Rising provisions for loan losses normally are a cause for concern, but KeyCorp (KEY) Chief Executive Beth Mooney says she is not sweating it.
The Cleveland company reported a provision of $42 million in the first quarter, compared with a $40 million credit a year earlier and a $22 million credit in the fourth quarter. An examination of the provisions of eight major banks (see related chart) finds that KeyCorp set aside the second-lowest amount in the first quarter but was the only one to log an increase from the year-earlier period.
Mooney described the increase as inevitable given the recent credits. A credit for a "provision expense is unusual in banking" and indicated that KeyCorp's credit was improving faster than those of its peers, said Mooney, who is also the chairman.
"A credit indicates that the bank has reserves that are in excess of what the quality of their books needs, so you release it to earnings so you get a credit," she said. But the first-quarter provision of $42 million is "very close to our normalized run rate," she said.
The bank's net chargeoffs to average loans fell four basis points from the fourth quarter and 77 basis points year over year to 0.82%. KeyCorp has set a target of 40 to 50 basis points for net chargeoffs.
Overall, KeyCorp reported that its income attributable to common shareholders totaled $194 million, up 12% from a year earlier but flat from the fourth quarter. Loan growth, especially in its commercial, financial and agricultural area, helped drive this, Mooney said. It made $19.6 billion of loans in that category, up 20% year over year.
The bank is focusing on niche lending to energy, industrial and healthcare businesses, Christopher Gorman, president of Key Corporate Bank, said Thursday during the company's earnings call. He pointed to 10 deals in the wind and solar sector that "raised well over $1 billion in the first quarter."
"Our growth is going to come from picking these niches, and continuing to be able to garner new clients," Gorman said. "That is how we're going to grow it."
KeyCorp has been working for several years now to grow in these areas by targeting midsize businesses with revenue between $10 million and $1.5 billion, Mooney said. Currently KeyCorp has an 18% penetration rate within these industries in its territory, Mooney said.
However, KeyCorp is not the only bank targeting niche areas to boost revenues. One Ohio rival, Huntington Bancshares (HBAN) of Columbus, has hired a former KeyCorp executive to head the expansion of its specialized healthcare banking. And BB&T (BBT) of Winston-Salem, N.C., created an energy team at its corporate bank last year. As of January, the BB&T team had originated 28 new relationships.
The $86.5 billion-asset KeyCorp will distinguish itself by providing a range of services, such as equity research and M&A advice, to customers in these areas, Mooney said.
"The more targeted you get, the more you can provide them with industry insight," she added.
Officials emphasized organic growth several times during KeyCorp's earnings call, but Mooney said the company was open to doing deals when asked about M&A prospects by an analyst. However, she reiterated her past remarks that it would be "disciplined and opportunistic" about any deals.
Mooney said during the earnings call that any deal would need to "augment our franchise." This trend is similar to other larger banks that are looking to expand within their current markets rather delving into new ones.
Mooney pointed to its agreement to buy 37 branches from First Niagara Financial Group (FNFG) in western New York, calling it a "small fill-in, where we enhance our presence in Buffalo, and an attractive market, such as Rochester." That deal is expected to close early in the third quarter.
KeyCorp is also deploying its capital through a common stock repurchase program of up to $334 million to begin in the second quarter and go for the next year. The board will also consider an increase in the quarterly common stock dividend from 3 cents per share to a nickel next month.