KeyCorp uses sale of indirect auto loans to accelerate share buybacks

KeyCorp has sold what’s left of its indirect automobile loan portfolio and plans to use the proceeds to repurchase up to $585 million of its own stock.

Key offloaded the $3.2 billion portfolio to an investment vehicle managed by a subsidiary of Waterfall Asset Management, the Cleveland-based company said in a Sept. 10 securities filing.

The sale came nearly a year after KeyBank’s parent company said that it would exit indirect automobile lending and focus more resources on consumer mortgages and its budding Laurel Road enterprise, which now includes a digital bank for doctors and dentists. Those moves are emblematic of the bank’s strategy of seeking to build deeper relationships with customers.

Bloomberg

“We are a relationship bank and there’s nothing relationship-oriented” about the indirect auto lending business, Chairman and CEO Chris Gorman said Monday in remarks at an industry conference.

KeyCorp acquired the indirect auto loan portfolio as part of its 2016 purchase of First Niagara Financial Group in Buffalo, New York. The portfolio, which totaled $4.6 billion last fall, has since been running off.

Analysts who cover Key responded favorably to both the portfolio sale and the stock buyback plans. Shares in Key rose 3.4% Monday in midday trading.

The sale will “accelerate the ‘clean-up’ of the loan portfolio,” while the proceeds “allow Key to frontload” some share repurchases, Piper Sandler analyst Scott Siefers wrote in a research note.

Getting out of indirect auto lending now and buying back stock “maximizes shareholder value,” Peter Winter of Wedbush Securities wrote in a research note. He argued that the expansion of the Laurel Road business — which includes student loan refinancing and the digital bank — “is a much better use of capital” than growing a single-product line like indirect auto loans that did not generate the same levels of returns that Key’s relationship-based businesses produced.

The buybacks will be part of an accelerated share repurchase program. In June, KeyCorp’s board of directors approved $1.5 billion in share repurchases.

KeyCorp expects to receive an initial batch of 23.5 million shares, or about 2.5% of its outstanding common shares, on Tuesday, according to the securities filing.

Concurrent with the portfolio sale, KeyCorp also purchased $2.8 billion of senior notes from a securitization that will be collateralized by the sold loans, the $181 billion-asset company said in the filing.

KeyCorp said it will remain the servicer of the auto loans. The portfolio’s sale price was not disclosed.