KeyCorp (KEY)

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KeyCorp (KEY)

Q4 2012 Earnings Call

January 24, 2013 9:00 am ET

Executives

Beth E. Mooney - Chairman, Chief Executive Officer, President, Member of Executive Council, Chairman of Executive Committee and Member of ERM Committee

Jeffrey B. Weeden - Chief Financial Officer, Senior Executive Vice President and Member of Executive Council

Christopher Marrott Gorman - President of Key Corporate Bank and Vice Chairman of Keybank National Association

William R. Koehler - President of Key Community Bank

William L. Hartmann - Chief Risk Officer, Senior Executive Vice President and Member Executive Council

Analysts

Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division

R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division

Josh Levin - Citigroup Inc, Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Ken A. Zerbe - Morgan Stanley, Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

Robert Placet - Deutsche Bank AG, Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Alan Straus

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Stephen Scinicariello - UBS Investment Bank, Research Division

Presentation

Operator

Good morning, and welcome to the KeyCorp 2012 Fourth Quarter Earnings Results Conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chairman and Chief Executive Officer, Ms. Beth Mooney. Ms. Mooney, please go ahead, ma'am.

Beth E. Mooney

Thank you, operator. Good morning, and welcome to KeyCorp's Fourth Quarter 2012 Earnings Conference Call. Joining me for today's presentation is Jeff Weeden, our Chief Financial Officer; and available for the Q&A portion of the call are the leaders of Key Corporate Bank and Key Community Bank, Chris Gorman and Bill Koehler; and also joining us for the Q&A discussion are our Chief Risk Officer, Bill Hartmann; and our Treasurer, Joe Vayda.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call today.

On Slide 3 are some highlights of our 2012 results. Again, I'd like to make some general comments about the year more broadly. I'm very pleased with the measurable progress we made during the year on our strategic and financial goals. Although the operating environment remains challenging, our results reflect our success in executing on our strategies and further refining our relationship-based model.

Some of our key proof points would include revenue, which was up 4% from the prior year as loans grew, net interest margin improved and fees increased. Our average C&I loans were up 21% over last year and led our year-over-year loan growth. Our net interest margin improved in 2012, including a 24 basis point increase in the fourth quarter from the same period a year ago. And I would point out that our margin improvement and C&I loan growth were among the best in our peer group.

These were also a positive story. Our commercial real estate mortgage banking group had its best year ever, and it was also a record year for KeyBanc Capital Markets, with strong fee growth from loan syndications, investment banking and debt placement.

On the expense side, we achieved $60 million in annualized savings in 2012, a strong start to our expense initiative, which exceeded our original goal we had set for the year. With that momentum, we are on track to realize cost savings of $150 million to $200 million on a run rate basis by year-end 2013. I remain committed, along with the rest of my management team, to achieving our targeted efficiency ratio of 60% to 65% by 2014.

Expense levels for 2012 reflect our acquisitions as well as upfront cost for our efficiency initiative and for technology, including a new trust and risk management system, along with the development of new payment and merchant processing capabilities. We closed 19 underperforming branches last year as part of a plan to rationalize our branch network. Another 40 to 50 branches are targeted for 2013. We also launched programs aimed at streamlining our backroom and support operations so we can achieve a more variable and efficient cost space.

Our capital management remains focused on value creation. To that end, in 2012, we returned approximately 50% of our net income to shareholders through both common share repurchases and dividends. We also used our capital to acquire market share in Western New York and to develop new revenue streams in the credit card and payments businesses.

Turning now to Slide 4. In 2013, our strategic themes remained the same. In the coming year, we are focused on 5 critical areas, consistent with the long-term growth priorities shown on Page 14 of our deck. Specifically, we will continue to leverage our focus and expertise in our targeted client segments to acquire and expand customer relationships. This is most apparent in our middle market and corporate bank, where our mix of distinctive product capabilities with local delivery has us well positioned to take advantage of the business and economic recovery.

Next, we will maintain a moderate risk profile. We have substantially improved our credit quality over the past several years by adhering to a robust set of enterprise-wide risk practices. Jeff will have more on credit quality in his comments.

Third, we will invest in opportunities to accelerate our revenue growth. In practical terms, this means finding ways to leverage our franchise as we did in 2012 when we deepened our retail footprint in Western New York, enhanced our payments capabilities with credit card and merchant services and invested in online and mobile banking. And just a quick comment on that point. We've been asked about the net impact of our efficiency initiative in the amount of reinvestment of those savings we expect. What I can commit to you is that we are rigorous on our investment decisions, being mindful of the size, timing, resources and prioritizations that they will take. And we will make the right trade-offs to ensure we deliver on our efficiency ratio commitments.

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