Earnings Preview: One-time charge to hurt KeyCorp

OVERVIEW: During the quarter, the Cleveland-based regional bank raised about $1.65 billion in stock offerings to shore up its balance sheet following an unfavorable tax ruling. The bank said a federal court decision involving the tax treatment of part of its leveraged lease portfolio will force it to take a charge of about $1.1 billion to $1.2 billion against second-quarter earnings.

Key also announced plans to cut its annual dividend in half to 75 cents, beginning in the third quarter, to save about $200 million a year.

In late May, Key said it expects charge offs in 2008 to be higher than it previously forecast. It now expects total charge offs--or loans written off as not being repaid--to range between 1 percent and 1.3 percent of total loans during the year, up from prior estimates of 0.65 percent and 0.9 percent. Charge offs could be even higher during the second and third quarters, the bank said in a regulatory filing.

The bulk of the losses stem from its residential homebuilder, education and home improvement loan portfolios.

BY THE NUMBERS: Analysts polled by Thomson Financial, on average, estimate a loss of $2.57 per share.

ANALYST TAKE: Sandler O'Neill & Partners analyst R. Scott Siefers forecasts a second-quarter loss of $3.04 per share, due to a combination of high net charge offs and the expected lease-related charge. Aside from poor credit trends and the one-time charge, Siefers expects modest loan growth and an improvement in the bank's net interest margin. He also expects core fee income to be relatively flat and only a slight increase in expenses.

WHAT'S AHEAD: On Monday, Robert W. Baird & Co. analyst David George upgraded the shares to "Outperform" from "Neutral," saying the bank is well capitalized and that it should be able to absorb higher credit costs going forward.

"Following the company's capital raise and dividend cut, Key's capital and reserve levels are adequate in our opinion for the company to absorb higher credit costs as we move through the current credit cycle," George said. "Once we move through the cycle, we believe Key still can generate at least $2 per share in earnings power in a more normal credit environment."

George also said it is unlikely that Key will need to raise additional capital to help cover losses tied to bad loans.