Improving Asset Quality Keyed This Bank's Performance This Quarter

KeyCorp (NYSE: KEY  ) reported earnings for its third quarter this morning, and a slight beat on EPS expectations created a small surge in share price this morning. With analysts expecting $0.21 in earnings per share, the bank checked in at $0.23, primarily driven by a branch acquisition and a reentry into the credit card market. Lending remains strong, and the bank remains committed to returning income to shareholders, as evidenced by the repurchase of 9.6 million shares during the quarter.

What I was watching
In addition to the standard metrics referenced above, I was also watching for a continued increase in total lending, as well as improvement in nonperforming assets. These assets accounted for 1.5% of total assets last quarter, but with the reduction this quarter by another $33 million, they now check in slightly below 1.3%. With increasing numbers like this, it is easy to see how KeyCorp managed to pass the Fed stress test in March, something Bank of America (NYSE: BAC  ) and Citigroup (NYSE: C  ) failed to do.

What to expect going forward
With KeyCorp among regional banks stepping up mortgage lending nationwide, the future is bright for this once down-trodden bank. Total loans were up again this quarter, with an increase in average loans of $1.2 billion from the second quarter. If KeyCorp can continue this performance into next quarter, there is no reason not to expect a dividend increase, which would further return value to shareholders. If anything, the bank is still cheap according to its Graham number valuation, so it could be an attractive option if you are looking for a smaller bank in which to invest.

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Robert Eberhard has no positions in the stocks mentioned above. Follow him on Twitter to see what really makes him tick. The Motley Fool owns shares of Bank of America, Citigroup, and KeyCorp. 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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