payments business.

At a time when many competitors are raising fees and eliminating or deemphasizing customer rewards, we believe that we can differentiate Key in the marketplace by offering exceptional service and a more compelling value proposition to our clients.

In the third quarter, we launched our enhanced relationship rewards program which is our unique response to Durbin and the changing regulatory environment. By staying true to our client insight approach, we took the time to listen to our clients and identified what is important to them. Key's new program will reward customers for taking advantage of our full range of services and for choosing Key as their primary bank. We believe this will help us drive new client acquisition and deepen relationships with our existing clients.

The final item on this slide focuses on capital management. Key ended the third quarter in a strong position, with our Tier 1 common equity ratio at 11.34% and our Tier 1 risk-based capital ratio at 13.55%. These levels should place us in the top quartile of our peer group and position us for a successful transition to Basel III.

Our strong capital position provides us with the flexibility to support our clients and our business needs and evaluate other appropriate capital deployment opportunities. We are currently in the process of finalizing and presenting our 2012 financial plan to our board which will then become our base case for our capital plan submission to our regulators.

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