Key Slashes Costs, Branches as 2Q Profit Slips

KeyCorp (KEY), which is still seeing expenses eat up more than two-thirds of its revenues, will slash costs and close branches in an effort to lower its efficiency ratio.

As it reported second-quarter results on Thursday, the Cleveland company announced plans to cut between $150 million to $200 million in expenses by the end of 2013 and close up to 5% of its more than 1000 branches. Key said it expects to see the full impact of these cuts in 2014.

The $86.5 billion-asset bank is hoping to reduce its efficiency ratio from 69% in the second quarter — a percentage point higher than it was in the first quarter — to 60% to 65%. The cost-cutting initiative, which includes the branch closures, is expected to reduce the ratio by four or five percentage points, while Key said it hopes to increase its revenues to make up the difference.

Key wants to improve that ratio to help weather the extended low interest rate environment, the increasing cost of regulation and a cautious attitude among American businesses, Beth Mooney, the bank's chairman and chief executive, said during a conference call with investors and analysts.

"You put all those together and it is clear, as I said, that we needed to be purposeful and proactive in addressing our cost base and our plans for revenue in light of those industry economics," she said.

The plan drew immediate praise from observers; one analyst on the conference call praised the cost-cutting initiative as "excellent."

Many of Key's regional bank competitors have better efficiency ratios, including Huntington Bancshares (HBAN), with a 62.8% ratio, U.S. Bancorp (USB) at 51.1% and Fifth Third Bancorp (FITB) at 59.4%.

KeyCorp is also the only bank in that group with its shares trading at less than 100% of its tangible book value. On Thursday morning, KeyCorp's shares were at 85% of its tangible book value compared with U.S. Bancorp's 2.7 times tangible book value.

The company reported second-quarter income attributable to common shareholders of $231 million, down roughly 1% from a year earlier, as a higher loan-loss provision offset a small increase in revenue. Key reported a loan-loss provision of $21 million for the second quarter, compared with an $8 million credit a year earlier.

The company has already notified the Office of the Comptroller of the Currency that it will close 17 branches, and it could shutter up to 5% of its network over the next 18 months, Bill Koehler, president of Key Community Bank, said during the call. As of June 30, the company had 1,062 branches in more than a dozen states.

Branches targeted for potential closure will be ones that are "not contributing to density or the client experience," Koehler said. The company will continue to "invest in a very selective basis in our priority markets" with a smaller focus on de novos, he said.

On the revenue side of the efficiency coin, KeyCorp officials said the bank must grow its profits to reach its goal. The company has added to its sales force and is reviewing its mix of products, Mooney said.

KeyCorp has recently emphasized growing its niche lending to energy, industrial and healthcare businesses, something that Mooney reiterated on Thursday. Although the company's average total loans remained relatively flat in the second quarter from the prior one, the company did see increases in its commercial and industrial loans and in its home equity loans.

Average balances of commercial and industrial loans increased 2.5% from the first quarter to $20.1 billion, while home equity loans were $9.9 billion, up more than 1.5% quarter over quarter.