KeyCorp Earnings Call Nuggets: Growth Rate of Core Expenses and Positive Operating Leverage

KeyCorp (NYSE:KEY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Growth Rate of Core Expenses

Steven Alexopoulos – JPMorgan: My question is on the expenses. Ex the severance charges core expenses are running at $740 million and if I look at your comments that $60 million of cost saves are now realized out of the $150 million to $200 million. This would imply a run rate, right, of somewhere around $705 million to $718 million for expenses, with all the cost saves. Now, I know you’re saying expenses are going to stay high in the first half of ’13. But as we get towards the last quarter of 2013, is that how we should be thinking about expenses sort of $705 million to $718 million with some adjustment for growth rate of core expenses?

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Jeffrey B. Weeden – SEVP and CFO: Steve, this is Jeff. I think as we look at how the year plays out is that expenses will trend down in the second half of the year. We’re not giving that specific of a number, but I would say in general terms, you’re thinking of it how we’re looking at those overall expense trends and I think we do have to factor in what other investments in terms of business opportunities that may exist. If we see opportunities in the market to add bankers, we will add bankers to grow revenue. So, we’re really trying to look at it on a net basis too is in terms of not just the expenses but also focusing on the revenue side of the equation.

Steven Alexopoulos – JPMorgan: Jeff, just a follow-up on that. In terms of the shift on this one slide to the cash efficiency target, could you give some color on that shift and should we read into that that the timing of getting into the 60%, 60% GAAP efficiency ratio range has maybe been extended a bit?

Jeffrey B. Weeden – SEVP and CFO: Steve, I think the cash efficiency ratio of the 60% to 65% just simply excludes the intangible amortization expense that we have. That was an item that also will decrease over time on the purchase credit card receivable amortization. Of course, it’s heavier in the first couple of years and the other core deposit intangible amortization is also heavier in the first couple of years. That will start to decrease over time. So what we wanted to get to is what’s the efficiency ratio ex the intangibles, and I think that’s where we are focused on, and we know we have to – 65% is the first step. Then we have to figure out how we are going to also continue to step down those overall expenses as well as grow revenue to get it down closer to the 60% level.

Positive Operating Leverage

Scott Siefers – Sandler O’Neill: I guess just to kind of follow up on the expense question. I appreciate all the color you provided. When you think about it kind of in tandem with the revenue outlook, I mean, do you guys think you’ll be able to generate positive operating leverage in 2013 and where does that ultimately fit into sort of your priorities? Then, I had a second question, unrelated, if you could just provide a little more color on the revaluation of the home equity guidance, just so if you can talk a little bit more about kind of what drove it and sort of where the charge-offs flushed out too?

Jeffrey B. Weeden – SEVP and CFO: So, as we look at again I think in terms of positive operating leverage, that is, our mission is to grow revenues faster than expenses, that is our outlook as we look at 2013 and beyond, and I think that’s one of the things that we’re very focused on as a management team. And we’re getting some of the lift, of course, not only from a better margin in 2013 than what we had in 2012, but also as we look at the overall average earning asset growth, now is starting to come into play. Last year we were very stable in that around $72 billion of average earning assets for the year. This year our expectation is that average earning assets will trend up with the general overall growth in the loan portfolio. So, from that perspective we feel very positive.

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I think if you look at the – then your second part of your question was on the home equity. In the third quarter, we, like everybody else was a national bank; had to make some determinations on the of level of Chapter 7 bankruptcies and the amount of a charge-off that we would take, and we worked through all of those particular charge-offs in the fourth quarter and actually got down to applying on a loan-by-loan basis across the entire portfolio group. That’s what led to some of the shifting around. We took a charge to the home equity book in the third quarter, and as we reapplied on to where those charge-offs actually came out in the fourth quarter, that resulted in that adjustment that you saw there. So, in total, charge-offs related to the home equity book about $10 million less across all portfolios related to that Chapter 7 in the fourth quarter.

A Closer Look: KeyCorp Earnings Cheat Sheet>>