KeyBank 2005 Annual Report Download - page 27

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26
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
The following discussion explains the composition of certain components
of Key’s noninterest income and the factors that caused those components
to change.
Trust and investment services income. Trust and investment services is
Key’s largest source of noninterest income. The primary components of
revenue generated by these services are shown in Figure 8.
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FIGURE 8. TRUST AND INVESTMENT SERVICES INCOME
Year ended December 31, Change 2005 vs 2004
dollars in millions 2005 2004 2003 Amount Percent
Brokerage commissions and fee income $247 $265 $265 $(18) (6.8)%
Personal asset management and custody fees 153 156 147 (3) (1.9)
Institutional asset management and custody fees 142 143 133 (1) (.7)
Total trust and investment services income $542 $564 $545 $(22) (3.9)%
A significant portion of Key’s trust and investment services income
depends on the value of assets under management. At December 31,
2005, assets under management at Key totaled $77.1 billion, representing
a 3% increase from $74.6 billion at December 31, 2004. As shown in
Figure 9, most of the increase was attributable to Key’s securities
lending business. When clients’ securities are lent to a borrower, the
borrower must provide Key with cash collateral, which is invested
during the term of the loan. The difference between the revenue
generated from the invested funds and the cost of the collateral is then
shared with the client. This business, although profitable, generates
significantly lower fees (commensurate with the lower level of risk
inherent in the business) than other types of assets under management.
December 31,
in millions 2005 2004 2003
Assets under management
by investment type:
Equity $35,370 $34,788 $31,768
Securities lending 20,938 16,082 13,640
Fixed income 11,264 12,885 11,133
Money market 9,572 10,802 12,162
Total $77,144 $74,557 $68,703
Proprietary mutual funds
included in assets
under management:
Money market $ 7,884 $ 9,103 $10,188
Equity 4,594 3,651 3,165
Fixed income 722 827 1,015
Total $13,200 $13,581 $14,368
FIGURE 9. ASSETS UNDER MANAGEMENT
Service charges on deposit accounts. In both 2005 and 2004, service
charges on deposit accounts declined due primarily to a reduction in the
level of overdraft, maintenance and account analysis fees charged to
clients. The decline in overdraft fees reflects enhanced capabilities,
such as “real time” posting, that allow clients to better manage their
accounts. Maintenance fees were lower because a higher proportion of
Key’s clients have elected to use Key’s free checking products. The
decrease in account analysis fees was attributable to the rising interest
rate environment in which clients have elected to pay for services with
compensating balances.
Investment banking and capital markets income. As shown in Figure 10,
during 2005 the growth in investment banking and capital markets
income was due largely to improved results from dealer trading and
derivatives, and higher net gains from principal investing. Of the $47
million improvement in income from dealer trading and derivatives, $11
million represented derivative income recorded during the first quarter
of 2005 in connection with the anticipated sale of the indirect automobile
loan portfolios completed in March and April 2005. The 2005 increase
in total investment banking and capital markets income was moderated
by a decrease in investment banking income caused by a slowdown in
activity within the client segments served by Key. During 2004, increases
occurred in all but one component of investment banking and capital
markets income, with the largest growth coming from investment
banking activities.
Key’s principal investing income is susceptible to volatility since most of
it is derived from mezzanine debt and equity investments in small to
medium-sized businesses. Principal investments consist of direct and
indirect investments in predominantly privately held companies. These
investments are carried on the balance sheet at fair value ($800 million
at December 31, 2005, and $816 million at December 31, 2004). Thus,
the net gains presented in Figure 10 stem from changes in estimated
fair values as well as actual gains and losses on sales of principal
investments. During the second quarter of 2005, Key received a $15
million distribution in the form of dividends and interest from principal
investing activities. This revenue was recorded in net interest income. Had
it been recorded in noninterest income, principal investing income for
2005 would have been significantly higher, and net interest income
would have been correspondingly lower.
The 2004 increase in income from trust and investment services was
caused primarily by an increase in the market value of trust assets
under management. However, results also benefited from the full year
effect of repricing initiatives implemented in 2003.