KeyCorp (KEY) 2012 Q4 法說會逐字稿

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.

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 would like to make some general comments about the year more broadly.

I am 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 in C&I loan growth were among the best in our peer group.

Fees 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 base.

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 payment system businesses.

Turning now to slide 4. In 2013, our strategic themes remain the same.

In the coming year, we are focused on five critical areas, consistent with the long-term growth priority 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 have been asked about the net impact of our efficiency initiative and the amount of reinvestment of those savings we expect.

What I can commit to you is that we are rigorous in our investment decisions, being mindful of the size, timing, resources, and prioritizations that they will take.

And, we will make the right trade-off to ensure we deliver on our efficiency ratio commitments.

However, when we see the opportunity to make an investment that is consistent with or additive to our strategy and it has the right return profile, we will make that investment.

There is an old saying that you can't shrink yourself to prosperity, and we must continue to find ways to generate more customers and more revenues.

We are committed to doing that and doing that in a way that delivers profitable growth.

Fourth, we will improve our operating leverage by growing revenue and creating a more efficient cost structure that is aligned with the current operating environment.

As I just said, this is a two-sided equation.

We need to be focused and rigorous in both our revenues and our expenses.

And finally, we will work closely with our Board and our regulators to manage capital to support our clients' needs and create shareholder value.

Our capital remains a competitive advantage for us in both the intermediate and long term.

We continue to imbue the environment for our industry in 2013 as challenging.

Nonetheless, I am encouraged by the fact that our employees have never been more focused on delivering outcomes for clients; and that, in turn, is giving us real traction in our market.

Customers are coming to us and staying with us because we are executing on our strategies and delivering a truly distinctive experience.

We had a strong 2012, and one that I am very proud of.

But, it's not enough, and we all know that.

Along with my team and all the employees at Key, we are focused on sustaining our positive momentum and continuing to drive our performance in 2013 and beyond.

I am confident that our strategies are working and that we are on the right path forward.

Now, let me turn the call over to Jeff for some further comments on our results.

Jeff?

Thank you, Beth.

Slide 6 provides a summary of the Company's fourth quarter 2012 results from continuing operations.

As we reported this morning, the Company earned a net profit from continuing operations of $0.21 per common share for the fourth quarter, compared to $0.23 for the third quarter of 2012 and $0.21 for the fourth quarter of 2011.

There are a couple of items I will touch on before moving to the more detailed discussion surrounding the quarterly results on the following slides that impact the current quarter.

First, the net interest margin expanded to 3.37%, an increase from both the third quarter of 2012 and the fourth quarter of 2011.

Second, we incurred costs of $16 million, or approximately $0.01 per common share, associated with our Fit For Growth efficiency initiative.

Third, credit cost decreased to $58 million, or 44 basis points of average total loans.

And fourth, we had strong revenue results from our commercial businesses in both investment banking and mortgage banking.

Now, turning to slide 7. Average total loans for the fourth quarter were up $1.164 billion, or 2.3% unannualized, compared to the third quarter of 2012.

And, compared to the fourth quarter of 2011, average total loans were up $3.2 billion, or 6.6%.

We have continued to have success in growing our commercial loan portfolio from both acquiring new clients, as well as expanding existing relationships in our focused industries, as demonstrated by the approximate $3.8 million, or a 21% increase, in C&I loans over the past year.

On the consumer front, average loans grew by $312 million, aided by the increase in credit card balances, which were up $282 million from the prior quarter, reflecting the full quarterly impact of the acquired balances from the third quarter 2012 acquisitions.

As we look out at 2013, we anticipate average total loans to grow in the mid to upper single-digit area, continuing to be led by growth in our commercial and industrial loans, as we capitalize on our success in our targeted approach to certain industries where we offer a full complement of products, services, and advice to clients.

Continuing to slide 8. On the liability side of the balance sheet, average deposits, excluding foreign branch deposits, grew $1.1 billion from the third quarter.

And our trend of improving deposit mix continued, with an increase in average balances of non-time deposits of approximately [$1.9 million], or 3.6% unannualized.

Our funding costs continued to decline, contributing to our stronger net interest margin experienced in the fourth quarter.

Turning to slide 9. For the fourth quarter of 2012, the Company's net interest margin expanded to 3.37%, compared to 3.23% for the third quarter of 2012 and 3.13% for the fourth quarter of 2011.

Taxable equivalent net interest income was $607 million for the fourth quarter, up 5% from the $578 million we reported in the third quarter.

The improvement was a result of a 10-basis-point decline in funding costs for interest-bearing liabilities and a 7-basis-point improvement in earning asset yields.

Recall from last quarter, we had two leverage leases terminate during the third quarter, which negatively impacted net interest income and the margin by $13 million and 7 basis points.

Aiding the fourth quarter margin were stronger fees and an additional dividend on other investments.

These two items benefited the margin by approximately 4 basis points.

Our current expectation, assuming a policy of low interest rates by the Federal Reserve continues, is for the net interest margin to trend lower from the fourth-quarter level throughout 2013.

For the first quarter of 2013, we anticipate the margin to be in the range of 3.3% and for continued modest pressure in the 1-basis-point to 3-basis-point area per quarter throughout the year.

With respect to average earning assets, we expect to see growth tracking in line with our overall loan growth and would not anticipate any material change in the size of our investment securities portfolio.

We remain approximately 1% asset sensitive at December 31, 2012, to a gradual 200-basis-point rise in interest rates, with the forward view that asset sensitivity will increase during the next 12 months, given normal funds close, positioning us to benefit if short-term to intermediate-term rates begin to rise.

On the noninterest income front, we saw continued solid performance from investment banking and net gains on loan sales driven by higher origination volume from commercial mortgage banking in our real estate capital line of business.

As Chris Gorman and Bill Koehler can comment on later, our pipelines remain good, headed into the first quarter.

In total, noninterest income was down in the fourth quarter, compared to the third quarter, due to gains realized from the early termination of certain leverage leases and from the redemption of trust preferred securities during the third quarter in the amounts of $39 million and $54 million, respectively.

Turning to slide 10, noninterest expense for the fourth quarter of 2012 increased to $756 million, up $22 million from the third quarter.

All of this increase was in the personnel area and relates to higher employee benefits, up $11 million; increased severance, up $5 million; and higher contract labor for implementing new technology projects currently underway, up $8 million.

In total, these three items were up $24 million in the fourth quarter compared to the third quarter of 2012.

The increase in employee benefits was due to higher medical claims and an accrual for the annual employee retirement contribution.

We expect employee benefit costs to decrease in the first quarter from the elevated fourth-quarter level, more than offsetting the normal seasonal increase that we typically experience from higher employment taxes.

Severance and other costs associated with our Fit For Growth efficiency initiative are expected to remain elevated throughout much of 2013.

Technology-related costs are expected to remain at the level we experienced in the fourth quarter through the first half of 2013 before starting to decline as we implement new systems for trust accounting, risk management information systems, treasury management, and card services.

Also included in our expense run rate for the fourth quarter was approximately $30 million in costs related to our acquisitions of branches in Western New York and our credit card portfolio.

These costs were up approximately $4 million from the third quarter, and of this increase, approximately $3 million represented additional intangible amortization expense.

As Beth commented on earlier, we remain committed to achieving our targeted efficiency ratio of 60% to 65% through planned cost reductions by 2014.

Turning to slide 11.

Our net charge-offs declined to $58 million, or 44 basis points, during the fourth quarter.

Down from the elevated level of the third quarter, when we implemented new regulatory guidance for consumer loan Chapter 7 bankruptcies.

The provision for loan losses in the fourth quarter was $57 million.

Both net charge-offs and the provision expense were within our long-term targeted range of 40 to 60 basis points for the fourth quarter.

And for the entire year, provision expense represented approximately 45 basis points of average total loans.

Our expectation for charge-offs and provision expense during 2013 is to remain within our long-term targeted range of 40 to 60 basis points.

Also, at December 31, 2012, our reserve for loan losses represented 1.68% of period-end loans and 132% coverage of nonperforming loans.

Turning to slide 12.

Our tangible common equity ratio and estimated tier one common equity ratio remained strong at December 31, 2012 at 10.2% and 11.2%, respectively.

We have also updated our estimated Basel III tier one common equity ratio, based on the Fed's NPR, on a fully implemented basis at December 31, 2012 to be 10.2%.

During the fourth quarter, we repurchased 10.5 million shares of common stock at an average cost of $8.37 per share.

And, we have $88 million remaining authority under our current repurchase authorization for the first quarter of 2013.

We also filed our updated CCAR capital plan with the regulators on January 7 of this year and expect to hear back on those findings from the submission at the same time as the rest of the industry during the month of March.

That concludes our remarks, and now I will turn the call back over to the Operator to provide instructions for the Q&A segment of our call.

Operator?

(Operator Instructions)

Steven Alexopoulos, JPMorgan.

My question was on the expenses.

Ex the severance charges, core expenses are running around $740 million.

If you 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 are 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, $718 million, with some adjustment for growth rate of core expenses?

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 are not giving that specific of a number, but I would say in general terms, you are thinking of it how we are 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 are 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.

Okay.

Jeff, just to 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%, 65% GAAP efficiency ratio range has maybe been extended a bit?

Steve, I think the cash efficiency ratio of the 60% to 65% just simply excludes the intangible amortization expense that we had.

That was an item that also will decrease over time.

On the purchase credit card receivable amortization, of course, is 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 is 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.

Thanks for that color, appreciate it.

Scott Siefers, Sandler O'Neill.

To follow up on the expense question -- I appreciate all the color you provided.

When you think about it in tandem with the revenue outlook, do you guys think you will be able to generate positive operating leverage in 2013?

And, where does that ultimately fit into your priorities?

Then, I had a second question, unrelated, if you could provide a little more color on the revaluation of the home equity guidance?

If you can talk a little bit more about what drove it and where the charge-offs flushed out to?

Okay.

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.

I think that's one of the things that we are very focused on as a management team.

We are 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 earnings assets will trend up with the general overall growth in the loan portfolio.

So, from that perspective, we feel very positive.

I think if you look at -- then, your second part of your question was on the home equity?

Yes.

In the third quarter, we, like everybody else that was a national bank, had to make some determinations on the level of Chapter 7 bankruptcies and the amount of a charge-off that we would take.

We worked through all of those particular charge-offs in the fourth quarter, and actually, got down to applying them 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 where those charge-offs actually came out in the fourth quarter, that resulted in that adjustment that you saw there.

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.

Okay, that's perfect, I appreciate the color on both those items.

Josh Levin, Citi.

You talked about the cost-cutting program, but you said you're thinking about investments also.

As you think about the trade-off versus cost cuts versus investing, whether it's investing in people or equipment, how do you think about the minimum payback period for such an investment?

Josh, this is Jeff Weeden.

We look at payback periods as one item, but it's also looking at what's the internal rate of return over time.

We want to strive for something that's in the, at least, the mid to upper teens on IRRs related to our investments.

When we talk about some of these investments that we're really looking at, we're really looking at the technology side of the equation remaining at these elevated levels through the first half of 2013.

If you go back and look, we were up, basically -- from where we were in the second quarter, that investment went up about $10 million.

It was up $2 million in the third quarter, and it ramped up an additional $8 million in the fourth quarter.

We expect it to remain at that level for the next couple of quarters as we deliver, now, some of our systems.

And, those systems, then, will help us also make some moves that we have with outside parties, currently, to bring those onto our own platforms and reduce costs elsewhere.

Those are very positive on the payback time periods.

Certain other investments you have to look at were trust accounting system.

It's an older system; we are going to a more modern system.

It will give more feature and function to our clients and to our bankers internally.

That's a necessary expenditure that we have to make; and again, that will be implemented here in 2013.

Josh, this is Beth.

One thing I would also add, in addition, I mentioned the rigor with which we will make those investments.

And, I would like to share that part of what we developed in our operating rhythm in 2012 is a project management office that, that's the business cases and make sure that we are clear about the resources, the staging, the timing, and the prioritizing we give; and then, rigorously also tracks the business value realization.

So, as Jeff talked about some of the metrics with which we would evaluate the return profile, that we also clearly track that we are realizing the benefits.

Josh, it is Chris Gorman.

The other area where we've invested, and invested successfully, is in people.

We think we have a unique business model focused on these targeted middle market companies.

And, if you look at the 82 people that we brought on that were senior-level calling people from the beginning of 2010 until present, that has been a good investment.

We also invested in 2010 in mortgage banking personnel, and we're seeing the fruits of that as well.

So, that's another element of the investment program.

Okay.

You had strong loan growth in the fourth quarter.

As you look at the first quarter and into the rest of the year, do you have a sense that your loans can continue to grow at that rate?

Or, do you think there might have been some pull forward, like other banks mentioned, in the fourth quarter?

Josh, a couple things to keep in mind.

One, there was some activity late in the fourth quarter, but we don't think it was driving or overriding our business.

Clearly, there was some tax-driven activity.

With respect to going forward, I think Jeff mentioned that we are comfortable mid to high single-digit numbers; and as we look at our backlogs, as we look at our ability to penetrate new clients, we are comfortable with that on a going-forward basis.

And I would say -- Josh, this is Bill.

As we look at our pipelines in the Community Bank, especially in our commercial businesses, the pipelines are significantly stronger than they were at the same time last year.

Our pull through in the fourth quarter was good, and yet, our pipelines are still strong.

And, I would say, importantly, more balanced regionally.

Thank you very much.

Erika Penala, Bank of America Merrill Lynch.

My first question -- I'm sorry to continue to focus on expenses, but I just wanted to make sure we are thinking about the first half of the year the correct way.

The GAAP expense number is $756 million, and you mentioned that severance expenses would remain elevated near term.

If I back out the amortization expense, the credit for lending-related commitments, as well as the $16 million in Fit-for-Growth-related expenses, I get to a core run rate of $742 million, like Steve said.

In the first half of the year, is it flat to the $756 million GAAP number, or is it flat to that $742 million GAAP number -- I'm sorry, $742 million core number?

I think the way that we are looking at this particular number, Erika, is that it will be within that fourth-quarter range for the first half of the year, and that has the additional technology spend in there, as well as severance-related costs and other costs associated with our Fit for Growth initiative.

It will be within a range of that, say, $750 million, in that particular range, for the next couple of quarters.

That is the expectation.

Got it.

My follow-up question is long term in terms of your efficiency goals.

If I strip out all the noise, and say that your core run rate right now is $742 million, and I think about your expense goals, if I calculate the midpoint of the 60% to 65%, it would imply an additional $460 million of annual revenues or expense cuts to get to the midpoint?

And, could you give us a sense, in terms of where we could get that $460 million from?

Is it because the balance sheet is growing much faster than you think, or are there additional expense cuts beyond '13 that we should look forward to?

Erika, I think we have to manage expenses.

After we take these particular expenses out of the organization, we have to effectively manage the expense base of the Company.

But, we have to have more revenue, so I think that's really where we are becoming much more focused all the time, in terms of what we are attacking in the marketplace.

Our exit portfolios are getting smaller and smaller all the time, so that is less of a drain that we have had.

And, I think in terms of -- once we start to look at overall core growth -- and it's not just the loan portfolio because it's really looking at client penetration and getting more of the overall business from those particular clients.

Chris, do you want to --?

I think, Jeff, you are exactly right.

We have had a fair amount of success in terms of adding relationships.

For example, this year we added 669 new relationships, so that will set the stage for future growth.

They average about $169,000 or so in revenue.

But to Jeff's point, because of our model, we are able to really penetrate the relationships that we had.

We talk about expanded relationships, those are relationships that we do $100,000 more than we did in the first measurement period of 12/31/11.

In that case, we had 425 expanded relationships that, in the aggregate, generated about $263 million.

Those will be some of the areas -- getting deeper with these highly focused clients and bringing new clients onto the platform; because as we mentioned, we think we can leverage the platform.

Erika, this is Beth.

I would add one thing for the Community Bank that, as we go through 2013, as Jeff indicated, we will burn through some of the amortization related to the credit cards, the HSBC, and that will be more -- the operating leverage of that will come through more fully.

Got it.

Just wanted to make sure I wrapped up on the revenue side -- make sure I got the message.

In terms of getting to that revenue growth number of around $450 million, $460 million, I guess that would be off, obviously, some NII growth, as you have loan growth coming in, but also, fee growth as you penetrate more deeply into the relationships.

Yes, it has to come from both.

It is not just balance sheet-driven.

Particularly, in this particular rate environment, I think you've got to have both.

You've got to get paid for your balance sheet, not only in some form of spread, but you also have to have ancillary businesses in today's environment.

Got it, thank you.

In the interest of time, if you could please limit yourself to one question, thank you.

Ken Zerbe, Morgan Stanley Smith Barney.

I guess my first question -- my only question is for Beth.

You mentioned the saying that you can't shrink yourself to prosperity.

The question I have, though, is there's a lot of very highly profitable banks that are much smaller than Key -- can you just walk us through your thought process on why growing is the only viable solution for Key to become more profitable?

Yes, Ken, this is Beth.

I think what we have articulated is we have spent, what I would call, the last couple years ss we've really repositioned and refocused our Company around this core value proposition between our corporate and our community banks where we clearly built our capabilities distinctively, as we've talked about within the Corporate Bank, with our various vertical strategies, our investment banking, debt and capital market capabilities, mortgage banking capabilities, with our local delivery of our Community Bank, clearly, leveraged to a business in economic recovery.

And, I think we have the proof points in 2012 that shows real momentum and returns from that strategy.

I think we have realigned, repositioned, and hit what I would call, the sweet spot of capabilities and clients that will provide growth.

My thinking is that much of the repositioning shedding that we needed to do, for lack of a better term, I think, has been accomplished.

And now, it is our time to continue the momentum you saw in 2012, execute that strategy, drive improved performance and valuation.

All right.

Great, thanks.

Jennifer Demba, SunTrust Robinson Humphrey.

I think most of my questions have been asked.

I'm wondering about what you're looking for in a tax rate in 2013?

Tax rate, on a GAAP basis, would be somewhere between 26% and 27%; and on a tax-equivalent basis, would be somewhere about 100 basis points higher in the 27% to 28%.

Just curious, in terms of fee income growth in '13 and probably into '14 as well, what do you see as the major drivers?

Is it primarily treasury management, investment banking, et cetera?

Yes, I think it will be -- Jennifer, it is Chris Gorman.

It will be across the board; but again, our strategy where we target these six verticals in the Corporate Bank enables us to sell a wide variety of advice and solutions.

So, payments -- our enterprise commercial payments business, that's an important business, and it's very, very sticky.

We also continue to grow our investment and debt placement fees.

That's another real area of focus.

We also have been raising a lot of capital for these mid-cap companies.

Right now, in terms of mix, we are about 57% non-interest income; the balance, interest income.

And, we don't see that deviating much.

We kind of like that mix, 55%/45%, so it will be, across the board, focused on these very targeted companies.

That mix is for the Corporate Bank.

Overall, we are about in that about 43% on the fee revenue.

I think the Corporate Bank is clearly an important driver of fee revenue for the Organization.

Jennifer, this is Bill.

In the Community Bank, in addition to some of the fee items that Chris talked about, we have additional opportunity with some of our new payment capabilities.

So, the card that we've already talked about; but also, we're seeing momentum in our private banking, investment management, and trust originations, so that our fees generated from investment continue to improve over time.

We think that is a very interesting opportunity long term and highly complementary to our business model and focus on working with privately owned companies in the middle market.

Jennifer, just to give you one proof point on our mix of fee versus interest income -- a great case study would be our real estate business that we have completely repositioned.

The actual balance sheet is about half today what was in the financial crisis; and as you look at loan origination, this year, loan origination is up 22%, but 57% of that is off balance sheet.

So, you can see that we continue to look at that mix and how we can use our balance sheet as a lead -- 70% or so of the syndicated finance deals we lead, but how we can utilize that to really drive some of the fee income streams you were referencing.

Thank you very much.

Mike Mayo, CLSA.

My main question is how can you be content with an efficiency ratio target of 60% to 65%?

I guess it was 69% in the fourth quarter, and I suppose, 68% or so for the year, so it is certainly an improvement.

But, when I look back over time, and with all the efficiency initiatives KeyCorp has had, and some of this predates you, Beth, but you have Fit for Growth, now; you finished Keyvolution; Resource 2,000; PEG; and when I look all the way back to 1994, your efficiency ratio was 58%.

And, after two decades of all these programs and all the technological advances and all the hopes for economies of scale, you are now targeting an efficiency ratio that's above what you had two decades ago.

So, should you be content with the ratio of 60% to 65%?

Yes, Mike, this is Beth, and I will go ahead and just reiterate, obviously, our commitment with Fit for Growth, which is to reduce our expenses by $150 million to $200 million, and also to use those to drive revenue in addition to our efficiency plans that get us to that 60% to 65% by 2014.

In addition to the business mix, which we are driving enhanced performance, I believe, through that mix of businesses and those differentiated capabilities, we are also incurring costs that include regulatory and compliance.

We have some costs related to investments that are still early in the days of their returns.

The examples in 2012 would be Western New York, credit card, Jeff mentioned and I mentioned, technology as an enabler of our business and investments in that regard.

But, I couple those in the context of the improvement in our business performance that is evident in 2012.

Loan growth, fees, growth in deposits, but also a significantly different mix and cost of those deposits.

We have had meaningful improvements in our operating results of our Corporate Bank, and we've got many initiatives aimed at improving the performance of our Community Bank.

Perhaps, most notably, the headline would be around rationalizing some of our branch networks.

I think we have been -- are and will be diligent in considering every meaningful idea.

Nothing is off the table.

And, we are working a portfolio of ideas that fit our strategy and our design to improve our performance, both in the immediate near term as well as over the long term, and we've got a nice mix of ideas in that regard.

I believe we are executing a very sound plan.

It will improve our performance and enhance our valuation.

If I could just have one follow up -- and, that was helpful.

On the one hand, Beth, you said KeyCorp is done shedding assets; and on the other hand, you said nothing is off the table.

Given under-performance again, that predates you, and efficiency ratios versus the best in class players, 52% versus your target of even 60% to 65%, why not have an independent board committee reassess the strategy to create more shareholder value, such as by optimizing the geographic footprint?

The reason I ask that is, in my mind, having covered the Company for two decades -- again, obviously predating when you got to the Company, Beth, but it seems to be so spread out, from Maine to Washington to Florida to Alaska, that maybe that's the root cause for not being as optimized as say a US Bancorp or several other banks, large and small.

Would you consider having an independent board committee take a look at how to create more shareholder value, such as by optimizing the geographic footprint, since you said nothing is off the table?

Yes, Mike, I think it's clear that Key has a very experienced Board of Independent Directors, and they regularly evaluate our strategies, our position in the industry and our markets.

They look at our plans, our performance, and balance that we are doing the right things for our constituencies and that our plan will drive value for our shareholders.

We believe there is tremendous value in our Company, and our job, as a management team, is to execute on those plans and strategies that we believe will be successful for us.

All right, thank you.

Brian Foran, Autonomous.

I guess loan sales, you mentioned the leverage to the improvement in commercial real estate, is that a line item you can continue to grow from here?

Or, how should we think about the near-term outlook for loan sales revenue?

Sure, it is Chris Gorman, Brian.

We have a solid pipeline.

Our pipeline is, frankly, every bit as big as it was going into this year.

If you look at the line items that go through there, which are basically mortgage banking to Fannie, Freddie, FHA, and the Life Companies, we were up from, say, $1 billion in 2010 to, let's call it, $3.9 billion this year.

We think it's -- we don't think we can continue, probably, on that trajectory; but as we look at our pipelines, our pipelines are actually greater today than they were a year ago.

Thanks.

Once again, just in the interest of time, please limit yourself to one question.

Nancy Bush, NAB Research, LLC.

(Technical difficulties) business segment; and as we know, that's an increasingly competitive segment.

Could you just speak to your results in small business, and whether small business customers are demanding things that are different than what they wanted in the past?

Nancy, this is Beth.

I apologize, but the very early -- probably about half your question did not come through.

Can we ask you to repeat your question?

Yes, I just said that KeyCorp has always been recognized as a good small business bank.

And, if you could just speak to your results in small business, since that segment is becoming increasingly competitive?

And, whether -- what the demands of small business are now that, perhaps, are different than they have been historically?

Nancy, this is Bill Koehler.

A couple of comments.

In the past year or so, we have seen the tone of small business improve.

People are beginning to invest more.

And, we have been able to serve them in two ways -- through providing loans and deposits and other operating capabilities, as you normally would; but also, by using our SBA capabilities.

We have leveraged them very effectively to support a wide range of small businesses in our footprint, to the point where we were even acknowledged by the SBA in May, I believe, or June, for -- as a leading SBA lender to middle-market companies in the country.

So, we feel very good about where our clients and prospects are, in terms of wanting to build their businesses and invest in them.

They are still a little cautious, but they are stronger.

And, we have proven an ability to continue to serve them.

We see opportunity ahead.

Chris mentioned payments as an opportunity to further penetrate our clients, add more value, and generate more revenue over time, but we feel good about the progress we're making.

Nancy, this is Beth.

I would add that I -- one of the things is we track various levels in new business volume and pipelines.

This particular market segment has been perhaps the slowest to regain confidence and really start borrowing and spending again.

And we noted, what I would call, the inflection point in the fourth quarter of 2011.

But, as we close out 2012, there has been a notable increase in pipelines and new business volume in business banking, coupled with some behavior that is similar to middle-market clients, while retaining more cash.

And, we have really also worked to make sure, not only we have the business capabilities, that we also connect those business owners to our private bank to help them maximize and optimize both their business assets and their personal assets.

Okay, thank you.

Matt O'Connor, Deutsche Bank.

This is Rob Placet from Matt's team.

I was just curious, how meaningful could fee-revenue opportunities be from the recent deals and investments you guys made in credit card and payment areas?

This is Bill, Rob.

We feel very good about the progress we are making in both cases.

In credit card, we are growing our accounts at a faster rate than planned.

We are seeing improvement in fees -- or I should say dollars per transaction.

So, we're seeing a lot of evidence that our integration process is working well.

We think we can grow that nicely, over time.

In the case of HSBC, within that franchise, we're seeing similar positive dynamics.

Retention rates of those clients have been better than planned; employee retentions, better than planned, so we see some momentum building, and we think we can continue to grow it.

Rob, this is Beth.

I would give you a particular metric that I look at when I think about it -- specifically about the income opportunity.

Not having been a credit card issuer, our platform would have been more debit-card focused, pre these moves of ours, and obviously, in a different environment before Durbin.

And, we have 70% penetration in our checking account of debit cards.

Now, granted people use debit cards in a variety of ways and a variety of reasons.

But, bringing back in credit card and becoming a credit card issuer, our penetration on credit card currently is only 12%.

If you think about the opportunity to align that with our relationship rewards and all our core product capabilities and create more choice of how people exercise payment capabilities between debit card and credit card both for transactional needs as well as revolving credit, there is a significant fee opportunity that will come from that, both through growth, but also through just penetration with our own client base.

Rob, one other thought -- we just spoke about the revenue side here.

As part of our integration plans, there are opportunities to improve our infrastructure costs as well, which end up flowing through to the bottom line.

Okay, thanks very much.

Gerard Cassidy, RBC Capital Markets.

Beth, can you share with us -- when you guys looked at your capital, clearly, it would appear to most of us that you are very well capitalized, especially when you look at the tier one common ratio in the Basel III.

I assume you guys will be around the 7.25% to 7.5% requirement, what level above that are you willing to carry the bank at?

And second to that, in terms of what CCAR -- in terms of your application, can you share with us if you applied for more of a return of capital than what you did last year?

Yes, Gerard, I will go ahead and start with that, and then I will let Jeff talk about relative capitalization levels.

On CCAR, I would tell you that we very much did like the starting point that we went into this year's process.

As you noted, we had strong capital, solidly profitable, rebalanced and derisked our balance sheet, and I think we've got very strong process and strong models, which are all important to that process.

Our capital remains solid, even after the plans we have submitted.

And, what we've submitted would be consistent with our capital priorities, and as we've talked about them, is the opportunity to increase our dividends to our shareholders, an opportunity to look at share repurchases, an opportunity to have a return of capital.

Everything we submitted would be consistent with that; and we, like the rest of the industry, will share more broadly in March with the expected announcement of the results with the Federal Reserve.

Gerard, on Basel III, I think we have to wait until we see the final rules that come out to determine where we are going to operate and where the industry is going to operate.

Clearly, at this particular point in time, we start with a very solid position; and of course, that will be something that we will have to manage to whatever those targets are over time.

It is not our expectation that anybody is going to be allowed to do a major step change in their overall capital.

So I think, consistent with what Beth is talking about, the capital plans are filed, we go through the process, and we wait to hear back in March on that.

Beth -- I don't know if you want to disclose this, some of the other banks have on that they have applied for more of a return of capital this year than last year.

Would you guys be able to tell us if your number is going to be greater than the 50%, I think, you mentioned earlier in the call?

Gerard, this is Jeff.

I think in terms of the 50% that was in 2012 was really for three quarters because we did not have any share repurchase plans in place in the first quarter of 2012.

So, last year's CCAR covered a period of the second quarter through the first quarter of 2013.

I believe we've talked about, we have $88 million remaining under that authorization at this point in time.

We evaluate share repurchase, dividends, and all the rest of the potential needs for capital when we put together our capital plan and submitted it.

And, I think we will simply wait until the findings come back from the Federal Reserve and disclose that information at that particular point in time.

Okay, thank you.

Alan Straus, Schroders.

I was following up on Mike Mayo's question.

Why is the target of 60% to 65% efficiency ratio so much lower -- or actually, the ratio is higher than some of the leading banks?

Where did that number come from?

Yes, this is Beth, and I will start with a piece about our business mix and our business model.

It does have differences, and from where we start, we are targeting 60% to 65% by 2014.

And, I think some of the tenor and the tone of what we tried to convey today is that will reflect the demonstrable progress we intend to make in 2013, but we are also committed to being a company that works continuous improvement and has a business model that will also have more opportunities for revenue growth over the intermediate and long term as well.

Okay.

Just one last question.

Do you guys give out average ending assets, not average assets at the end of the quarter, but ending assets?

They are in our balance sheet.

They are directly in the press release, you can look at ending, average, all different --

I must have missed it, sorry --

They are in the press release.

Ken Usdin, Jefferies.

I just wanted to come back on the efficiency ratio question.

Beth, when you mentioned 2014 and you mentioned 60% to 65%, I just wanted to make sure we are all super clear -- 60% to 65% is you're expecting now to be on a cash basis or on a GAAP basis when you speak about 2014?

It is on a cash basis.

But, if you look at the amount of amortization that we have in any given year, what we are currently running at would amount to about $45 million.

Right, so it's not that much.

And then, the second clarifying question is -- are you talking about getting there on a full-year basis or by the end of the year?

We talk about entering 2014 at that level.

Entering, okay.

Does that mean in the fourth, meaning you are there at the end of the fourth when you report fourth quarter earnings, or do you mean first quarter?

These are the questions that are coming in today, so I just want to make sure everyone is super clear.

We mean in the first quarter of 2014.

2013 is our year to show that we are making that stepped improvement, that we are taking costs out of the Organization, and we are growing the franchise at the same time.

As we go through the year, the expectation in the second half of the year is you will see improvement over what we're running at in the first half of the year.

And then, we will have the full benefit as we enter 2014.

We are trying to be as aggressive as possible in addressing our costs in the first half of the year to get as much as we can, and we will provide, obviously, updates as we go on through this calendar year.

That is our current plan.

And, I think we have been pretty transparent in our previous comments that we have made about other forms of expectations in the past, whether it has been on margin, expense levels, et cetera.

So, that is what we are targeting -- end the year; start next year.

First quarter '14 cash efficiency ratio breaks into 60% to 65%.

Thank you, Jeff.

Steve Scinicariello, UBS.

Just a big-picture question for you, Beth.

As I look at all the focus areas that you have for 2013 and all the opportunities that you have, whether it is increasing the revenues through the fee income, average earning asset growth, continuing to manage the expenses, optimizing the franchise, deploying capital, all these things, I was just curious, as you look at the year, how do you rank these opportunities, and which ones give you the most bang for the buck?

Yes, Steve, as I look at it, I think several of the priorities, we are well in flight and it is a matter of continued rigor and focus, that would be in our maintain our moderate risk profile, I think, returning within our targeted range on charge-offs, and having realized significant benefit of quality of improvement in our balance sheet is something we just need to stay focused on.

Our distinctive business model, I think, is already showing results and is in our 2012 proof points.

So, I think, continuing to invest smartly and drive our business outcomes is a momentum we take into 2013.

I think the two areas that are highest on our radar screen would be aligning our cost structure and delivering on our Fit for Growth commitments in a way where our targeted investments, as well as our business strategy, creates the trajectory of revenue to meet that 60% to 65% cash efficiency ratio as we start 2014.

Makes total sense.

Sounds like 2013 should be one of playing a lot more offense, rather than defense, and definitely look forward to that, so thanks very much.

Due to time constraints, that does conclude our question-and-answer session for today.

I would now like to turn the conference back over to Ms. Beth Mooney.

Thank you, Operator.

Thank you for taking your time, all, out of your schedule to participate in our call today.

If you have any follow-up questions, you can direct them to our Investor Relations group, Vern Patterson or Kelly Lammers.

Their number, 216-689-3133.

That concludes our remarks for today.

Thank you.

This does conclude today's conference call.

Thank you all for your participation.