One year after establishing a section 20 subsidiary, KeyCorp is struggling to gain credibility in the securities business.

During the past 12 months, it has added 25 employees to Key Capital Markets Inc., bringing its payroll to 105. It has bought one of Cleveland's largest investment banks, Carleton, McCreary, Holmes & Co., into its fold. And it has rolled out a partnership with boutique firm SPP Hambro to offer private placements.

But Key Capital Markets had yet to shed the identity of a commercial bank.

"Corporate clients have historically seen the bank as a bank, being able to make loans, but they have not seen us as an investment bank," said Shiv V. Krishnan, president and chief executive officer of the subsidiary. Changing that perception requires time and a track record.

"There is no short cut to it," Mr. Krishnan said. "Aside from getting that kind of talent and expertise, you've got to execute."

Key Capital Markets, which has net capital of $50 million, has fully functional operations in merger and acquisition services, private placements, derivatives, foreign exchange, public finance, trading and sales, and asset securitization, Mr. Krishnan said. The subsidiary also plans to apply for corporate debt and equity underwriting powers this year, he said.

How has the new unit fared? "Results through the first year have been pretty good," said R. Jay Tejera, a banking analyst at Dain Bosworth Inc. "But this has been an excellent environment. The true test will come on the other side of the credit cycle."

The unit's revenue was up almost 25% last year, compared to the previous year's revenue for those business lines already in operation.

The subsidiary brought in about $40 million of revenue last year, said Mr. Tejera, and is expected to bring in more than $200 million annually by 1999.

Although the section 20 unit has not focused on any industry, it leverages much of its business off its parent's corporate banking clients in telecommunications and media, leasing, health care, and commercial real estate. It does, however, target middle-market companies with annual revenues of $25 million to $300 million.

"That market is becoming increasingly more competitive, no question about it," said Mr. Krishnan. "The key is for us to ensure that we are providing solutions to corporate clients' needs."

Developing the unit has also presented other major obstacles. "The challenge for us has been figuring out how you operate in this regulatory environment," said Mr. Krishnan.

"Having worked within the bank setup, there is no question that you are used to a certain amount of regulation," he said, but with a section 20 unit, "you've got three regulatory agencies that are looking over your shoulder, so it brings with it a new level of compliance and regulatory administration."

Another hurdle, said Mr. Krishnan, has been convincing corporate clients that the unit can execute the deals it offers.

Time will be the true test of how well Key Capital Markets can meet its goals, said an observer.

"The strategy makes sense," said Mr. Tejera. "It's still clearly very embryonic. It can, and should, still work, but they have yet to demonstrate how they will do it and how successful it will be."

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