KeyCorp Pressed for More Expense Cuts

The reaction to KeyCorp's cost cuts — nice work, but you'll need to do more — offers a valuable lesson for the many banks that plan major streamlining this year.

Executives at KeyCorp (KEY) faced some questions from analysts during its fourth-quarter call Thursday about whether it was doing enough. KeyCorp still has higher efficiency ratios than some of its peers, including Fifth Third Bancorp (FITB), U.S. Bancorp (USB) and Huntington Bancshares (HBAN).

"We are definitely hearing more and more concern about the cost side and overall profitability," R. Scott Siefers, an analyst at Sandler O'Neill & Partners says of KeyCorp despite some success from its expense-reduction plan. "Expenses will stay high for another couple of quarters and unfortunately investors want to see it come down more materially."

The Cleveland company reported that it lowered its cash efficiency ratio to 69.34% in the fourth quarter, from 73.29% a year earlier. (Cash efficiency removes from the standard efficiency calculation the effect of KeyCorp's intangible-asset amortization, a roughly $45 million expense each year.)

Yet trimming expenses and growth efforts cost money in the short run. Its cash efficiency rose from 64.62% in the third quarter, thanks largely to a $16 million charge tied to its streamlining plan and a$30 million charge related to acquisitions of a credit card portfolio and branches in Western New York.

Expenses should remain elevated in the short term as the company records severance charges and other costs associated with its efficiency plan. It also implementing new systems for its trust accounting, risk management information systems, treasury management and card services, executives said during the call.

Noninterest expense totaled $756 million, up 5% from a year earlier.

"We achieved $60 million in annualized savings in 2012, a strong start to our expense initiative, which exceeded our original goal we had set for the year," Beth Mooney, the chairman and chief executive of the $89.2 billion-asset company, said during the call.

The company last year pledged to cut between $150 million and $200 million in expenses by the end of 2013 and close up to 5% of its branches. It is aiming to reduce its efficiency ratio to between 60% and 65%.

KeyCorp shuttered 19 "underperforming" branches in 2012 and has another 40 to 50 targeted for closure in 2013, Mooney said. It also launched a program streamline its back room and support operations.

KeyCorp has had "meaningful improvements in our operating results of our corporate bank and we've got many initiatives aimed at improving the performance of our community bank," Mooney said after an analyst asked whether the bank should be content with its target efficiency ratio. She specifically pointed to KeyCorp's plans to close some of its branches.

"We have been, are and will be diligent in considering every meaningful idea," Mooney said. "Nothing is off the table."

In addition to cost cutting, KeyCorp has emphasized that it is looking to expand revenue to reach its efficiency target. Total revenue in the fourth quarter reached almost $1.1 billion, up almost 10% from a year earlier.

Average total loans increased more than 6%, to $51.9 billion, from a year earlier. This improvement was mostly driven by an almost 21% increase in commercial, financial and agricultural loans. Mooney also touted it as a "record year" for KeyBanc Capital Markets, which produced strong increases in fee income.

The company's loan pipeline, especially in its commercial business, is significantly stronger now than it was at the same time last year, executives said during the call. KeyCorp expects to have mid to high single-digit growth in its average total loans in the coming year.

KeyCorp's net interest margin was 3.37%, up 14 basis points from the third quarter and 24 basis points a year earlier. This was slightly higher than expectations, Siefers says. Going forward, the company expects its net interest margin to remain around 3.30%, executives said during the call.

KeyCorp's fourth-quarter earnings increased 1.5%, to $197 million, from a year earlier. For 2012, the company earned $836 million, almost 3% higher than 2011. KeyCorp reported fourth-quarter earnings per share of 21 cents, meeting the expectations of analysts polled by Bloomberg.

The company's shares were trading at $9.14 early afternoon Thursday, about 1.7% lower than Wednesday's closing. Roughly 31.8 million shares changed hands, up from its average daily volume of 13.5 million.

"Overall, the quarter was pretty consistent with what we were looking for," Siefers says. "The story really is reverting to costs at this point."

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