KeyCorp (KEY)

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See all Bulls Reasons Bulls: Reasons To Buy Key stock price down 45% 0% agree Key stock price down 45% Key stock price down 45% in 2008 mainly due to subprime industry problems. Key sold off its subprime business in late 2006 and early 2007. Dividend raised to $1.50 annually (+2.7%) View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Accounting charges hit Key earnings 0% agree Accounting charges hit Key earnings June 11,2008 The Ohio bank announced that it will take a Q2 after-tax accounting charge to earnings and capital in the range of $1.1-1.2 billion for the leveraged-lease tax litigation and all of its other contested leveraged-lease transactions. This action is in response to a... read more View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Although KeyCorp avoided the subprime mortgage disaster with the sale of its $2.5 billion Champion Mortgage subprime mortgage subsidiary in 2006,^[2] it is highly exposed to commercial real estate construction and home equity loans, with more than 40% of its loan portfolio in these two asset classes.^[3] This has led to a record $529 million provision for loan loss in 2007 as US housing prices have declined.

KeyCorp has suffered from a court decision about the tax treatment of leveraged loans, which resulted in a $1.1 billion charge spread between the lease income and tax provision segments of the company's income statement.^[4][5] Because of this charge and other loan induced losses, KeyCorp was forced in 2Q2008 to raise new capital in a $1.5 billion offering of common and preferred stock.^[6] KeyCorp is bolstering its balance sheet by reducing exposure to the residential properties segment of its construction loan portfolio while also increasing loan loss reserves.

[edit] Business Overview

KEY Revenue and Net Income^[7]

KEY Allowance for Bad Debt^[7][3]

KeyCorp operates in two main segments: community banking and national banking. The community banking segment is slightly bigger than national banking, earning 57% of the companies revenue.^[8] Community banking consists mainly of the company's savings-and-loan business, earning money off the interest paid on loans by individual customers and small to mid-size businesses.^[8] National banking consists of the company's investment banking business and its financing operations for large companies and lenders, earning money off of interest paid on loans and fees for financing and cash management services.^[8]

[edit] Business and Financial Metrics

Although KeyCorp's revenue consistently grew from 2004 to 2007, its net income and profit margin have decreased since 2005.^[7] This decrease is attributable to two factors: increased loan loss provisions and a loss from discontinued operations. In 2007, KeyCorp's provision for loan losses increased from $150 million to $529 million on the expectation of higher defaults on the company's commercial real estate and lease financing loan portfolios.^[7]

KeyCorp records a provision for loan losses in order to better estimate the value of its outstanding loans. Though this provision remained under $200 million between 2004 and 2006, the company was forced to increase it by 252% from $150 million to $529 million in fiscal 2007^[7], due to a $405 million increase to $415 million in nonperforming real estate construction loans in fiscal 2007.^[9]

[edit] Business Segments

KEY Revenue and Net Income^[7][11]

[edit] Community Banking (53% of Revenue, 57% of Net Income)^[11]

With revenues of $2.7 billion in fiscal 2007,^[11] Community Banking makes up 53% of KeyCorp's total revenue.^[12] Community banking revenues have remained roughly constant since 2005, growing .4% from 2006 to $2.7 billion in fiscal 2007. ^[11] However, net income from this segment increased more than 27% to $538 million in fiscal 2007, due to a one time gain from the sale of subsidiary McDonald Investments.^[11] Excluding this gain, net income from community banking fell 13% from fiscal 2006 as a result of decreased interest and non-interest revenue.^[11] Within Community Banking, there are two primary businesses: Regional Banking and Commercial Banking.

• Regional Banking: In 2007, the regional banking segment brought in $422 million in net income on interest revenues of $2.3 billion.^[13] Regional banking products include deposit services, investment products, residential mortgages, and home equity loans.^[8] KeyCorp has 985 full-service regional banking branches in 13 northern US states, including Alaska, Colorado, Idaho, Indiana, Kentucky, Maine, Michigan, New York, Ohio, Oregon, Utah, Vermont and Washington, and 1,481 ATMs in 16 states.^[1][14]

• Commercial Banking: In 2007, the commercial banking segment brought in $116 million in net income on revenues of $376 million.^[13] The commercial banking segment primarily services mid-sized companies and offers products including commercial lending, cash management, equipment leasing, investment and employee benefit programs, succession planning, access to capital markets, derivatives and foreign exchange.^[8]

[edit] National Banking (46% of Revenue, 35% of Net Income)

With revenues of $2.3 billion in fiscal 2007,^[11] National Banking makes up 46% of KeyCorp's total revenue.^[12] Highly involved in commercial real estate finance and other sectors affected by the subprime lending and housing meltdowns, this segment has posted steep declines in net income in fiscal 2007. National banking revenues fell 3.2% from 2006 to $2.3 billion in fiscal 2007.^[15] Net income, on the other hand, fell by 53% to $329 million as a result of a $380 million increase in the provision for bad debt.^[16][7] Within National Banking, there are four primary businesses: Real Estate Capital, Equipment Finance, Institutional and Capital Markets, and Consumer Finance.

• Real Estate Capital: In 2007, the real estate segment had a net loss of $42 million on revenues of $585 million.^[13] The real estate capital segment provides construction and interim lending, permanent debt placements and servicing, and equity and investment banking services to developers, brokers and owner-investors.^[8] This segment was the most heavily affected by the 2007-2008 credit crisis and suffered a $322 million write-down for bad debt in 2007.^[13]

• Equipment Finance: In 2007, the equipment finance segment brought in $110 million in net income on revenues of $611 million.^[13] Equipment finance meets the equipment leasing needs of companies worldwide for equipment varying from corporate aircraft to office furniture and cash register systems.^[8][17]

• Institutional and Capital Markets: In 2007, the institutional and capital markets segment brought in $164 million in net income on revenues of $759 million.^[13] Institutional and capital markets provides products including commercial lending, treasury management, investment banking, derivatives and foreign exchange, and equity and debt underwriting and trading to large companies. Through its subsidiary Victory Capital Management, KeyCorp provides asset management services to institutional and governmental investors. Additionally, it manages the Victory family of mutual funds. Victory Capital Management operates over 20 funds, in asset classes ranging from equity to fixed income.^[8][18]

• Consumer Finance: In 2007, the consumer finance segment brought in $75 million in net income on revenues of $387 million.^[13] Consumer finance includes indirect lending, which offers loans to consumers through dealers; commercial floor plan lending,which finances inventory for automobile and marine dealers; home equity services, which works with home improvement contractors to provide home equity and home improvement financing solutions; and business services, which provides payroll processing solutions for businesses of all sizes.^[8]

[edit] Trends & Forces

[edit] KeyCorp is Highly Exposed to Commercial Real Estate Construction Loans and Other Credit Risk

A number of KeyCorp's products expose it to credit risk, including loans, leases and lending commitments, derivatives, trading account assets and assets held-for-sale. When one of these products is judged to be noncollectable, the company must write down the product's value and record a loss, lowering net income. With more than 40%^[3] of its $67 billion loan portfolio in commercial real estate and home equity loans,^[10] KeyCorp has been heavily affected by the subprime lending crisis. Although KeyCorp limited exposure to subprime borrowers by selling its subprime portfolio in 2006,^[19] it is affected by the secondary effects of falling house prices and decreased demand for new home construction. When housing prices fall, homeowners with home equity loans find themselves with more in loans than their house is worth. Similarly, developers find themselves building projects that may be worth far less than the cost to build them. In fiscal 2007, KeyCorp's nonperforming real estate construction loans increased $410 million to $415 million.^[9] Because of this, KeyCorp may have to write down more loans, recording a bigger loss and lowering income.

[edit] KeyCorp Relies On Growth Through Acquisitions of Traditional Banks and Loan Servicing Companies

KeyCorp has focused its geographic growth through acquisitions of traditional savings and loans banks outside its 14 state footprint. In early 2008, the company acquired Union State Bank, gaining significant market share with Union State's 31 branches in the lower Hudson Valley.^[20] In order to maintain revenue growth in its Community Banking Segment, KeyCorp must acquire other regional banks outside of its current geographic footprint. Additionally, the company has expanded its financial service offerings through the acquisitions of several mortgage servicing companies and a college tuition servicing company.^[20] Through these acquisitions, KeyCorp hopes to earn more non-interest revenue, decreasing its exposure to credit risk. Because loan service companies earn income through fees instead of an interest rate spread, they provide income even during times of low interest rates.

[edit] Competition

KeyCorp is the 17th largest bank holding company by domestic deposits.^[21] The company faces competition for deposits from both national banks and regional banks in the northern United States.

[edit] Regional Competitors

• National City (NCC) is the 11th largest bank holding company by domestic deposits.^[21] With 1400 retail banking branches in 9 states, National City and KeyCorp intersect in Ohio, Indiana, Kentucky, and Michigan.^[22] Addtionally, National City has a larger percentage of its loans in mortgages, and operates 410 retail mortgage outlets throughout the United States.^[22]

• U.S. Bancorp (USB) is the 7th largest bank holding company by domestic deposits.^[21] With 2518 retail banking branches in 24 states, U.S. Bancorp and KeyCorp intersect in Colorado, Indiana, Idaho, Kentucky, Ohio, Oregon, Utah, and Washington.^[23]

[edit] National Competitors

• Bank of America (BAC) is the largest bank holding company by domestic deposits.^[24] With 6100 retail banking branches in 32 states, Bank of America and KeyCorp intersect in Idaho, Maine, Michigan, New York, Oregon, and Washington.^[25] Bank of America also operates in 30 foreign countries.^[25]

• J P Morgan Chase (JPM) is the second largest bank holding company by domestic deposits.^[24] With 3100 retail banking branches in 17 states, JP Morgan Chase and Keycorp intersect in Colorado, Indiana, Kentucky, Michigan, New York, Ohio, Utah.^[26][25] Unlike KeyCorp, only 20% of JP Morgan Chase's 2007 revenue came from retail banking; the rest came from its investment banking, commercial banking, and card services businesses.^[27]

[edit] References

1. ↑ ^{1.0 1.1} KEY 2007 10-K pg. 1  
2. ↑ KEY 2007 10-K, Exhibit 13 pg. 30  
3. ↑ ^{3.0 3.1 3.2} KEY 2007 10-K, Exhibit 13 pg. 35  
4. ↑ Earnings Preview: One-time charge to hurt KeyCorp.
5. ↑ KEY 2008 10-Q pg. 64  
6. ↑ Jonathan Stempel. KeyCorp raises $1.65 bln after shares plunge.
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7} KEY 2007 10-K, Exhibit 13 pg. 21  
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8} KEY 2007 10-K, Exhibit 13 pg. 75  
9. ↑ ^{9.0 9.1} KEY 2007 10-K, Exhibit 13 pg. 54  
10. ↑ ^{10.0 10.1} KEY 2007 10-K, Exhibit 13 pg. 53  
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5 11.6} KEY 2007 10-K, Exhibit 13 pg. 24  
12. ↑ ^{12.0 12.1} KEY 2007 10-K, Exhibit 13 pg. 27  
13. ↑ ^{13.0 13.1 13.2 13.3 13.4 13.5 13.6} KEY 2007 10-K, Exhibit 13 pg. 78  
14. ↑ Key Facts.
15. ↑ KEY 2007 10-K, Exhibit 13 pg. 26  
16. ↑ KEY 2007 10-K, Exhibit 13 pg. 25  
17. ↑ What Can You Lease.
18. ↑ Victory Fund.
19. ↑ KEY 2007 10-K, Exhibit 13 pg. 37  
20. ↑ ^{20.0 20.1} KEY 2007 10-K, Exhibit 13 pg. 74  
21. ↑ ^{21.0 21.1 21.2} Top 50 Bank Holding Companies by Total Domestic Deposits.
22. ↑ ^{22.0 22.1 22.2} National City Corp.
23. ↑ ^{23.0 23.1} U.S.Bancorp.
24. ↑ ^{24.0 24.1 24.2}
25. ↑ ^{25.0 25.1 25.2 25.3} Bank of America.
26. ↑ ^{26.0 26.1} JP Morgan Chase.
27. ↑ http://www.wikinvest.com/stock/J_P_Morgan_Chase_(JPM) Wikinvest JP Morgan Chase