Bank chiefs should retire the "headwinds" metaphor and start thinking in terms of crosscurrents. Tsunami-style ones. From all directions.
Just ask Beth Mooney, the chairman and chief executive of KeyCorp, who sat at the edge of a gathering storm as she answered questions Tuesday about the Cleveland bank's quarterly results — and its future.
KeyCorp, like a lot of banks, needs more revenue. Its pre-provision net revenue in the fourth quarter fell 38% from a year earlier, and 25% from the previous quarter. It recently agreed to buy 37 branches in western New York, but that kind of fill-in deal is a drop in the bucket. Luckily, it has a healthy amount of capital — its Tier 1 common equity exceeds 11%.
But investors are generally skeptical about the returns from deals, and analysts peppered Mooney with several versions of a fundamental question: Are you going to use your excess capital to accelerate growth, or are you going to spend it on share buybacks or dividends to mollify shareholders who are not sure how much longer they want to hold on?
Mooney insisted that KeyCorp is not hell-bent on doing more deals. She reiterated that message later in an interview, to the point that it resembled a mantra she might quietly repeat to herself at night.
"There is not pressure to do deals," she said.
"The words we consistently use are 'disciplined' and 'opportunistic.' … We are building value for the long term. … We are trying to set very much a tone of patience, long-term thinking, strategic vision and a strategy that makes sense to stay the course."
She offered a clear list of priorities to analysts and an interviewer. "We have consistently said that our capital priorities are supporting organic growth and loan growth, our common dividend, share repurchase and, fourth on the list, would be other opportunities such as acquisitions."
Then, she pointed out, that KeyCorp's capital plans hinge on more than management's desires or investor demands, but the approval of the Federal Reserve Board, too.
"Overall, how we deploy capital in the coming years is a very important part of how we will run our business."
The more one mulls her comments, the more the preferences that chief executives at rivals like Fifth Third Bancorp, Huntington Bancshares Inc. and PNC Financial Services Group Inc. have expressed in recent weeks for prudence and internal growth make sense. It is almost a necessity; but will it work?
Organic growth is not easy, Mooney acknowledges.
Though KeyCorp — again, like other banks — has increased commercial and industrial, agricultural and other commercial loans, low interest rates stifle the benefits of that expansion. Debt and equity issuance, merger and acquisitions advice and other fee-based capital markets services have slowed. And don't forget the Durbin rule, which KeyCorp says cost it $15 million last quarter and hasn't taken its full bite yet.
Her prescription is a different kind of M&A, an "acquisition of relationships clients" that comes from roll-up-your-sleeves building of ties with midsize commercial clients that need lots of services. KeyCorp will have to offer new products, strengthen its rewards, targeting the right clients and marketing.
Mooney drew an example from a past, in which a teller referred a small business to another part of the bank, which helped it obtain a Small Business Administration loan to fund an expansion. The company got bigger, took out more loans from the bank and eventually turned to KeyCorp financing and consulting help when it gambled on the purchase of an abandoned processing plant.
"Years later, they are now No. 1 indeed in their market space," she said.
Yet the anecdote underscores the challenge. Big successes like this do not happen every day, and this relationship bore fruit after years of work. The personnel and the marketing of basic banking cost money, too; KeyCorp's noninterest expenses rose 3.6% year over year.
KeyCorp's revenue suffered some one-time hits last quarter, including a $24 million charge related to some former Visa holdings and a $10 million charge connected to the elimination of some debt, KeyCorp officials point out.
That said, its guidance for pre-provision net revenue this year is $280 million to $330 million, down from $300 million to $340 million it projected for 2011.
Still, Mooney says, KeyCorp will resist the temptation for anything more than selective acquisitions.
"As it relates to capital, we have said we will opportunistically look at acquisitions that enhance our franchise," she told one analyst.