KeyCorp's CEO Presents at Citigroup US Financial Services Conference (Transcript)

Mar. 5.13 | About: KeyCorp (KEY)

KeyCorp (NYSE:KEY)

Citigroup US Financial Services Conference

March 05, 2013 2:50 pm ET


Beth E. Mooney - Chairman, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee and Chairman of Enterprise Risk Management Committee

Jeffrey B. Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council


William R. Katz - Citigroup Inc, Research Division

Josh Levin - Citigroup Inc, Research Division

Beth E. Mooney

Thank you, Arjun [ph]. We appreciate the opportunity to be here today at Citi's conference here in Boston. As you said, I'm joined by Jeff Weeden, our Chief Financial Officer, and he will participate in the Q&A portion of our presentation today. And also in the audience is Vern Patterson, from our Investor Relations team.

On Slide 2 is our forward-looking disclosure and non-GAAP financial measures. It covers our presentation, as well as the Q&A session of our comments today.

Let's go ahead and start on Slide 3. Over the past several years, we have made significant progress in repositioning our businesses, de-risking our company and pursuing a strategy that not only differentiates us in the marketplace but also enables us to grow and increase shareholder value.

If you start with 2010, as we were coming out of the downturn, our focus was on restructuring the balance sheet and reducing our risk profile. We became a core-funded company and began to see significant improvement in our credit quality. At that same time, strategically, we were sharpening our focus around specific client segments, including industry verticals within our Corporate Bank, and we left 2010 a much stronger and more stable company.

I took over as our CEO in 2011 with a clear focus to drive relationship and client acquisition, shareholder value and loan growth. During that year, we not only saw the inflection point in our loan growth, but we also successfully exited TARP and we began to reduce our exit portfolios. Having addressed the balance sheet and risk profile, last year was about enhancing profitability and our growth trajectory.

We delivered on our commitment to grow revenue, with growth of 4% in 2012 versus 2011, and 10% in the fourth quarter compared to the prior year. We increased our net interest margins, grew loans, especially in our C&I loan book, and leveraged our fee-based businesses. Funding costs and credit quality also improved materially during the year.

And as you know, we made critical investments in our geographic footprint in Western New York and our payment product offerings, with credit card and merchant services. With all of these positive achievements, we recognized that there were still serious headwinds in front of us and launched an efficiency initiative to improve operating leverage and remove $150 million to $200 million from our cost structure.

We ended 2012, we achieved cost reductions of $60 million. And I am confident that we will deliver the remainder of the $200 million by the end of 2013. As we focus forward, we are committed to delivering on our efficiency ratio target of 60% to 65% by the first quarter of 2014. While not an endpoint, it is an important milestone. We will accomplish this by both growing our revenue and reducing and variablizing our cost structure, and we will continue to be strong stewards of our capital and our focus on maintaining our revenue momentum through executing on our relationship-based strategy.

Turning to Slide 4. In terms of footprint, I believe that the balance and diversity of our franchise has been and remains an important part of our growth strategy. And we are continually evaluating the success of our efforts and our market opportunities as we think about future investments as well as our efficiency initiatives. Our footprint provides us with meaningful advantage in terms of pricing, risk management and opportunities to expand and grow. In addition to being our primary source of stable low-cost funding, our branch franchise gives us a critical access point to our small business and middle-market banking clients, where market presence and branding are differentiating factors in fostering and serving these important relationships.

And now, I'm going to spend a few minutes on some of our market specifics. In our Eastern markets, we see an older, wealthier population and more established businesses. We are able to leverage not only our wealth management capabilities but also our denser footprint and our long-standing presence to continue to drive meaningful customer relationships in all of our businesses.

In the West, we have a younger, faster-growing population and a different set of corporate customers, and we are seeing success in terms of penetrating both. While the East offers us more deposits, the West has been a driver of strong lending and, historically, of less expensive deposits. The West generates about 1/3 of our deposits, but provides over 45% of the Community Bank loan balances. This is also an area where we have continued to invest, with 70 new branches out of the 400-plus in the Western markets, which gives us plenty of runway as these new locations mature.

In all our markets, our branches run off a common technology and operating platform, utilize many shared services and lever our image-enabled back-office. We feel we are poised to realize growth as both our community and Corporate Bank franchises gain meaningful headway in these markets. Our focus on serving business customers with the combination of local relationships and distinctive industry expertise is positioning us to win in both the Eastern and Western part of our franchises.

Moving to Slide 5. I've spent a lot of time talking about our distinctive positioning with commercial clients. Like our peers, we offer all of the traditional loan, deposit and treasury management products to these clients. What makes us different and, in my opinion, better, are the capital market capabilities that we bring to those clients. Many regional banks say they have this expertise, well, we believe ours is deeper and broader. We have over 300 experienced senior bankers, delivering these services, from commercial mortgage banking, which is coming off a record year in 2012; to M&A; debt placements; equity capital markets and industry-focused research. When we couple our expertise, resources and middle-market capabilities with our strong local relationship managers, we win.

Turning to Slide 6. Let me tell you how this might feel for a middle-market client. Relationship starts with the local leadership in the market and their involvement with the clients in the community. Augmented by our physical presence in the market, the combination of the local bankers in the market and our overall convenience with branches, ATM and other channels generate a real presence for Key. Then we bring in the expertise, such as providing industry research to clients who want to keep up with trends and changes in their industry. We enhance that with industry-focused bankers, who bring meaningful, relevant knowledge and lead a series of strategic conversations, which further allows us to demonstrate the true depth and breadth of our capabilities.

Over time, we become a valued adviser to the company, both through that original local touch and ongoing relationship and the truly distinctive industry expertise and product capabilities that the average middle-market client rarely gets to experience. All delivered seamlessly through our collaborative approach, we create a different client experience that leads to enduring and profitable customer relationships.

On Slide 7, we show our relationship structure across the spectrum of our business clients. In our Community Bank, we have dedicated business banking and commercial banking RMs, who serve our local relationships. In the Corporate Bank, we have aligned our bankers around our 6 Key industry verticals with true expertise that allows us to go to the client both in and out of our footprint. Our opportunity is to continue to grow this platform by adding outstanding senior bankers who bring with them relationships that are aligned with our targeted segments. Over the last several years, we have added 86 bankers to our platform and they haven't disappointed. They've generated $240 million in incremental revenue over that time period.

Moving now to Slide 8. There it is. We've been strengthening our model for several years and we feel like we are hitting our stride, with significant room for growth. In our footprint, we have at least 10,000 companies in our targeted industry verticals, with annual revenue between $25 million and $1.5 billion. Currently, less than 2,000 are clients. This presents a meaningful opportunity for us to penetrate our markets further by leveraging our platform for profitable growth.

And the real measure of our success can be seen on Slide 9. We have had significant growth in our C&I portfolio, demonstrating that our model is resonating with customers and we are taking market share. Coupled with our success in growing loans, we are seeing strong growth in our capital market fees, including investment banking and debt placement fees. We think this is a great indicator that not only are we acquiring clients by providing credit, but that our model is driving a real advisory relationship in which we earned the right to serve these customers on their most important business issues.

Turning now to Slide 10. In addition to continuing to execute our strategy, we are constantly looking at our businesses and finding ways to make them better. In some cases, like payments, online and mobile, we are making investments to ensure that we can fulfill client needs with great products and in the channels that they want. We also are looking for new ways to serve our existing clients and to find new clients.

As you know, in 2012, we reentered the credit card business as a self-issuer by acquiring a portfolio of current and former KeyBanc clients. In the spirit of operating efficiently, we did this by entering a third-party arrangement for back-office processing to drive more favorable client economics. We think there's a lot of upside here, as today we have only penetrated about 12% of our clients with credit cards. We believe that owning the client makes a big difference and while early, we saw a 93% increase in new card production in January of 2013 versus January of 2012. That's obviously only 1 month, but it certainly seems to support our views.

We also acquired 37 branches in Western New York. And as we said before, the acquisition continues to go well. We are exceeding all of our clients' and employee metrics at this time. And sometimes, evaluating our portfolio of businesses means it's time to exit, as we did with education and indirect lending. We also recently announced the sale of Victory Capital Management. This is the business that over the last several years has repositioned itself to become an adviser-driven, institutional money manager. As such, there was very little connection to the rest of Key and our client base. Given the prospect of continuing to make needed investments in that platform, we determined that it wasn't the best use of our capital and that there were better owners for this business than Key. We expect this transaction to close in the third quarter and we will seek regulatory approval to repurchase common shares for the amount of the gain realized.

Our businesses also need constant fine-tuning, and we've done that as well. For example, we've built the commercial mortgage banking platform that has doubled its growth over the last 2 years. We've also redefined merchant service business by exiting our joint venture for new originations, taking the business on directly as of February 1. Similar to credit card, we think owning the client will translate to real growth with our business customers. Again, we have a very attractive back-office arrangement, allowing us to focus on sales and service with our clients.

And lastly, we have taken a hard look at our branch network, given the low rate environment and the accelerating change in customer behavior. We are addressing that network by closing, relocating and consolidating branches, rationalizing the ATM network and enhancing our alternative channels.

Moving now to Slide 11. In July, with our second quarter earnings call, we told you that we would take out $150 million to $200 million out of our cost structure. In January, we shared that we were well on our way, having achieved $60 million of that on a run rate basis at year end. Today, I want to provide you with some more detail on this initiative and I am confident that we are going to deliver on this commitment. On this slide, we show a path the $200 million of run rate savings by year end, a critical step in achieving our near-term goal of a 60% to 65% efficiency ratio by the first quarter of 2014. We have divided our efforts into 5 major categories and have shown what we think we will realize against each category, and providing you with some illustrative examples of the types of actions we are taking.

For example, in vendor and spend management, we are negotiating better contracts and more efficiently managing our vendors. In support and alignment, we are sourcing in places where it makes sense for others to do the work instead of ourselves. Our Berkadia transaction last year is a good example of that. We've looked at our support infrastructure and reorganized and consolidated it to deliver better service more efficiently in addition to process improvements. And I already mentioned the work we're doing with our branches. We closed 19 branches in 2012 and we will do another 50-plus this year, rationalizing about 5% of our branch networks. In sales, we have and will continue to look at our go-to-market structure and streamline it so that decision makers are empowered and are closer to the client. We will also ensure that our sales teams are freed up to spend more time with customers and prospects.

Lastly, we have looked at our marketing and insights team and we're making changes there as well that will allow us to direct our marketing spend in a more targeted and efficient way. And during 2013, we will continue to incur severance and other costs related to our efficiency initiatives. And by the fourth quarter, we expect our quarterly expense run rates to be in the range of $680 million to $700 million, which excludes approximately $20 million in expenses related to Victory Capital Management. And further, we expect to be within our targeted efficiency ratio range of 60% to 65% by the first quarter of 2014.

The result is a robust plan to achieve these savings, but beyond that, the establishment of a culture of continuous improvement that goes well beyond incremental steps. Through this effort, we have identified lists of opportunities in excess of what we have shown you here. And we are constantly reviewing those, assessing their value and visibility and we'll continue to put things into the queue. This clarity helps demonstrate why I am confident that we can and will deliver on our targets.

Now let me close with a few slides that provide detail on financial trends and priorities. On Slide 12, you can see that Key has done a good job in the latter half of 2012, defending its net interest margin relative to peers. In the fourth quarter alone, our margin was up 24 basis points year-over-year compared to a decline for the peer median. Assuming a continuation of the current interest rate environment, we expect our margin in the first quarter to be in the 330 range and drift down 1 to 3 basis points per quarter throughout the year. Net interest income should benefit from higher levels of average earning assets, driven by continued loan growth, especially from our C&I book, and we have the opportunity to further reduce our funding costs.

Turning now to Slide 13. We have a strong capital position and how we deploy, invest and return that capital will be some of the most important decisions we will make in the coming years. To that end, our capital priorities have remained consistent, focused on organic growth, dividends, share repurchase and opportunistic growth.

In 2012, we returned approximately 50% of our net income to shareholders, including the repurchase of $251 million of common stock, which began in the second quarter last year, and an increase in our quarterly dividend. And of course, on March 14, we will have the Federal Reserve's response to our capital plan, which we will share with you at that time.

As I close on Slide 14, I want to emphasize why I remain positive about the outlook for Key and believe that while we always have work to do, we're on the right path to achieve our long-term targets. As I've discussed, we've made substantial changes to our organization over the past few years, and we are now focused on efficiently managing our franchise and delivering what we will believe to be a differentiated client experience. And if we do that well, we will continue to increase our client base, grow our balance sheet, improve revenue and profitability and deliver shareholder value.

More specifically, we plan to improve our operating leverage by both increasing revenues and reducing and realigning our cost structure. And as I mentioned earlier, we are on our way to achieving our near-term efficiency targets. And we'll also continue to work closely with our board and our regulators to manage our capital consistent with our capital priorities.

As I approach the end of my second year as the CEO of Key, I couldn't be prouder of the progress we have made. Our employees have never been more focused on delivering outcomes for our clients and executing on our strategies.

And with that, I thank you for your time and Jeff and I would be happy to take your questions. Thank you.

Question-and-Answer Session

William R. Katz - Citigroup Inc, Research Division

I guess the first question would be just in understanding that you can't really say much about CCAR. Just could you help everyone in the room and me to just understand how the -- the timeline and kind of how the milestones to look forward on the 7th and the 14th and what we can expect between that time and now, and just any anecdotal stories about the process this year versus last year?

Beth E. Mooney

I think there's not a lot to add other than what I already think is out in the public venue, which is on the 7th of March, the banks will receive the results of the stress test from a quantitative point of view. And then on the 14th is when we will learn of the results of the outcome of our capital actions, request for capital action. So the next week will be impactful and then we would not know nor would we plan to announce whether the -- how our capital plan was submitted and whether we receive an objection or not from the Federal Reserve that we will know on the 14th and obviously, we'll share it on the 14th, as will all the other banks will come through the stress test. He's going to make you walk up.

William R. Katz - Citigroup Inc, Research Division

And just a second question would be on loan growth and kind of looking at the industry data through 1Q -- through, yes, today, at 1Q '13, and looking to other presentations today,. Do you have any comments on kind of this seasonal trend you're seeing? And how much may actually be seasonal versus maybe a slowdown that is not -- that's responsible because of seasonal reasons?

Beth E. Mooney

First quarter typically is a time where there is seasonal changes to patterns in loan growth because there's always often a increase in activity in the fourth quarter. And as we saw this year, there were some -- indeed, some transactions related to the uncertainty around tax and fiscal policy. But we have said in our earnings guidance that we gave at the fourth quarter call that we expect through the year to see mid to upper single-digit loan growth, and that growth will be led again by our growth in our C&I loan book. Don't have any reason to have a different view. It is an economy where I think clients and business clients particularly continue to be cautious. But as they did last year, we have seen a combination of our own client base borrowing for things that will improve the efficiency of their business, for things that will allow them to take out a competitor to become -- acquire a product or capability they think they need, as well as our ability to continue to acquire new clients, with half of our growth last year coming from new client acquisitions. So while first quarter always has that particular attribute or some seasonality, we think through the year, it is a pretty resilient economy and that we should be able to mid- to upper-single-digit growth.

Josh Levin - Citigroup Inc, Research Division

When you think about kind of M&A and your most recent disposition, how do you sort of weigh those? I mean, was that driven by wanting to make a more efficient organization or was that driven by some other factors? I mean, obviously, it was, what, $85 million of expenses a year, I think. So how did you guys kind of weigh that?

Beth E. Mooney

I will reiterate what I said in my remarks and then I'll ask Jeff to augment some of the thinking on that transaction, but one is Victory Capital Management was no longer core to our relationship strategy. They had developed a book of business around institutional money management that was essentially a standalone platform. And so as such, as we looked at the execution of our strategy, it was no longer within the purview of how we were viewing growing our business. And then I'm going to let Jeff answer some more about some of the thinking around the efficiency and the other things that went into it.

Jeffrey B. Weeden

Yes, I think from an overall strategy, too, it was something that made a lot of sense for Victory. Victory, being part of a financial institution was always something that they were having to respond to when they were out seeking additional institutional investors and dealing with the consultant community. So this is a way also to kind of set them on their own -- in a pattern, the path that they could have ownership in the new company going forward. From an efficiency standpoint, we disclosed in our press release that it represented about $112 million of revenue and approximately $88 million of expenses. So, it is additive to the overall efficiency by not having it as part of the organization. But at the same time, our expense guidance that Beth gave just a few minutes ago takes that out of the overall equation. And it wasn't a primary driver for doing the transaction, the other strategic issues were.

William R. Katz - Citigroup Inc, Research Division

I guess I'll go again. Just speaking on loan competition and kind of pricing, we've the Midwest has been historically a little more competitive on pricing. Just wanted to hear your comments on competition, either on pricing or even on turn or leverage.

Beth E. Mooney

And obviously, with our geographic footprint, we are competing in several different markets across the country. I would tell you all have varying kinds and types of competitive intensity and pressure. I will tell you that we are seeing some more competitive intensity around structures. I think just before me, Bill Demchak [ph] was here and he said at the very high end of the market you can see a lot of loosening, but we likely see a more in-the-middle market, and where we see the middle-market pressure has a lot to do with the tenure of the loan. We see some trend towards some institutions going out 7 to 10 years on fixed-rate offerings. We have not chosen to do that for a variety of reasons, not the least of each of which AL, from an asset liability point of view, it doesn't really fit in our balance sheet. And there is, in any given transaction, people competing on hold limits. There are people competing on price. I would tell you, on average, if you look over the last 5 or 6 quarters, we have seen a consistency of spread on new business volume of around LIBOR plus 200 to 275 in our new upper-end business clients and middle markets. And our average loan yields have held in our C&I books over that period of time as well. So while there is a lot of competitive pressure, as there is always, I think some people -- what we feel is happening, is with our distinctive model and our combination of our local relationship managers with our corporate bank capabilities, our people tell us you don't have to compete for the last 25 basis points if you're targeting the right client who appreciates the value proposition of what you bring.

William R. Katz - Citigroup Inc, Research Division

I think, with that, if there's no more questions. We'll call the session. Thank you very much.

Beth E. Mooney

Thank you for your time today. I appreciate it.

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