KeyCorp’s (KEY) third quarter loss from continuing operations of 50 cents per share was substantially worse than the Zacks Consensus Estimated loss of 39 cents. This compares unfavorably to a net loss from continuing operations of 2 cents in the prior-year quarter.

Results were primarily hurt by an increase in the provision for loan losses, write-downs of certain real estate-related investments, higher costs associated with other real estate-owned (OREO) assets and the write-off of certain intangibles. The downside also resulted from a 6.2% sequential increase in loan loss reserve to $2.5 billion, representing 4.00% of period-end loans and 108.5% of non-performing loans.

Provisions for loan losses from continuing operations reached $733 million, compared to $336 million in the prior-year quarter. It exceeded net loan charge-offs by $146 million as KeyCorp continued to add to its reserves.

Tax-equivalent net interest income increased 4.2% sequentially to $599 million. This increase was primarily a result of a 10 basis-point (bps) increase in net interest margin (NIM) to 2.80% as a result of re-pricing maturing certificates of deposit at lower market rates, new or renewed loans with more favorable interest rate spreads, and increasing the securities available-for-sale portfolio using excess cash flows from loan repayments and deposit flows. However, during the third quarter of 2009, KeyCorp terminated certain leveraged lease financing arrangements, which reduced net interest income by $14 million and decreased the NIM by approximately 7 bps.

Non-interest income for the quarter decreased 45.9% sequentially and 2.1% year-over-year to $382 million. The year-over-year decrease was primarily attributable to a $26 million loss resulting from changes in the fair values of certain investments made by the Funds Management unit within the Real Estate Capital and Corporate Banking Services line of business, a $20 million loss resulting from changes in the fair values of certain commercial mortgage-backed securities held in the trading portfolio, and a $12 million charge resulting from an increase in the reserve for losses related to customer derivatives.

Non-interest expense for the quarter increased 5.4% sequentially and 21.8% year-over-year to $901 million. On a year-over-year basis, personnel expense increased by $6 million, due primarily to higher costs associated with employee benefits. Non-personnel expense for the quarter increased by $155 million.

Credit quality metrics worsened significantly during the quarter. Non-performing assets as a percentage of portfolio loans, OREO as well as other non-performing assets increased 69 bps sequentially and 277 bps year-over-year to 4.46%. Net charge-offs as a percentage of average loans increased 66 bps sequentially and 231 bps year-over-year to 3.59%.

Capital ratios continued to improve during the quarter as KeyCorp successfully exchanged common shares for retail capital securities, raising $505 million of additional Tier 1 common equity. This completed a series of successful capital raises and exchanges that generated approximately $2.4 billion of new Tier 1 common equity to bolster the company’s overall capital.

KeyCorp’s tangible shareholders’ equity to tangible assets ratio was 10.41% at the end of Sept. 30, 2009, compared to 10.16% at the end of the prior quarter and 6.95% at the end of the prior-year quarter. Tier 1 risk-based capital ratio was 12.61%, compared to 12.57% in the prior quarter and 8.55% in the prior-year quarter.

Though we expect the company to benefit by exiting the risky and unprofitable businesses, elevated provision requirements and a weak net interest margin will put significant pressure on its profitability. As such, the shares carry an Underperform recommendation from us.
Read the full analyst report on “KEY”
Zacks Investment Research

Last 5 posts by Zacks Market Commentaries

• Company News for November 25, 2009 - Corporate Summary - November 25th, 2009
• Stock Market News for November 25, 2009 - Market News - November 25th, 2009
• Manulife Buys Stake, Raises Equity - Analyst Blog - November 25th, 2009
• NCR Rolls Out New Products - Analyst Blog - November 25th, 2009
• Zacks Bull and Bear of the Day Highlights: MEMC Electronic Materials, Inc., Energy Transfer Partners, Ford, Whirlpool and Wal-Mart - Press Releases - November 25th, 2009