KeyCorp's New Business Moves Should Help Increase Profits

| About: KeyCorp (KEY)

KeyCorp (NYSE:KEY) of Cleveland, Ohio, is a regional bank that recently raised its quarterly dividend by 10%. That was a move investors seemed in favor of, as shares are up almost 22% year to date. KeyCorp's first-quarter revenue did rise 1.3% from a year earlier, but fell 3.1% from the fourth quarter to $1 billion. The bank's profit fell 2% from a year earlier, to $204 million, and has remained virtually flat from the fourth quarter on.

In other areas of shareholder return, Fox reported that KEY announced that the Fed has raised no objections to its goals of additional capital distribution. These goals include a share buyback program of up to $426 million. KeyCorp wants to issue share buybacks using after-tax proceeds realized on the pending sale of Victory Capital Management and Victory Capital Advisors. In February, the company sold Victory for $246 million. Current estimates of the after-tax net gain come in around $120 million to $125 million. This sale is expected to close in the third quarter pending regulatory and shareholder approvals.

At the same time all this is going on, KEY has also made a lot of moves in the mortgage servicing area. One recent big move was buying commercial servicing rights from Bank of America (NYSE:BAC). The commercial mortgages involved have a total portfolio value of $110.5 billion. This business makes sense for KEY since it can increase the bank's revenue as it struggles (like most regional banks) in the current low-interest environment to generate additional top line revenue.The deal should make KeyCorp the third-largest commercial mortgage service after Wells Fargo & Co. (NYSE:WFC) and PNC Financial Services Group (NYSE:PNC). The terms of the transaction weren't disclosed to the public.

The BAC deal includes $110.5 billion in servicing rights for performing commercial mortgages, and $14 billion for loans in default. Special servicing rights for these loans in default are more profitable for a bank because banks in general charge a higher fee to deal with loans that are in default. Keycorp has subcontracted with Berkadia Commercial Mortgage LLC, which is another commercial mortgage servicer, to service $75 billion of the BAC portfolio. KeyCorp was forced to subcontract the servicing rights because the private investors who actually own those loans require a higher credit rating than KeyCorp currently has. But Berkadia isn't just taking here. It is giving KEY the servicing rights to $10 billion of defaulting loans. Remember, this lets KEY earn higher fees for these special servicing rights.

These efforts by KEY to have a steady revenue flow in an area that is less cyclical than lending is a reaction to the current financial environment. Low interest rates mean that a bank makes less money lending. And economic confusion means there are less people asking for loans in the first place. Not that KEY is giving up loaning money. It must be remembered that as part of the new servicing arrangement, KeyCorp is getting deposits that carry no interest. These monies can be used by KEY to fund other high-margin banking services in the future.

KeyCorp is moving on other fronts, as well. TSYS of Columbus, Ga., said it has signed a long-term payments agreement to provide payment processing services for the bank company's consumer credit card portfolio. The length and financial terms of the agreement were not disclosed. This follows last year's decision by KeyCorp to begin self-issuing credit cards. Credit cards facilitate a very high interest form of consumer lending. Credit cards typically generating 13% or more in interest returns on floated spending.

KEY bought a $725 million Key-branded credit card portfolio from Elan Financial Services as part of that effort. TSYS said that KEY has selected its TSYS TS2 platform to convert the portfolio and issue new cards as KeyCorp goes forward. Beyond the payment processing agreement, TSYS said KeyCorp has also contracted with it to provide fraud prevention and risk management services to bank clients.

KeyCorp issued a release about this agreement. As Beth Mooney, KeyCorp chairman and chief executive officer said in it that, "As we move aggressively toward expanding our presence in the consumer credit card market, we need a partner who can provide us with strong card industry insight, flexibility and speed-to-market. TSYS has already demonstrated their ability to meet our needs for a turnkey solution, and we are confident they are a good fit for KeyBank."

Moody's has placed some of KeyCorps business under review for an upgrade. On May 17, Moody's issued a release that said, "Moody's Investors Service has placed under review for upgrade the ratings of four classes of notes in three KeyCorp Student Loan transactions. The underlying collateral for these transactions includes loans originated under the Federal Family Education Loan Program and private student loans."

It also went on to say, "The reviews for upgrade are prompted primarily by the continued build-up in the tranche level credit enhancement for the Group II notes. In addition, classes II-B and II-C in the 2005-A transaction benefit from a build-up in over-collateralization as a result of declining defaults in the Group II pool. The quarterly defaults for the Group II pool in the 2005-A transaction have been declining from the peak levels."

This is all very dense and complex, but the takeaway is that right at the moment, things seem to be going well for KEY. The recent aggressive moves to increase top-line revenue is just what the bank needs to regain momentum in the marketplace.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Money Center Banks
Problem with this article? Please tell us. Disagree with this article? .