KeyCorp Shares Fall as Profit Sinks on Credit Turmoil

KeyCorp, a large Midwest U.S. bank, Tuesday said third-quarter profit fell a larger-than-expected 33 percent, citing real estate losses and writedowns and volatility in fixed-income markets.

The bank also projected fourth-quarter profit below the average forecast. KeyCorp shares fell more than 5 percent.

Net income fell to $210 million, or 54 cents per share, from $312 million, or 76 cents, a year earlier. Profit from continuing operations totaled $224 million, or 57 cents per share, as revenue fell 9 percent to $1.15 billion.

On that basis, analysts on average had forecast profit of 71 cents per share on revenue of $1.24 billion, according to Reuters Estimates.

The Cleveland-based bank also projected fourth-quarter profit of 68 cents to 74 cents per share. Analysts on average expected 75 cents.

"KeyCorp had a huge increase in nonperforming assets, and projecting continued weakness in net interest margin and higher net charge-offs," said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $77 billion. "Clearly, it is challenged both on the consumer side and the commercial side in terms of credit losses."

Nonperforming assets rose 73 percent to $570 million from $329 million. Most of the increase related to the residential portion of KeyCorp's commercial real estate construction portfolio, principally in Florida and California.

The bank set aside $69 million for loan losses, up from $35 million a year earlier, and net charge-offs rose 37 percent to $59 million. Unsteady capital markets caused $77 million of losses from investments, loan sales, writedowns and trading.

"Fixed-income markets experienced one of the most volatile periods in a long, long time," Chief Executive Henry Meyer said on a conference call. He nevertheless said the markets "feel better to us today than they did just a few short weeks ago."

Noninterest income slid 19 percent to $438 million, hurt by fixed-income volatility, lower investment gains, the sale of the McDonald Investments branch network, and a writedown for real estate private equity investments.

Lending income fell 2 percent to $712 million. KeyCorp said net interest margin fell to 3.40 percent from 3.61 percent, and from the second quarter's 3.46 percent, hurt by competition for loans and deposits. The bank had earlier this year forecast margin staying around the 3.50 percent range.

KeyCorp operates 954 branches, including many in New York and the Pacific Northwest. It ended September with $97.4 billion of assets.

Through Monday, KeyCorp shares were down 15 percent this year, compared with a 10 percent drop in the Philadelphia KBW Bank Index.