By Andrew R. Johnson and Saabira Chaudhuri
KeyCorp shares slumped Thursday as the Cleveland-based regional
lender's expenses rose higher than expected in the fourth quarter,
overshadowing strong growth in the bank's commercial-loan
portfolio.
While improving economic data have raised hopes lending will
pick up this year, the banking industry remains under immense
pressure to cut costs as low interest rates have crimped revenue
and borrowing by consumers and businesses remains tepid.
Key said its costs totaled $712 million in the quarter, more
than a previous forecast of as much as $700 million, due to
higher-than-expected pension costs, technology projects and other
initiatives.
"You can only cut so much until you sort of hit the cutting
wall," Nancy Bush, an analyst with NAB Research LLC, said in an
interview. "I think they've kind of hit that" wall.
Key's shares were down 4.9% at $13.45 in recent trading, though
they are up more than 44% over the last year. Shares of Fifth Third
Bancorp., another Ohio-based lender, were down 2.2% at $21.44 on
Thursday after reporting results that were relatively in line with
expectations.
Key posted a profit of $230 million, or 25 cents a share, in the
quarter, up from $203 million, or 21 cents a share, a year earlier.
Revenue edged down 0.4% to $1.04 billion.
Analysts polled by Thomson Reuters were expecting income of 24
cents a share on $1.03 billion in revenue.
Key, with $93 billion in assets, has been working to lower
expenses over the last two years by closing bank branches,
consolidating back-office operations and rolling out new
technology, but the bank failed to meet cost targets during the
quarter, raising questions from analysts over whether management
needs to take more drastic steps to improve the efficiency of its
operations.
It appears the bank's progress "stalled in the fourth quarter,"
Mike Mayo, an analyst with CLSA, said during a conference call with
Key's executives.
This year the bank is targeting an efficiency ratio--which
measures how much it costs to produce revenue--of 60% to 65%. The
lower the efficiency ratio, the better.
Mr. Mayo said 65% is "still a really lousy efficiency
ratio."
Beth Mooney, who has been Key's chief executive since 2011, said
during the call the target isn't an end-goal for the company but an
logical target for the year due to low interest rates, which may
continue to constrain revenue growth.
Ms. Bush said Key may benefit from doing acquisitions to beef up
its presence in areas of consumer lending and filling in its
far-flung physical footprint, which has made it harder to compete
against larger rivals.
The bank in recent years has done a handful of deals, including
acquiring a portfolio of Key-branded credit-card loans that had
been issued by an outside financial institution and buying more
than 30 branches in upstate New York from HSBC Holdings PLC's U.S.
bank.
While Key has excess capital to deploy that would allow it to do
"opportunistic" deals that arise, M&A is "not something that I
feel is necessary to complete the equation," Ms. Mooney said.
She, like other bank executives in recent days, said continued
economic improvement could lead businesses and consumers to
increase their borrowing later this year.
The economy appears to be "on firmer ground" than last year, Ms.
Mooney said in an interview.
Key said average loan balances grew 3.4% to $53.61 billion in
the quarter, driven by growth in commercial, financial and
agricultural loans.
Fifth Third's average loan balances grew 5% from a year earlier
to $87.9 billion, also driven by commercial lending.
The Cincinnati-based bank said it earned $402 million in the
quarter, up from $399 million a year earlier. Per-share earnings
were flat at 43 cents.
Revenue dropped 9.8% to $1.61 billion. Analysts polled by
Thomson recently expected per-share earnings of 42 cents on revenue
of $1.53 billion.
The bank's results benefited from modestly stronger loan growth
and lower expenses, although a key measure of lending profitability
continued to decline.
Fifth Third's noninterest expense dropped 15% from the year
earlier to $989 million as salaries and employee benefits fell from
the fourth quarter of 2012, and the bank benefited from comparison
with a year-earlier quarter weighed down by a $135 million charge
tied to debt.
"The bigger picture reality is that there are some signs of hope
on the revenue side but banks still have to do everything they can
to hold the line on expenses," Jefferies analyst Ken Usdin said in
an interview.
Write to Andrew R. Johnson at andrewr.johnson@wsj.com and
Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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