KeyCorp, which has been undergoing a lengthy restructuring program in an effort to shore up leaking profits, plans to exit the auto leasing business and reduce indirect lending, resulting in a hefty $402 million in various charges for the second quarter.
The charges will result in after-tax losses of between 34 cents and 38 cents per share, chief executive officer Henry L. Meyer 3d said. For the year, the company expects earnings between $1.43 and $1.53 per share. Speaking at the companys annual shareholder meeting, Mr. Meyer said he is taking several measures to improve the Cleveland banking companys financial performance.
Mr. Meyers plan includes exiting the auto leasing business, which has proven unprofitable for a number of banks, and slashing KeyCorps total auto loan portfolio from $7 billion to $3 billion. The total after-tax charge includes some $27 million stemming from the cost of exiting the leasing business, $189 million in added loan loss reserves, and $150 million related to losses stemming from its AutoFinance Group, acquired in 1995.
I will tell you frankly, I was disappointed with our first-quarter results, Mr. Meyer told shareholders. By taking the charges, the company will be streamlined and more likely become profitable, he said.
KeyCorp is not the only banking company having car trouble. In March, Charlotte, N.C.-based Bank of America Corp. announced plans to scale back its participation in the auto leasing business.
KeyCorps decision to exit the auto leasing business was a move in the making, according to Matt Snowling, an analyst at Friedman Billings Ramsey. Bank One Corp. and Wells Fargo & Co. have also taken charges on auto leasing, and First Union Corp. sold its unit. They are somewhat behind the curve, he said of KeyCorp. They are the last to come out and say this isnt making money.
The charges are the latest pitfall for a company that has been in an almost constant state of restructuring for the last couple of years. Earnings quality was somewhat suspect in the past, Mr. Snowling said. It seems like they are cleaning house this quarter. They are trying to reposition themselves for better earnings in 2002.
The company also plans to reduce indirect lending and eliminate credit-only transactions. KeyCorp is establishing a $2.7 billion commercial run-off portfolio to help eliminate the indirect lending. Another $300 million will be added to the loan-loss reserve to help in resolving the credit transactions. The company does not plan on replenishing the $300 million reserve.
Mr. Meyer said one priority is to reemphasize our commitment to relationship-based activities, while avoiding high-risk, low-return businesses. We believe that focusing on service-centered relationships is the most profitable approach.
Key also will incur a one-time $23 million charge because of an accounting change on retained interest in securitized assets. The company is also taking a $13 million miscellaneous charge.
On Thursday, a generally uneventful day for bank stocks overall, the companys stock actually rose a touch, gaining 0.4% to close at $24.40.
Mr. Meyer, who has just completed his first quarter as chief executive, said the company plans to improve revenue by offering third-party products to clients going forward.
The company has been working to increase profits for the last two years. In late 1999, Key sold its $1.3 billion credit card portfolio to Associates First Capital Corp. The deal included 600,000 Visa and MasterCard accounts, resulting in a net gain of approximately $330 million.
Last fall, the company announced plans to cut its work force by 10% or 2,300, after already slashing its work force by nearly 1,975. Last December KeyCorp consolidated its retail banking operation and specialty consumer business segments into a single unit to boost efficiency. Under the new organization, retail banking and home equity finance were combined with other consumer finance units, including Champion Mortgage.
That consolidation was part of a plan to cut the number of its business units by nearly half, from 22 to 12. By bringing the units into more centralized divisions, the company said it would be easier to study each business line to find ways to maximize revenue.
Our decision last year to recognize 12, rather than 22, lines of businesses is helping enormously by allowing us to make decisions faster and more easily hold people accountable for achieving expected results, Mr. Meyer said.
By cross-selling products, KeyCorp believes it can increase revenue growth substantially, he said.