KeyCorp (KEY) 2004 Q1 法說會逐字稿

Good morning, and welcome to KeyCorp's first-quarter 2004 earnings results conference call.

This call is being recorded.

At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Meyer.

Mr. Meyer, please go ahead, sir.

Good morning, and welcome to KeyCorp's first-quarter earnings conference call.

We appreciate you taking some time to be a part of our discussion.

Joining me for today's presentation is Jeff Weeden, our CFO, and also available for the Q&A portion of our call is Lee Irving, our Chief Accounting Officer and Kevin Blakely, who is our Chief Risk Officer.

We are also supported by our Investor Relations team.

If you turn to Slide 2, as always, this is our forward-looking disclosure statement, and it covers not only our presentation but also the Q&A portion of the call.

If you would now turn to Slide 3, before we discuss the details of our first quarter, I want to comment on the progress that has been made on our three strategic priorities, profitably growing revenue, improving credit quality, and maintaining our expense discipline.

First, revenue, Key's revenue was up compared with the year ago quarter, but this remains a challenging environment.

Loan demand remains weak, although we did see a small increase in commercial balances this quarter.

We saw improved performance relative to the first quarter of last year in our market-sensitive businesses, such as asset management, brokerage, investment banking and principal investing.

And I believe these businesses are well positioned to benefit from continued improvement in the economy and the financial markets.

We have also seen positive results in terms of our customer growth.

In our retail business, we added over 11,000 new clients in the first quarter and our cross-sell numbers increased by 5 percent from the year-ago period.

On the commercial side, we have continued to increase the number of loan commitments, although as you can see in the appendix of our presentation, utilization remains at historically low levels, but we view this as a business opportunity.

Utilization rates have also been impacted by the improved risk profile in our commercial portfolio as higher-quality borrowers have more alternatives to fund their capital needs.

The real bright spot this quarter was asset quality.

Jeff will go through the numbers, but I am very pleased with the progress that has been made in reducing non-performing loans and net charge-offs, which are now at their lowest level since the first quarter of 2001.

Expense discipline, another priority, to comment on expenses, were another positive this quarter.

Non-interest expense was down 39 million from the fourth quarter and relatively stable with a year ago period.

Our capital position continues to strengthen, supporting our outstanding dividend record of 39 consecutive years of increases.

We have also repurchased 8 million shares in the first quarter.

Overall, it was a very solid quarter for Key and I was pleased with the progress that we've made.

Now, I will turn the call over to Jeff Weeden for a more detailed review of the quarter.

Jeff?

Thank you, Henry.

Turning to the financial summary shown on Slide 4, we earned 59 cents in the first quarter compared to 51 cents a year ago and 55 cents in the fourth quarter.

Total revenue increased 16 million from a year ago period as a result of higher non-interest income.

Total revenue was down from the seasonally strong fourth-quarter level.

As Henry mentioned, the improvement in asset quality was the real stand-out for the quarter.

Non-performing loans were down 107 million from the fourth quarter and down 317 million or 35 percent compared to the year-ago level.

Turning to Slide 5, the Company's net interest margin decreased by 4 basis points in the quarter from 378 to 374 percent.

Our expectation is for the margin to decline by 5 to 10 basis points in the second quarter as we continue to let swap (ph) positions roll off, in anticipation of higher rates in the second half of the year and into 2005.

Our current sensitivity to rising rates remains very modest, at approximately one-half of one percent of net interest income to a 200 basis point rise in interest rates over the next 12 months.

This is down from almost one percent as of December 31, 2003.

Slide 6 shows Key's total revenue trends.

As expected, revenue was down from the seasonally strong fourth quarter, and as mentioned earlier, was up 16 million from the year ago period.

The improvement from last year was entirely a in non-interest income, resulting from improvements in our market-sensitive businesses.

On the expense front on Slide 7, our total costs were down 39 million from last year, or from last quarter, and up only slightly from a year-ago period.

Both personnel and non-personnel costs remain very well-controlled.

Slide 8 summarizes our asset quality highlights.

Net charge-offs were down 12 million from the prior quarter and down $50 million from the same period one year ago.

For the first quarter, charge-offs represented 71 basis points of average loans outstanding.

As we mentioned earlier, we also experienced continued improvement in our NPLs and NPAs in the quarter.

NPLs declined 107 million to 0.94 percent of loans, and NPAs declined 83 million to 1.07 percent of loans and ORE (ph), representing reductions of 17 and 13 basis points, respectively.

Our allowance to total loans at March 31 was 1.3 billion or 2.09 percent of loans, and represented 222 percent coverage of NPLs at quarter end.

As we stated in our earnings release for the quarter, we reclassified $70 million of the loan loss reserve to an other-liability account to reserves for unfunded commitments.

This amount had previously been accounted for as part of the reserve for loan losses.

Looking at Slide 9, the Company's tangible equity to asset ratio increased by 4 basis points to 6.98 percent.

We also repurchased 8 million shares in the quarter. up from 4 million in the fourth quarter.

And at the end of the quarter, we had 13 million shares remaining under our current board authorization.

It is our intention to continue to execute share repurchases in the open market in coming quarters under this authorization.

Now turning to Slide Number 10, our second quarter and full-year 2004 earnings outlook.

We remain positive regarding general market conditions for market-sensitive businesses and improving asset quality.

Commercial loan growth should pick up as we progress throughout the year.

However, we have yet to see -- yet to experience -- any meaningful improvement through the first quarter.

The margin will be under some pressure in the second quarter as we continue to reposition the Company for rising rates in the second half of the year and into 2005.

We will continue to focus on our costs, spending what we believe we can have a positive impact on future earnings.

With the above in mind, we estimate 2004 earnings per share to be in the $2.30 to $2.45 range for the -- and for the second quarter, in the range of 54 cents to 59 cents per share.

That concludes our remarks, and now I will turn the call back over to the operator to provide instructions for the Q&A portion of our call.

Operator?

(OPERATOR INSTRUCTIONS).

John McDonald, Banc of America Securities.

Jeff, wondering if you could just give us a little clarity.

The guidance for the full year is a little bit higher.

Is that largely due to the overage in the first quarter?

Or are there other drivers of the increase there?

Well, John, it includes both the overage in the first quarter, as well as -- we may again, with improving credit quality, have additional release of some of our loan loss reserves.

Okay.

And also, when you let some of these swaps roll off in the second quarter, do you expect your asset sensitivity to increase or to move to an asset-sensitive position going forward after the second quarter?

That is the general direction that we are headed.

Okay.

The last thing is maybe Kevin can comment on what you view as kind of a normalized charge-off ratio and what you would be shooting for as a goal there?

At this juncture, John, we are estimating that our normalized rate is around the vicinity of 65 basis points.

We should be coming into that range probably toward the end of this year.

Joe Duwan, Fox-Pitt, Kelton.

I might follow up on John's question on the reserve releases, what you have factored into the increase now at this point, and any other color you can give on that?

This is Jeff Weeden.

Any reserve releases, of course, will be dependent upon improving asset quality as we continue to go forward, as well as overall general growth in the portfolio.

But the upper end of the range would have some additional reserve release incorporated into it.

Without giving any specifics on there, there are additional amounts that may be flowing through in the future quarters.

Is there a targeted allowance to loan ratio at all?

There is not a specific percentage.

Joe, we go through a process here of really evaluating the overall risk in the portfolio and determining the adequacy based upon that risk profile.

With an improving risk profile that we've had the last couple of quarters, the reserve as a percentage has been able to come down.

Right, and still strong.

All right.

Thank you.

Brent Erensel, Portales Partners.

Structurally, it seems you're more asset sensitive than some of your peers given your low component of investment securities -- less than 10 percent of the portfolio.

Is this true?

And then second, what specific actions are you taking other than these swaps running off to get more asset sensitive going forward?

It is true.

Our natural position would be more of an asset-sensitive type of position.

We have synthetically, with these swaps, moved that particular position.

As they roll off, we will become more asset sensitive in the future here.

Can you be a little more specific?

Is this a second-quarter event?

How big are these swaps?

We have anywhere -- at the end of the year, we had fixed receive -- paid variable swaps of a little over $12 billion.

About 1.35 billion rolled off in the first quarter, and there's an additional rolloff that's occurring here in the second quarter of $1 to $2 billion.

And so that will change that position to more asset-sensitive here.

Jeff Davis, FTN Securities.

A follow-up question to the prior -- with regards to the swaps roll-offs, what type of spreads do those entail?

They were pretty wide spreads in the first quarter.

I think we had some fixed receive swaps there where the spread was around 400 basis points.

So it was a pretty healthy spread that we had rolling off in the first quarter.

And of course, they decrease as we go forward.

If you looked at the overall swap book, I believe it was about a 2.2 percent on the receive side and one percent, 1.2, on the pay side.

So there was about 100 basis-point spread between them at the end of the year, and I believe also at the end of the first quarter.

Okay.

And what about your Q2 roll-off?

Those will be wider spreads, but not as wide as the first quarter.

And then, Jeff, are you doing anything else with regards to positioning for rising rates?

No.

At this juncture, Jeff, what we did also in the first quarter, we sold some fixed rate mortgages for approximately $600 million of fixed rate mortgages that we sold during the first quarter when rates -- we had a very good opportunity to move those particular fixed-rate mortgages.

And so that was also part of our repositioning for the second half of the year.

Lastly, Jeff, if leaving aside over the next few quarters, if we look out a year to a year and a half if short rates come up, whatever 100 or 200 basis points, you take these actions, the margin -- is it something that you can re-build back to the 394 percent level?

Or are we really talking about sort of tweaking the margin at the margin?

I think at this juncture, Jeff, what we're looking at is the margin will build back up as we go forward.

But we are not anticipating at the level that you talked about.

I think it's more coming back up five, ten dips at a time.

Gerard Cassidy, RBC Capital Markets.

Regarding the reserve release that you guys anticipate throughout the year, where do you see your allowance at the end of the year as a percentage of total loans?

And is there a targeted level that you wouldn't go below?

Specifically, the previous question, we do not have a target for the loan loss reserve as a percent of loans.

Again, it goes through really what the overall risk profile of the portfolio is.

And until we continue to -- we had very good improvement in credit quality.

The forecast in our expectation is for continued improvement in credit quality.

So without giving a specific percentage, there will be some additional release of reserves as we go through the year, depending upon overall improvement of credit quality -- but nothing specific in terms of dollar amounts.

On your net charge-offs, I think in one of your slides, it showed that the consumer net charge-offs had a little uptick in the quarter.

Any particular reason for that to happen?

And do you see it being that way for the remainder of the year?

Or was it kind of a one quarter type of a --?

We sold some of the non-performing loans in the consumer portfolio in the first quarter.

So those ran through as additional charge-offs, of about $5 million.

So that may have had a little bit of an uptick in that particular percentage.

Finally, regarding the swap book again, what kind of revenue were you guys kicking off with that swap book as you came into this year, in terms of -- I assume it went through the net interest income line?

It does run through the net interest income line.

I don't think we've disclosed that particular amount.

Joe, do you have any comment on that?

It was part of being liability-sensitive.

And the carry that's involved in -- effectively (ph) being long-asset short funded.

So as Jeff mentioned earlier, we had relatively wide spreads on fixed versus variable in the first quarter, that -- for spreads around 500 basis points.

That's a position that obviously cannot be replicated today.

Correct.

Thank you.

(OPERATOR INSTRUCTIONS).

Mike Mayo, Prudential Equity.

I just wanted a little bit more color on the revised upward guidance.

So, is all the revised upward guidance due to this quarter's exceeding by 6 cents plus the reserve releases?

Mike, it is a -- that's correct.

It is a combination of this quarter's better performance, as well as reserve releases in the future periods.

And is there anything else in your mind that helps offset -- I mean, in other words, if you're talking about outlook, the outlook for the margin is a little bit less than what you thought before.

Is the outlook for loan growth a little bit less than what you thought before?

And is the outlook for expenses and credit quality a little better than what you thought before?

I'm just trying to clarify.

I understand.

And I think, Mike, I think that's correct.

I think the loan growth is a little bit less than what we thought before.

The margin, while in the second quarter is coming down, we really expect that to stabilize and maybe even come back in the third and the fourth quarter of this year.

And then as we look at expenses, I think, are running better than what we had initially forecast, and the credit quality.

And just because it's asked so often, as far as the consolidating industry, what is your thought about buying other banks?

You bought some.

What do you think about mergers of equals?

What's your typical answer when somebody asks you that today?

This is Henry.

The typical answer is, we are interested, as we've said before, in adding banking operations in our footprint.

We continue to be active in discussions but we also are going to be disciplined, in terms of any deal that we get done.

The bin (ph) -- the operator (ph) is still pretty wide, in terms of what sellers want and what buyers believe are the right numbers.

Clearly, currencies in the last three weeks have established new levels.

And I think all of that has got to be taken into consideration.

Steve Shapiro (ph), Satellite Asset Management.

Just one quick question.

In the non-interest expense, it looks like you had a $7 million reversal in the quarter from equity and gross receipt state taxes.

Just curious what that is?

Thanks, a lot.

That was an over-accrual that we had from prior years in those particular -- on the taxes, we went through and Jeff settled up.

We filed all of our tax returns there -- nothing more than that.

So we will go back to a more normal level as we go forward here.

Okay, but that's kind of a seasonal -- it will go back to $5 million a quarter or something along those lines?

Something along those particular lines, maybe a little less than that.

Jeff Davis, FTN Securities.

Henry, could you comment on loan demand or maybe lack thereof by region, and particularly segregating out northeast Ohio and the West Coast franchise?

Yes.

Jeff, I actually -- I talked to Tom Bunn this morning to be prepared for that question.

And Tom was very upbeat about the business activity -- not yet loans taken down -- but business activity has picked up significantly across our entire franchise with the one exception being what we call the northeast corridor, which is really northeast Ohio.

I think the deep manufacturing belt, which for us really includes Cleveland, Akron, Canton, Youngstown -- activity is picking up there.

Talk is good, but it is not at the levels that we're seeing across the other regions.

And I asked specifically about the Northwest, the Rockies, the Northeast, the Midwest; and where before we've reported the Northwest was a little bit slower, it's actually come back.

And we're seeing a lot of good talk.

It's why you can see in that one chart in our appendix our utilization is down because our commitments are continuing to grow.

And we are hearing more and more anecdotal talk that our borrowers are looking to come back into the bank in the second half of 2004.

Okay.

And then on the deposit side, any evidence that corporations are drawing down excess liquidity?

And on the consumer side, whether consumer deposits are working their way back to the equity markets or some other venue?

This is Jeff Weeden.

We did see a little bit of seasonal activity in the first quarter, if you will, with corporate EDA balances coming down for a couple of months, January, February; then they started to come back a little bit in March and back up there again in April.

So we're not seeing a lot of draw-down yet corporations still have a lot on deposit with us.

On the consumer side, it looks like the consumer deposits for us were relatively flat in the first quarter.

There is -- more activity, obviously, is happening over in our wealth management group and over in the McDonald Financial side of the equation -- which if you saw their particular profitability, they basically doubled between last year and this year.

So they had a very good performance with increased activity happening in that particular part of our company.

Okay.

Thank you.

Jeff, let me just add to that, like many other financial services companies that have been reporting, our weakest loan demand is in our large corporate, our big industrial.

And as I commented earlier, one of the reasons is that they still have access to alternative capital markets.

And we don't see much happening, even lining up, in that particular segment.

And while at Key, that is not our bread and butter, that is really the middle market in business banking, those are still big-number kinds of loans.

And some of the commitments, again, are being made to those companies without the kinds of usage that would more traditionally be there.

Okay.

And Henry, how big's that book?

I can't recall.

The shared credit book is about $20 billion in commitments.

Okay.

And what about outstandings?

In total, total outstandings is about --

Three to 4 billion.

3.4.

Precise, all right.

Thank you.

(OPERATOR INSTRUCTIONS).

Gerard Cassidy, RBC Capital Markets.

Thank you.

As a follow-up again on the swap book, when do you expect that to completely run off?

I think you'd said that you expect some of it to run off in the second quarter.

When does that completely run off?

Or do you plan to have it completely run off?

We may not have it -- plan to run completely off and start replacing here too in the future.

I mean, we use it for our asset liability management.

If you look at -- at the end of the year, we had a maturity of about 1.3 years on our swap book.

And that's on the receive fixed pay variable.

That's down at the end of the first quarter, about 1.2 years.

So it has shortened up slightly.

And so it's going to continue to run down, but there may be a point in time where we decide we want to go ahead and start putting positions on as we move more toward asset-sensitive type of a position in the Company.

Okay, Thanks.

And also, do you guys have any floors on your loans?

And if you do, what percentage of the portfolio has them?

And what rates should we be looking at for -- if rates were to go higher -- short-term rates -- what level do they have to kick in -- go to -- before you start to see some improvement in your yields in those loans that have the floors?

I am not aware of any material amount of floors that we have on our loan portfolio at this juncture.

So if rates go up, I believe, longer-term -- it's beneficial for us.

Great, thank you.

Let me just add, I believe that too.

And let me reinforce a point that we've made in the past.

But KeyCorp is a naturally asset-sensitive institution.

Our cash flows that come in build our asset sensitivity.

When we have reported and structured a liability sensitivity, it's manufactured -- again, those exact words Jeff used earlier -- but we manufacture it by the receive fixed pay variable.

And that's been very advantageous to us.

But we don't have to do anything but let maturities happen.

And the asset sensitivity regains.

We don't have to take dramatic, overt actions, we just don't renew the manufactured liability that we had.

So we think that our track record on margin, our timing on using the yield curve to put some of the receive fixed pay variables on has been judicious and very beneficial.

But it isn't like there's some big move we need to make to fine-tune to rising rates.

We just need to let the natural balance sheet flows happen.

Thanks.

There are no further questions at this time.

I would like to turn the call back over to management for any additional or closing comments.

I just want to thank everyone.

We know this is a busy day in terms of calls.

And I think we are -- in a half an hour, we have gotten a lot of information to you.

And we appreciate your participation.

And if there are any follow-ups, please don't hesitate to call our team.

Thank you, all.

That concludes today's conference call.

Thank you for your participation.

You may now disconnect.