KeyBank 2007 Annual Report Download - page 34

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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS KEYCORP AND SUBSIDIARIES
A significant portion of Key’s trust and investment services income
depends on the value and mix of assets under management. At December
31, 2007, Key’s bank, trust and registered investment advisory
subsidiaries had assets under management of $85.4 billion, compared
to $84.7 billion at December 31, 2006. As shown in Figure 12, the
increase was driven by Key’s equity portfolio, reflecting improvement in
the equity markets in general. However, the growth of this portfolio was
moderated by the transfer of assets in connection with the sale of the
McDonald Investments branch network.
December 31, Change 2007 vs 2006
dollars in millions 2007 2006 2005 Amount Percent
Assets under management by investment type:
Equity $42,868 $41,877 $35,370 $ 991 2.4%
Securities lending 20,228 21,146 20,938 (918) (4.3)
Fixed income 11,357 11,242 11,264 115 1.0
Money market 9,440 9,402 9,572 38 —
Hedge funds 1,549 1,032 — 517 50.1
Total $85,442 $84,699 $77,144 $ 743 .9%
Proprietary mutual funds included in assets
under management:
Money market $ 7,298 $ 7,579 $ 7,884 $ (281) (3.7)%
Equity 6,957 5,713 4,594 1,244 21.8
Fixed income 631 629 722 2 —
Total $14,886 $13,921 $13,200 $ 965 6.9%
FIGURE 12. ASSETS UNDER MANAGEMENT
The decrease in the securities lending portfolio was a result of increased
volatility in the fixed income markets during 2007. 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 investment and the
cost of the collateral is shared with the lending client. This business,
although profitable, generates a significantly lower rate of return
(commensurate with the lower level of risk) than other types of assets
under management.
Service charges on deposit accounts. Service charges on deposit accounts
were up from 2006, due primarily to an increase in overdraft fees
resulting from higher transaction volume, a rate increase instituted
during the second quarter of 2007 and growth in the number of
transaction accounts within Key’s Community Banking group.
Investment banking and capital markets income. As shown in Figure 13,
investment banking and capital markets income declined during 2007.
The decline was caused by less favorable results from investment
banking activities, from other investments, and from dealer trading and
derivatives, all of which reflected extraordinary volatility in the fixed
income markets during the latter half of 2007. The loss recorded from
other investments in 2007 was due largely to reductions in the fair values
of certain real estate-related investments held by the Private Equity unit
within the Real Estate Capital line of business. This revenue component
declined from 2006 because of these reductions and a $25 million gain
from the initial public offering completed by the New York Stock
Exchange during the first quarter of 2006.
The level of investment banking and capital markets income was
essentially unchanged from 2005 to 2006, as significant growth in
investment banking income was offset by reductions in dealer trading and
derivatives income, and in income from other investments. Dealer
trading and derivatives income declined in part because Key recorded $11
million of nonrecurring derivative income during the first quarter of 2005
in connection with the sale of its indirect automobile loan portfolio.
Year ended December 31, Change 2007 vs 2006
dollars in millions 2007 2006 2005 Amount Percent
Investment banking income $86 $112 $ 87 $ (26) (23.2)%
(Loss) income from other investments (34) 43 48 (77) N/M
Dealer trading and derivatives income 17 33 54 (16) (48.5)
Foreign exchange income 48 42 40 6 14.3
Total investment banking and capital markets income $117 $230 $229 $(113) (49.1)%
N/M = Not Meaningful
FIGURE 13. INVESTMENT BANKING AND CAPITAL MARKETS INCOME