KeyCorp to Adopt Cost-Cutting Measures

Ohio-based KeyCorp (KEY - Analyst Report) has recently announced its plans to commence cost-curtailing measures with the aim of improving efficiency. The measures include closure of branches as well as job cuts.

The news of the cost containment plan follows the company’s solid second-quarter results, which included a 27.8% earning surprise. Stable non-interest income, continued improvement in credit quality and robust capital ratios were the primary highlights of the quarter. However, dwindling net interest income and escalating operating expenses slightly subdued the results

Actions To Be Taken

KeyCorp aims at reducing expenditures by $150–$200 million through the end of 2013. Moreover, it will start exploring newer opportunities for generating higher revenues. It plans to close around 50 units of its 1,000 plus strong branch network.

The first phase of the closure will involve 17 branches, all outside Cleveland. At the same time, KeyCorp plans to open new branches.

Layoffs are also expected, but there has been no official number provided. Moreover, KeyCorp plans to save money by consolidating office space and renting out some of these. Through all these activities, it aspires to achieve an efficiency ratio of 60-65%.

Sluggish macro economic growth, the persistent low interest rate environment, gradually increasing regulatory expenses as well as wary business outlook have contributed to an oppressive situation, which is likely to continue for sometime. Due to this, it has become necessary for the companies to redesign their strategic set up to survive in a changing environment.

Initiatives of Other Banks

About two months ago, FirstMerit Corporation (FMER - Snapshot Report), a regional bank, announced cost-cutting measures. Other regional banks, including Huntington Bancshares Incorporated (HBAN - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report), are expected to follow suit. These banks have to resort to expansive efficiency measures in order to survive in the market amid the new business environment.

Besides these regional banks, big banks like Bank of America Corporation (BAC - Analyst Report) have also come up with cost-cutting actions. In 2011, BofA announced – Project New BAC – a two-phased initiative with the primary aim of streamlining workflows and processes, aligning businesses and expenses more closely with the overall strategic plans and operating principles, and subsequently increasing revenues. Under Phase 1, the company announced nearly 30,000 job cuts and expects annual operating expenses to decline nearly $5 billion by 2014.

Likewise, in Phase 2, BofA would be laying off employees in Global Banking, Global Markets and Global Wealth & Investment Management segments. However, the reductions under Phase 2 are not expected to be as severe as in Phase 1.

Conclusion

Given the dismal economic scenario, reduction of expenditure and closure of non-core units are the only ways for the companies to survive these tough times. Considering this, it can be stated that KeyCorp’s measures are fully justified. However, this will increase the already high unemployment.

Currently, KeyCorp retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.