Improving Credit Quality Key to KeyCorp's Growth


Cleveland-based KeyCorp (NYS: KEY) has once again beaten analysts' estimates, as improvement in its overall credit portfolio enabled the bank to report a leap in net income.

The quarter in detail
The bank's net income for the quarter jumped to $234 million from $29 million in the second quarter of 2010, primarily due to a sharp decline in loan losses and expenses.

Key's net charge-offs declined to $134 million, its lowest level since the first quarter of 2008. Nonperforming assets -- loans delinquent longer than 90 days -- decreased to $950 million from about $2.1 billion in the corresponding quarter last year. This was the seventh consecutive quarterly decline in the bank's nonperforming assets. Declining provisions -- the money banks set aside for loan losses -- has been a widespread profit-boosting trend in the banking industry.

The results also reflect the banking company's continued focus on expense management. While its non-interest income increased by $7 million, its non-interest expense for the quarter declined to $680 million from $769 million.

On the other hand, Key competitor State Street (NYS: STT) recently released its earnings report, revealing a surge in operational expenses. There was a 30.6% year-over-year increase due to higher salaries and other related expenses.

Key showed solid improvements on the capital front as both its Tier 1 common equity and Tier 1 risk-based capital ratios ticked up. Tier 1 common equity grew significantly, to 11% from 8.1% in the same quarter last year.

However, net interest income slipped to $570 million from $623 million due to a decline in average earning assets, resulting from the repayment of TARP preferred stock at the end of the preceding quarter.

The Foolish bottom line
On the whole, KeyCorp looks like a well-capitalized bank that has been doing well in improving its earnings and credit quality. I presented my bullish stance on this regional bank in a couple of previous articles, and it is giving me enough reasons to hold that view.

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At the time thisarticle was published Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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