A year after Keycorp and Society Corp. completed a merger forming the nation's 10th-largest banking company, Wall Street is beginning to wonder when the deal will pay off for investors.

To the discomfort of the merged bank's officers and the consternation of long-term investors, the Cleveland-based company's stock is trading at a 10.1% discount to what Society's value stood at immediately prior to the Oct. 4, 1993, announcement of the merger.

That compares with a lesser 3.4% decline in the American Banker top 50 index and a nearly 9.4% gain in the S&P 500 index.

At the root of the trading setback, analysts say, is market displeasure over sluggish revenue growth at the $66.8 billion-asset company. Having thus far failed to show the merged entity can grow revenues faster than its predecessors, Keycorp's managers have been put on a short leash.

"There is no evidence that the growth rate has been enhanced, and in that sense, the merger between Keycorp and Society has fallen short," said Raimundo C. Archibold Jr., an analyst at First Manhattan Corp.

To be sure, Keycorp remains one of the nation's top-performing large regional banking companies. The institution delivered a sound 1.36% return on assets last year, and no one questions the bank's prospects for continued solidity.

But health is not the central issue when it comes to assessing the Keycorp-Society union. Given that there was no overlap between the two banks' territories - and thus little opportunity for cost cutting - revenue growth has always been the central rationale for the deal.

Robert Gillespie, the former Society chief executive who is now president and chief operating officer of Keycorp, set the target in a 1993 interview, saying: "I believe we are going to enhance revenues as early as 1995, and in a substantial way."

Now that 1995 has arrived, analysts are still waiting. S.G. Warburg & Co. estimated in a recent report that 1995 revenues "should show little improvement over 1994 levels."

Indeed, the company's top officers recently told New York analysts that a just-unveiled strategic plan would not translate into above-average growth until 1997.

What went wrong?

The consistent response from the half-dozen analysts interviewed for this story is that Keycorp's liability sensitivity left it inordinately exposed to last year's Federal Reserve rate hikes.

The exposure, which was enlarged by the use of derivatives, occurred as liabilities rolled over more quickly than assets, permitting Keycorp's interest expense to rise more rapidly than interest income.

On top of a whopping 48-basis-point decline in its net interest margin, to 4.83%, Keycorp announced $100 million of pretax portfolio restructuring charges, to be spread over the fourth quarter of 1994 and the first quarter of 1995.

"Rates spiked decisively, and Keycorp's margin came down so fast that it offset a lot of other things," said Livia Asher, a banking analyst at Merrill Lynch & Co.

Keycorp's officers say the merger thus far has unlocked a $30 million annual increase in interest and fee revenues, equal to 0.56% of total 1994 interest and fee revenues. Ms. Asher said margin compression "makes it hard for outsiders to quantify progress."

James Wert, Keycorp's chief financial officer, conceded that liability sensitivity worked against the company. But he said that accounted for only a third of the margin decline. The executive cited stiff price competition on loans and prepayments of higher-yielding automobile and residential loans as the dominant factors.

In retrospect, said Mr. Wert, Keycorp and Society came together in the final days of what he termed "bank heaven," an era of liberal Federal Reserve monetary policy that exaggerated the profitability of financial intermediaries.

"Take away the underpinnings of an accommodative Fed policy, and you are back to an environment where there is insufficient support for banking's core infrastructure," said Mr. Wert. That, combined with ever-stiffening nonbank competition, "makes the business more volatile," he said.

Analysts "are just going to have to get used to the new realities," said Mr. Wert. "We are tired of apologizing."

Still, analysts say Keycorp's travails seem to buttress the market's generally unfavorable view of mergers of equals.

Felice Gelman, a buy-side analyst at Keefe Managers Inc., said combining two franchises the size of Keycorp's and Society's "is a gigantic project" under the best of circumstances.

A union between equals further complicates the picture, she said. Extra consensus-building is required when there is no dominant partner, and that slows decision-making and responsiveness.

"Yes, the environment has been difficult, but other regional banking companies are coping in better fashion because they are not distracted by cultural and integration issues," said Ms. Gelman. "The reality is, the envisioned benefits of almost every merger of equals I can think of have taken considerably longer to extract than what was originally advertised."

In that light, said Morgan Stanley analyst Dennis Shea, an outright sale still appears more desirable than a merger of equals for most banking companies seeking strong partners. "If you are going to give up your independence, why not get a purchase premium," said Mr. Shea, who noted that most targets fetch at least 30% premiums over pre-acquisition trading values.

Predecessor Keycorp was not auctioned, however, and managers of the successor company say they are getting on with business. Under "First Choice 2000," the new strategic plan, Keycorp by the end of the century aims to deliver annual growth double that of an average bank.

But analysts are leaving the ball in Keycorp's court, saying they want to see more financial evidence of progress before advocating anything more than a return to industry-average trading multiples.

"The jury is still out," said analyst Nancy Bush of Brown Brothers Harriman & Co. "Management says it has achieved a strategic consensus, but the question is how quickly that consensus will be translated into increased operating earnings."

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