Rising fee income and strong cost controls helped two large banks report double-digit earnings gains Thursday.
Cleveland-based KeyCorp said first-quarter profits jumped 11%, to $235 million. At BankBoston Corp., earnings shot up 15%, to $238.3 million. "The trend has been fee income," said Frank Barkocy, an analyst with Josephthal & Co. "And I'd say it's been right across the board from service charges on deposits to trust income to mortgage servicing."
Earnings per share of 53 cents at $73.2 billion-asset KeyCorp were a penny shy of analysts' consensus estimates.
Noninterest income was $356 million, up 37% from the same period last year. Service charges on deposits, and fees from trust and asset management were the biggest contributors. Investment banking revenues showed the strongest growth, soaring 160%, to $47 million. The company also benefited from a $29 million gain from the sale of branches.
Noninterest expense rose 4%. Net interest income, however, declined 4%, to $664 million. While KeyCorp showed some loan growth, the net interest margin narrowed to 4.23% from 4.75% in the year-ago quarter.
"The salient point here-and you can say this about virtually every company that reported this week-is this drive that is coming from the fee side," said Mr. Barkocy. "The only real negative is the magnitude of the pressure on the margins."
KeyCorp officials emphasized the bank's fee income gains and its tight rein on expenses.
"Results of the first quarter were consistent with our expectations and confirm the success of our business strategies," said Robert W. Gillespie, chairman and chief executive officer. "Our increased focus on fee-producing businesses and expense management enabled us to grow our earnings at a double-digit pace. We're achieving revenue growth through diverse fee- income sources."
KeyCorp has been restructuring its operations since November 1996. Mr. Gillespie said the streamlining effort has paid off and will continue.
As KeyCorp continues to cut unprofitable businesses, the company will "become less dependent on traditional bank activities for growth," Mr. Gillespie said.
BankBoston's robust showing was helped by a one-time gain of $165 million from the bank's sale of its 25% stake in Homeside Inc., a mortgage company. Earnings per share of $1.58 beat the Wall Street consensus by 2 cents.
Charles K. Gifford, chairman and chief executive officer, said this year "is an important year for executing our strategy and transitioning our key businesses to the next stage of development."
The $71.4 billion-asset bank said fee revenues soared 78%, to $589 million. But much of that came from the Homeside sale to National Australia Bank. Without it, fee revenues would have grown 28%.
Trading revenues jumped 76%, to $34 million, and rebounded from a fourth-quarter loss of $9 million, when earnings suffered from economic turmoil in emerging markets.
Venture capital and other equity investment profits rose 40%, to $52 million, reflecting the bank's continued focus on capital markets, analysts said.
In contrast, net interest revenue fell 3%, to $603.3 million, and the net interest margin contracted to 4.07% from 4.47% last year.
Analysts said BankBoston's experience is similar to other regional banks this quarter. "They have all felt pressure on the margin, but they have been able to overcome it with strong fee revenues," said Gerard Cassidy, an analyst at Tucker Anthony.
BankBoston said the lower margin resulted from narrower spreads in Argentina and the bank's exit from several consumer finance businesses, including the sale of Fidelity Acceptance Corp. and the spinoff of a credit card business.
Total loans grew 7%, to $43.8 billion. The addition of $1 billion in loans from Deutsche Bank's Argentina operations, which BankBoston bought during the quarter, fueled a 37% rise in Latin American commercial lending, to $11 billion.
Net credit losses were $141 million, up 78%. BankBoston said the number included $66 million in loans made fraudulently by an employee in its New York private bank. The bank also said it was "confident" that the loan would be recovered.
BankBoston took a $48 million charge to cover restructuring efforts.
Other expenses included $17 million related to de novo branch expansion in Latin America and $10 million for the acquisition of Deutsche Bank Argentina. Total expenses rose 21%, to $661 million. +++
BankBoston Corp. Boston, Mass. Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $238.3 $206.8 Per share 1.58 1.27 ROA 1.39% 1.33% ROE 21.31% 18.02% Net interest margin 4.07% 4.47% Net interest income 603.3 620.0 Noninterest income 589.0 329.7 Noninterest expense 661.0 544.2 Loss provision 140.0 60.0 Net chargeoffs 141.0 79.0 Balance Sheet 3/31/98 3/31/97 Assets $71,428.0 $64,780.0 Deposits 46,397.0 42,307.0 Loans 43,822.0 41,019.0 Reserve/nonp. loans 222% 218% Nonperf. loans/loans 0.70% 1.00% Nonperf. assets/assets 0.50% 0.70% Nonperf. assets/loans + OREO 0.80% 1.10% Leverage cap. ratio 7.30%* 7.80% Tier 1 cap. ratio 7.90%* 9.00% Tier 1+2 cap. ratio 12.30%* 13.00%
KeyCorp Cleveland Dollar amounts in millions (except per share) First Quarter 1Q98 1Q97 Net income $235.0 $212.0 Per share 0.53 0.48 ROA 1.32% 1.30% ROE 18.25% 18.07% Net interest margin 4.23% 4.75% Net interest income 673.0 700.0 Noninterest income 356.0 259.0 Noninterest expense 600.0 575.0 Loss provision 77.0 67.0 Net chargeoffs 77.0 67.0 Balance Sheet 3/31/98 3/31/97 Assets $73,198.0 $67,893.0 Deposits 41,661.0 44,239.0 Loans 54,900.0 49,724.0 Reserve/nonp. loans 241.29% 234.50% Nonperf. loans/loans 0.68% 0.75% Nonperf. assets/assets 0.58% 0.63% Nonperf. assets/loans + OREO 0.77% 0.85% Leverage cap. ratio 6.61%* 6.68% Tier 1 cap. ratio 6.89%* 7.47% Tier 1+2 cap. ratio 11.47%* 12.31%
* Estimate ===