KeyCorp.’s (KEY - Analyst Report) first-quarter 2015 earnings from continuing operations of 26 cents per share came in line with the Zacks Consensus Estimate. Further, the bottom line was stable with the year-ago figure.

Keycorp - Earnings Surprise | FindTheCompany

Rise in revenues and continued growth in loan and deposit balances were the tailwinds. However, higher expenses and an increase in provision for loan and lease losses acted as dampeners. Moreover, credit quality was a mixed bag, while capital ratios deteriorated.

Net income from continuing operations attributable to common shareholders in the reported quarter came in at $222 million, down 4.3% year over year.

Behind the Headlines

Total revenue came in at $1.01 billion, up 1% from the prior-year quarter. However, it lagged the Zacks Consensus Estimate of $1.03 billion.

Tax-equivalent net interest income (“NII”) increased 1.4% from the prior-year quarter to $577 million. The rise reflected higher loan balances, partly mitigated by lower earning asset yields. However, net interest margin decreased 9 basis points (bps) year over year to 2.91%.

Non-interest income grew 0.5% year over year to $437 million. The rise was mainly attributable to higher trust and investment services income, net gains from principal investing, corporate-owned life insurance income, cards and payments income, and other income. These increases were, nevertheless, partially offset by a fall in investment banking and debt placement fees.

Non-interest expense inched up 0.8% from the prior-year quarter to $669 million. The increase was mainly led by higher employee benefits costs, partially offset by lower business services and professional fees, as well as continued cost savings across the company.

As of Mar 31, 2015, average total deposits came in at $68.4 billion, up 4.9% year over year. Further, average total loans were $57.5 billion, up 5.1% from Mar 31, 2014.

Credit Quality

Credit quality depicted a mixed bag during the quarter. Provision for loan and lease losses increased significantly to $35 million. Also, net loan charge-offs, as a percentage of average loans, increased 5 bps year over year to 0.20%.

However, nonperforming assets, as a percentage of period-end portfolio loans, other real estate owned properties (“OREO”) assets and other nonperforming assets, were 0.79%, down 16 bps year over year. Further, allowance for loan and lease losses was $794 million, down 4.8% from the year-ago quarter.

Capital Ratios

Capital ratios deteriorated during the quarter. KeyCorp's tangible common equity to tangible assets ratio was 9.92% as of Mar 31, 2015, down from 10.14% as of Mar 31, 2014. In addition, Tier 1 risk-based capital ratio was 11.22% versus 12.01% as of Mar 31, 2014.

The company’s estimated Basel III Tier 1 common ratio (under the fully phased-in Regulatory Capital Rules) was 10.58% at the end of the quarter. This exceeded the fully phased-in required minimum Tier 1 common equity ratio of 7.00%.

Share Repurchases

During the reported quarter, KeyCorp bought back 14.1 million shares for $208 million. This was part of the company’s 2014 capital plan.

Our Take

A low interest rate environment and stringent regulatory restrictions remain the company’s major concerns, exerting pressure on the top line. However, a decline in expenses and an efficient organic growth strategy should continue to support KeyCorp’s long-term performance. Also, we remain optimistic about the company’s strong balance sheet and capital position.

At present, KeyCorp has a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Among other major regional banks, The PNC Financial Services Group, Inc. (PNC - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report) surpassed the Zacks Consensus Estimate. For PNC Financial, the beat was mainly driven by a fall in the provision for credit losses and rise in non-interest income, partially offset by higher expenses and lower net interest income.

For Wells Fargo, results benefited from revenue growth, partially offset by higher expenses and increased provision for loan losses. On the other hand, for JPMorgan, lower operating expenses and improvement in revenues were the primary reasons behind the earnings beat.