KeyCorp (KEY) 2004 Q3 法說會逐字稿

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The Keycorp conference call will begin momentarily .

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Good day and welcome to Keycorp's third 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.

Thank you, operator.

Good morning and welcome to Keycorp's third quarter earnings conference call.

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

Joining me for today's presentation is our CFO, Jeffrey Weeden.

We also have several members of our executive team available for the Q&A portion of our call.

I turn your attention to slide 2, which is our forward-looking disclosure statement.

As always, it covers not only our presentation, but also the Q&A portion of our presentation this morning.

Now, if you'd turn to slide 3, I wanted to highlight the progress that we've made on our strategic priorities of growing revenue, improving asset quality, and focusing on expenses.

And our success on these three priorities will improve our financial performance and result in better long-term shareholder returns.

As you have probably heard me say at recent industry conferences, my number one priority, Key's number one priority is to profitably grow revenue.

In the third quarter, revenue was up modestly due to a higher net interest margin and stronger commercial loan growth.

The growth in our commercial balances was broad-based and spread among a number of industry sectors.

We were also encouraged by some of our line-of-business results.

Revenue was up in retail and small business as we continue to add new clients and improve our cross-sell ratios.

The growth in net new clients year-to-date was almost doubled the year-ago period and our retail cross sell number has moved up to 3.24 accounts per customer.

Again, quarter-over-quarter progress.

We also expect to close our EverTrust financial acquisition tomorrow.

As you will recall, EverTrust will give us the number two market share in Everett, Washington, with 12 banking offices and approximately 550 million in deposits.

For our commercial businesses, loan growth, growth was the big story, but we also experienced a 31% year-to-date increase in investment banking income and moved up significantly to place 13th in the league tables for lead arranger by number of deals.

Our second priority is improving asset quality, and we continue to make great strides in this area.

In the third quarter, nonperforming loans were down for the 8th consecutive quarter and net chargeoffs as a percent of average loans fell to the lowest level since the second quarter of 2000.

Our final priority is maintaining our expense discipline.

This is something that we focused on for several years going back to our PEG program, although our efficiency ratio remains below, I'm sorry, above our targeted range, primarily due to lower revenue growth, we have continued to hold the line on expenses.

Expenses in the third quarter were down relative to the year-ago period and only up slightly from the previous quarter as a result of higher incentive accruals and employee benefit costs.

Total return for Key shareholders year-to-date was up 11% through the end of September, outpacing the 6% gain for the S&P bank index.

Overall, it was a very solid quarter with some encouraging signs in terms of loan growth, the net interest margin and asset quality trends.

Now, we'll turn the call over to Jeffrey Weeden for a more detailed review of the quarter.

Jeff.

Thank you, Henry.

I'll begin with the financial summaries shown on slide 4.

We earned $0.61 in the third quarter compared with $0.58 in the second quarter and $0.53 in the year-ago period.

Total revenue was up $12 million in the third quarter due to an increase in net interest margin and an increase in average earning assets driven by stronger commercial loan growth.

Net interest income declined, noninterest income declined in the quarter compared to last quarter due to softness in our brokerage and trading related diaries.

As Henry mentioned, asset quality continued to improve in the quarter with net chargeoffs reaching their lowest level in over four years and nonperforming loans declining another 64 million from the prior quarter.

Turning to slide 5, the company's net interest margin increased by four basis points in the quarter from 3.57% to 3.61%.

Our expectations is for the net interest margin to remain relatively stable in the fourth quarter.

Similar to the second quarter, we ended the third quarter in a neutral position to a 200 basis point increase in rates over the next 12 months.

Moving to slide 6, we were particularly encouraged by the commercial loan growth we experienced in the third quarter.

Annualized average balances of commercial loans in the third quarter were up 13.7% when compared to the second quarter.

And ending balances of commercial loans at September 30, 2004, were up 7.2% compared to one year ago.

Average balances of consumer loans increased 2% on an annualized basis.

While we continue to reduce certain non-relationship portfolios in our consumer finance division, our retail banking division increased it's loan balances by an annualized 8.1% during the third quarter when compared to the second quarter of this year.

Turning to slide 7, our average core deposits increased 6.3% on an annualized basis during the quarter.

We continue to show good growth in transaction related deposits while CDs under 100,000 continue to decline.

White aid highlights our asset quality trends.

Net chargeoffs were down $28 million from the prior quarter and down $47 million from a year ago.

For the third quarter, chargeoffs represented 47 basis points of average loans outstanding.

Having experienced a number of quarters where our chargeoffs have exceeded our long-term goal, as we previously stated of 65 basis points, we believe we have entered into a period where our results are, and they continue to be, below this targeted level.

As we mentioned earlier, we also experienced continued improvement in our MPLs and MPAs in the quarter.

MPLs declined $64 million from the second quarter to 60 basis points of loans and MPA is declined $80 million from the second quarter to .71% of loans and ORE.

Compared to one year ago, nonperforming loans and nonperforming assets have been reduced by more than 400 million.

Our loan loss reserve at September 30 represented 1.93% of loans and 321% coverage of MPLs at quarter end.

Slide 9 shows the progress we are experiencing in both our commercial and consumer loan portfolios in terms of chargeoffs.

These are some of the lowest levels we have experienced in several years.

Looking at slide 10, the company's capital ratios are within our targeted ranges, specifically, we targeted tangible capital ratio in the range of 6.25% to 6.75%.

During the quarter, we repurchased 2.2 million shares of stock leaving 29.5 million shares available under our current board authorization.

We will continue to use share repurchases as a tool in the management of our total capital levels.

Now turning to slide 11, which covers our fourth quarter earnings outlook.

During the fourth quarter, we continue to expect some growth in net interest income driven by a relatively stable net interest margin and modest growth in loans and average earnings assets.

We also expect credit quality to remain relatively stable in the fourth quarter with our third quarter levels.

Our expectation is for the fourth quarter -- our fourth quarter earnings to be in the range of $0.60 to $0.63 per share.

That concludes our remarks and now I'll turn the call back over to the operator to provide instructions for our q-and-a segment of our call.

Operator?

Thank you.

The question-and-answer session will be conducted electronically today.

Anyone wishing to ask a question may signal us by firmly pressing the star key followed by the digit 1 on your touch-tone telephone.

We will take as many questions as time permits and will proceed in the order in which you signal us.

As a reminder, there may be many callers holding to ask a question at one time.

We appreciate your patience.

Again, that is star 1 to ask a question and we'll pause for just a moment to give everyone an opportunity to signal.

Once again, that is star 1 for any questions.

Our first question comes from Jefferson Davis with FTN Securities.

Hey Good morning.

Good quarter.

Thank you.

Question, I don't know if Tom's there or for you, Henry.

Can you give us more color on the commercial loan growth and maybe looking back from the end of the first quarter on a, if not so much a month-by-month basis, but has it sequentially strengthened as you moved through the last six months or, um, I guess some companies have talked about a little bit of a tailoff in September?

If you could comment on that and then a little bit more color on, on how the large corporate may have impacted balances.

Actually, Tom is here, but I'm going to try and answer that.

It's kind of open-ended.

The truth is that we have seen and as we have reported, we have seen modest growth month-over-month.

We've had some good activity in the commercial real estate sector, and while I reported that our loan growth was broad-based, actually as we dig a little deeper in discussions with Tom Bond, the northeast had a more meaningful uptick in terms of what we look at as our four regions and we're hoping that that will spread east to west as we go forward, but as Jeff indicated, we're look for example a continuation of the relatively stable but positive loan growth as we go into the fourth quarter.

Nothing dramatic, but if we could see the better uptick in the northeast spread throughout our other regions, we might be pleasantly surprised.

If I could do a follow-up.

Was the northeast a function of the pick up in demand or did it come out of fleet and then an unrelated question, what was the private equity mark this quarter?

To the first question, I'm not sure I know the second.

To the first question, I would tell you without data at my fingertips, that there has been some disruption in the marketplace because of the major acquisition by B of A of Fleet.

We see it in the human capital side.

I would be surprised if there wasn't some indication from the people on the ground we were winning some of that business, but I quite honestly don't have that business.

Jeff, this is Jeff Weeden, with respect to principle investing, we ended up recording $10 million of agains this quarter versus 19 million in the prior quarter.

That is a combination, of not only of the marks but also the monetization of investments.

Okay.

Great.

Thank you much.

We'll go next to Kevin St. Pierre with Sanford Bernstein.

Good morning, guys.

I was just wondering if you could tell me. --period end balances, total deposits, I have 3.4 billion in growth.

I was wondering if you could reconcile if there was an impact from branch acquisitions or acquired deposits in the third quarter.

Well, you'll see that part of that growth in the third quarter, if you're looking at toal deposits, also includes foreign office deposits, which are just another form of wholesale funding, so if you look at the growth in the interest bearing and the non-interest bearing, there is obviously some seasonality that comes into play, but it's pretty much core growth.

We did have the Sterling acquisitions that was completed in the third quarter that closed, I believe, on July 23.

That accounted for approximately 325 million of that particular total growth and deposits.

Okay, so your roughly 1 billion growth in noninterest bearing deposits, I expect was mostly organic?

That would be the organic activity that is coming through.

Again, it's a function of where the calendar falls, as far as corporations go, but there is good organic growth in that particular number.

Okay. -- thank you.

We'll go next to Brent Earnsdale With Portales Partners.

Thank you and good morning.

Where do you target your loan loss reserve ratio?

We don't have a specific target, if you will, for loan loss reserve ratio, as far as a percent of loans.

It's a buildup based upon the risk and the portfolio.

If you see how the reserve has been coming down, it was over, all over 2% a year ago.

It's now at 1.93%.

The credit quality continues to show improvement and the reserve has been coming down as well as through the growth of the overall loan portfolio.

So you would expect what you would so in asset quality for this thing to be sort of drifting down over the next couple of quarters and is there some level where you just will resume building 1.5% or something like that in.

Again, I would expect that given the credit quality and the trends in credit quality, the trend would probably be coming down over the next several quarters, but, again, it's going to be built up on the facts and circumstances of the, of the portfolio as to what that level ends up coming down to.

Thank you.

We'll go next to Craig McBeth with Lehman Brothers.

Mr. McBeth, your line is open.

Please check your mute button.

What do you expect on consumer loan growth?

Well, we've had good consumer loan growth in the, our branch-based operation which, is primarily our home equity lending.

That's been running around 7.5 to 8% on an annualized basis for the last two quarters.

I think the expectation for the branches would be to continue at that particular level.

Overall courage loan growth has been much lower than that as we have continued to look at some of the nonrelationship portfolios and reduce our positions in those.

Thanks.

As a reminder, if you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone.

Our next question comes from Joe Dwayne with Fox-Pitt, Kelton.

Yes, good morning.

I had a follow-up question on the commercial loan growth.

Henry or Tom, can you provide color in the pricing or competitive environment.

Are you also seeing differences in geography on the competitive environment?

Actually, Joe, this is Henry.

We talked about that this morning and the environment remains competitive.

It's been competitive.

It's not a booming environment out there.

In fact, um, in the, you know, informal chatter, um, I don't think the election is doing a whole lot to instill great confidence in any one about, you know, this particular period.

Which is why we aren't looking for anything out of the trends that we've been looking at.

But it isn't that it's gotten more competitive.

It continues to remain very competitive on the pricing side, Joe.

Chuck Hyle and Kevin also reported that that companies are not reaching so far as to give credit quality away, but they're continuing to be very aggressive on good quality pricing.

Okay.

Thank you.

And it appears that we have no further questions at this time.

Thank you, operator.

Again, let me thank all of you for participating in our third quarter conference call from Key's perspective, another positive step in our transition to a better returns and we look forward to a number of these trends continuing in the fourth quarter.

As always, and as we reported this call was, was being recorded and please don't hesitate to give Vern or any of our investor relations staff a call if you have specific questions.

Thank you and we're signing off.

This does conclude today's teleconference, thank you for your participation, you may now disconnect.