KeyCorp in Cleveland is making big changes to its consumer banking business.
The $171 billion-asset company is exiting indirect automobile lending and will devote more resources to mortgages and its Laurel Road student loan refinance business. KeyCorp, which has 1,057 branches over a wide footprint, is also planning a significant restructuring of its network.
The changes reflect a need to invest in relationship-driven businesses at a time when people are flocking to digital channels, said Chris Gorman, Key’s chairman and CEO, adding that indirect auto doesn’t fit the model.
“If you’re in an indirect business, just by definition, it can’t be a relationship product,” Gorman said. Indirect auto “just didn't achieve what we wanted it to do vis-à-vis investing our capital. It’s a good business and a lot of people are in it. But it’s just not in keeping with our strategy.”
It will take about five years for Key to run off $4.6 billion in indirect auto loans, said Don Kimble, the company’s chief financial officer. Key inherited the business from First Niagara Financial Group, which it bought in 2016.
Key plans to share details about its branch restructuring in January.
“We actually think there’s a significant opportunity to look at the fleet,” Gorman said, declining to discuss where Key could close branches. “We're in the final throes of planning that.”
The overhaul of Key’s consumer banking operations comes at a time when its customers are quickly adopting online banking. Gorman said 60% of Key’s consumer clients are digitally active, while digital sales have increased 50% from a year earlier.
“What’s the right combination of physical and digital?” the CEO said. “Whoever figures out that right mix is going to be in a really good position.”
For Gorman, branches are places where people will visit to seek advice on life-changing decisions about things like mortgages, retirement planning or college financing. “Those are the types of discussions most people would like to sit down and talk to people,” he said.
Routine transactions will continue to migrate online.
“There won’t be as many branches, clearly, but within those … they’ll be more heavily skewed to advice,” Gorman said.
Key joins a growing list of banks that gotten out of indirect auto lending, including Bank of the West, which
Key actually left indirect auto lending once before, selling its portfolio to Bank of America in 2005.
Indirect consumer loans produced an average yield of 3.66% in the third quarter, well behind the 5% yield on consumer direct loans. Consumer mortgages generated $133 million in fee income through the first nine months of 2020.
Key has big plans for Laurel Road, which it
Building on that foundation, Key plans to launch a national affinity digital bank aimed at medical professionals. In addition to checking accounts, the company wants to offer mortgages, small-business loans and money management services from the digital platform.
“We see Laurel Road as a platform that we've grown a lot,” Gorman said. “It's achieved everything we hoped it would, and we think there's a lot to do on top of it.”
Building out internal platforms seems to be the focus, and Gorman downplayed the possibility of pursuing a whole-bank deal.
“That’s not really a focus on ours,” he said of M&A. “We think we have everything we need to be successful. We think the right course is to execute our strategy to create value for the shareholders.”
Overall, KeyCorp’s $428 million profit was more than double what it reported a quarter earlier. It loan-loss provision declined by 67% to $160 million.
Still, net charge-offs rose by 33% to $128 million. And loan losses are expected to increase in coming quarters before peaking in mid-2021, Kimble said.
