KeyBank 2005 Annual Report Download - page 41

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40
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
As of December 31, 2005, based on the results of a model in which we
simulate the effect of a gradual 200 basis point increase in short-term
interest rates only in the second year of a two-year time horizon, using the
“most likely balance sheet,” and assuming that management does not take
action to alter the outcome, Key would expect net interest income in the
second year to increase by approximately .09%. Conversely, if short-term
interest rates gradually decrease by 200 basis points in the second year but
remain unchanged in the first year, net interest income would be expected
to increase by approximately .74% during the second year.
The results of the above second year scenarios reflect management’s
intention to gradually reduce Key’s current asset-sensitive position to
rising interest rates. In the fourth quarter of 2005, $1.5 billion of
receive fixed/pay variable interest rate swaps were executed, most with
maturities of one year. Given the current expectations for future
increases in short-term interest rates, we currently plan to add moderate
amounts of receive fixed/pay variable interest rate swaps during 2006 in
support of a gradual reduction in asset sensitivity.
The results of the simulation model can be different for different changes
in market interest rates and over different time frames, even if the
various business flow assumptions remain static. Figure 27 demonstrates
Key’s net interest income exposure to various changes in the overall level
of interest rates over various time frames. For purposes of demonstrating
Key’s net interest income exposure, it is assumed that semi-annual base
net interest income will be $1.5 billion for the next two years, and that
interest rates will not change. The extent to which Key’s assumed base
net interest income will change from a current asset-sensitive position
depends on the assumed slope of the yield curve as well as how fast and
far interest rates are assumed to change.
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Per $100 Million of New Business Net Interest Income Volatility Interest Rate Risk Profile
Floating-rate commercial loans Increases annual net interest income $2.0 million. No change.
at 6.25% funded short-term.
Two-year fixed-rate CDs at 4.50% Rates unchanged: Decreases annual net interest Reduces the “standard” simulated
that reduce short-term funding. income $.3 million. net interest income at risk to rising
rates by .03%.
Rates up 200 basis points over 12 months:
Increases annual net interest income $.8 million.
Five-year fixed-rate home equity Rates unchanged: Increases annual net interest Increases the “standard” simulated
loans at 7.00% funded short-term. income $2.4 million. net interest income at risk to rising
rates by .03%.
Rates up 200 basis points over 12 months:
Increases annual net interest income $1.5 million.
Premium money market deposits at Rates unchanged: Increases annual net interest Reduces the “standard” simulated
4.00% that reduce short-term funding. income $.3 million. net interest income at risk to rising
rates by .01%.
Rates up 200 basis points over 12 months:
Increases annual net interest income $.5 million.
Information presented in the above figure assumes a short-term funding rate of 4.25%.
FIGURE 26. NET INTEREST INCOME VOLATILITY
First Year Second Year
in millions First Six Months Twelve Months First Six Months Twelve Months
Assumed Base Net Interest Income $1,500 $3,000 $1,500 $3,000
POTENTIAL RATE CHANGES SIMULATED NET INTEREST INCOME CHANGE FROM BASE
Short-term rates increasing .5% per quarter + $9 + $23 + $27 + $73
in the first year, then no change afterwards. (asset sensitive) (asset sensitive) (asset sensitive) (asset sensitive)
Short-term rates increasing .5% per quarter + $9 + $23 + $24 + $56
in the first and second year. (asset sensitive) (asset sensitive) (asset sensitive) (asset sensitive)
Short-term rates unchanged in the first year, — — – $1 + $3
then increasing .5% per quarter afterwards. (liability sensitive) (asset sensitive)
Short-term rates decreasing .5% per quarter + $2 + $15 – $4 – $32
in the first year, then no change afterwards. (liability sensitive) (liability sensitive) (asset sensitive) (asset sensitive)
FIGURE 27. NET INTEREST INCOME EXPOSURE OVER A TWO-YEAR TIME FRAME