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Bank of America reported its best quarterly profit in more than a year, but with revenue declining and expense-reduction slowing, it is unclear where the company can turn to boost earnings. Similar questions are plaguing many banks as the latest earnings season unfolds.
April 15 -
First-quarter results from U.S. Bancorp and PNC Financial Services Group shows banks have little choice but to wait until the Fed raises interest rates. They have cut expenses almost as far as they can go, and fee income is limited in how much it can offset narrower spread income.
April 15 -
KeyCorp may ultimately need to buy some niche business lines, or sell its operations in some fringe markets, to cure its efficiency woes.
January 24 -
KeyCorp has named Mark Danahy president of its mortgage operations. Danahy had been managing director of Citigroup's U.S. mortgage operation from July 2011 to May 2014 and, before that, was president and chief executive of PHH Mortgage.
March 4
KeyCorp in Cleveland, which has started to benefit from a small, yet strategic, acquisitions, could be on the prowl for similar-sized deals.
First-quarter results, by and large, have been
The $94.2 billion-asset Key was not immune to these challenges; its net interest margin compressed and it posted lower-than-expected fee income. Still, the company held its own by managing expenses and tapping into recent acquisitions such as
"Overall, KeyCorp's quarter was pretty good, particularly in the context that it hasn't been a great earnings season from the large regionals," said Scott Siefers, an analyst at Sandler O'Neill. "They did a nice job of controlling costs and credit quality, so that allows them a little wiggle room in the overall earnings profile."
Key's trust and investment services income received a lift from the Pacific Crest deal, though a number of other fee lines, such as investment banking and debt placement fees, took a hit. Management, meanwhile, said during a conference call to discuss quarterly results that more deals like the Pacific Crest acquisition are possible.
"There are clearly businesses out there that are very niche-focused that we think could fit into the platform we have built," said Christopher Gorman, president of Key Corporate Bank. "In the ordinary course of doing business we are always out looking."
Future deals are likely to remain small, Siefers said. In addition to Pacific Crest, Key
Overall, Key's net income fell almost 4% from a year earlier, to $227 million, though earnings per share of 27 cents met the average estimate of analysts polled by Bloomberg.
Smaller deals "don't move the needle" on their own, but they "tend to be positive" in the aggregate, Siefers said. "Personally I would be surprised to see them do something big and flashy. It's not their style."
Key executives also addressed the possibility of buying assets from GE Capital as General Electric
Beth Mooney, Key's chairman and chief executive, noted that her company has a policy barring her from discussing specific transactions, though she noted that, "as a historical precedent, we haven't bought portfolios, per se, just to supplement our balance sheet."
Mooney, however, did not hesitate to weigh in on Key's opportunity to snag business from GE Capital's breakup.
GE Capital "has been a strong competitor in the market," Mooney said during Thursday's conference call. "We see them in many of our businesses, and we think these kinds of situations offer great opportunities for our team as markets get disrupted."
Mooney's tempered remarks about a GE Capital deal contrasted with that of other banks, including Wells Fargo and U.S. Bancorp, Siefers said. Wells Fargo has already
Richard Davis, U.S. Bancorp's chairman and chief executive, said during his company's quarterly call that his appetite for buying assets from GE Capital or finding another portfolio of loans was "definitely higher based on the lack of alternatives on how to deploy both the deposit growth we have and the capital that we are starting now to build."
Besides finding ways to boost revenue, Key's management is also focused on controlling costs to lower its cash efficiency ratio, which was flat from a year earlier, at 65.1%. Key's efforts could include continuing to close up to 3% of its branches annually. Key closed 35 branches over the 12-month period that ended March 31, finishing the first quarter with 992 locations.
Still, management periodically
An analyst asked during Thursday's call whether it made sense to sell branches in smaller markets where Key lacked scale, freeing the company to reinvest the proceeds elsewhere. Executives dismissed the idea, stating that they believe Key can get its efficiency ratio below 60% without such structural changes.
"When you take a look at downsizing through a sale of certain portions of our franchise, keep in mind what you lose from that is the revenue associated with that book and only the incremental cost associated with supporting that on a direct basis," Don Kimble, Key's chief financial officer, said.
"We do have infrastructure here from a technology platform and other perspectives that you really can't reduce proportionally for the sale of those types of branches and geographies," Kimble added.