KeyCorp Beats as Expenses Decline (Update 1)

  • First-quarter net income from continuing operations of $196 million, or 21 cents a share.
  • Earnings beat the consensus EPS estimate of 20 cents.
  • $15 million, or a penny a share, in Q1 costs for efficiency initiative.
  • Noninterest expense down 7% quarter-over-quarter.

Updated from 8:53 a.m. with afternoon market action and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- KeyCorp ( KEY) on Thursday reported a significant decline in overhead expenses during the first quarter.

The Cleveland-based regional lender reported first-quarter net income from continuing operations attributable to common shareholders of $196 million, or 21 cents a share, increasing from $190 million, or 20 cents a share, in the fourth quarter, and $195 million, or 20 cents a share, in the first quarter of 2012.

First-quarter earnings came in ahead of the 20-cent EPS estimate among analysts polled by Thomson Reuters.

The first-quarter results included $15 million, or a penny a share, in charges related to the company's expense reduction initiative. KeyCorp said it expected to see its expense run rate decline by about $105 million on an annualized basis.

When discussing the company's "Fit for Growth" plan for lowering expenses, KeyCorp CEO Beth Money said in a statement that the company had made "significant progress toward our $200 million goal by the end of 2013," adding that "during the second quarter we expect to make further progress on our efficiency efforts as we consolidate branch locations and continue to work toward creating a variable cost base."

The company also said that when it completes the previously announced sale of Victory Capital Management and Victory Capital Advisors in the third quarter, it will book an after-tax gain of between $145 million and $155 million.

KeyCorp's first-quarter noninterest expense totaled $681 million, declining from $734 million in the fourth quarter, but increasing slightly from $679 million in the first quarter. First-quarter personnel expense totaled $391 million, declining from $422 million in the fourth quarter, but increasing from $372 million a year earlier.

Personnel costs declined from the fourth quarter because of higher severance costs in the prior period, and also because of declines in technology contract labor expenses and employee benefit expenses during the first quarter. Personnel costs were up year over year, because many of the same items, including technology contract labor and severance costs, increased from the first-quarter of 2012.

First-quarter net interest income was $583 million, declining from $601 million in the fourth quarter, but increasing from $553 million in the first quarter of 2012. The sequential decline in net interest income reflected a lower number of days in the quarter, but also a narrowing net interest margin, which is the spread between the average yield on loans and investments and the average cost for deposits and borrowings.

The first-quarter net interest margin was 3.24%, narrowing from 3.37% the previous quarter, but widening from 3.16% a year earlier.

KeyCorp's average total loans grew 1.5% sequentially and 6.5% year over year, to $52.6 billion in the first quarter. Average commercial financial and agricultural loans were up 4% quarter over quarter and 16% year over year, to $23.3 billion.

First-quarter noninterest income totaled $425 million, declining from $439 million in the fourth quarter and $442 million in the first quarter of 2012. The sequential decline mainly reflected a 28% drop in investment banking revenue to $79 million. The year-over-year decline reflected a $20 million gain on the early termination of a lease, booked in the first quarter of 2012.

Investors were less than thrilled, sending KeyCorp's shares down over 1% in afternoon trading, to $9.43.

Jefferies analyst Ken Usdin rates KeyCorp a "hold," with a price target of $10.50, and said in a note to clients after the earnings release that the company's expenses were "in good shape."

"Lower personnel costs drove the majority of the sequential improvement, but most other lines (occupancy, professional fees, marketing) were lower as well. Some of these line items could revert higher, but the starting point is simply better," Usdin wrote.

KeyCorp's March 31 estimated Basel III Tier 1 common equity ratio was a very strong 10.3%. According to Usdin, KeyCorp "continues to be among the best excess capital stories in our coverage universe."

KeyCorp's shares closed at $9.53 Wednesday, returning 14% this year, following a 12% return during 2012. The shares trade just below their reported March 31 tangible book value of $9.78, and for 9.9 times the consensus 2014 EPS estimate of 96 cents. The consensus 2013 EPS estimate is 87 cents.

Following the completion of the Federal Reserve's annual bank stress tests in March, KeyCorp raised its quarterly payout to 5.5 cents from 5 cents a share, and the company's board of directors authorized share repurchases of up to $426 million through the first quarter of 2014. The company also received regulatory approval to put the gain from the Victory sale toward additional share repurchases.

The shares have a dividend yield of 2.31%.

KEY Chart KEY data by YCharts

Interested in more on KeyCorp? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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