KeyCorp (KEY) has largely focused on cutting expenses to improve efficiency but perhaps doing deals, as either a buyer or seller, is the way to go.
Analysts in recent quarters have hammered management at the Cleveland company for its chronically troublesome efficiency ratio. That was especially true on Thursday when KeyCorp announced its fourth-quarter earnings. Expenses came in higher than expected, and observers weren't happy.
The $92.9 billion-asset KeyCorp cut $241 million of expenses and closed roughly 8% of its branches since June 2012. Still, its cash efficiency ratio meaning how much money the bank spends to earn $1 of revenue was around 65%, even once charges tied to its cost-cutting initiative were excluded. Mike Mayo, an analyst at CLSA, called this figure "lousy" during the earnings presentation.
Nancy Bush, an analyst at NAB Research, questioned Beth Mooney, Key's chairman and chief executive, during Thursday's call about whether the company's inefficiency was a structural problem tied to its lack of scale in certain markets. KeyCorp currently operates in roughly a dozen states ranging from Maine to Washington and all the way up in Alaska. Mooney rebuffed the suggestion.
"I think it's something we have evaluated pretty thoroughly, [and] it is not a structural cost related to our footprint, particularly in an era of image-enabled technology," Mooney said. "There is no particular cost burden to our geographic footprint that I think is burdensome to the company."
Instead, the problem was tied to productivity and generating revenue, Mooney said. To address this, the company would focus on reviewing its processes end to end which has never been done before, Mooney said to boost productivity.
Bush followed up by asking about the potential for acquisitions. Management at the well-capitalized KeyCorp has faced repeated questions about how it would deploy its funds. Its Tier 1 risk-based ratio was almost 12% at Dec. 31.
"I think we would always look at something that could complement a market where we already have presence," Mooney said. "And by building density or bringing in the right customer base, that that would be added. I think we are looking at how can we use investments and technology, mobile and digital to augment our franchise."
Mooney also pointed out that KeyCorp has shown a willingness to acquire specialty businesses. KeyCorp purchased its credit card portfolio in 2012 and a commercial mortgage servicing rights portfolio in 2013.
But this reluctance could be a mistake for the company, Bush said during an interview with American Banker. KeyCorp "has been cutting expenses for years now, so part of their problem is there is not enough revenue," Bush said.
"My belief is they will eventually acquire banks and other businesses, but until then it will be difficult to get the efficiency ratio down to where it is a more respectable number," Bush said. "They need to think about what businesses they want to be in, particularly on the consumer side."
Some areas the bank may consider getting into include mortgages. It sold its mortgage business several years ago and now that refinancing is slowing down and the business is stabilizing, management may want to reconsider it, Bush said.
However, concerns over how much capital banks will need to hold and the potential for regulatory snags may prevent KeyCorp from doing deals anytime soon. If the company fails to seize a bigger share of existing markets, it should consider "pulling in [its] horns to the Midwest and just becoming a more significant player in the Midwest" by selling parts of it business or branch network, Bush said.
"There are markets where they don't have enough share to really enjoy economies of scale," Bush added.