Mike Mayo Extends His 20-Year Wait for KeyCorp Makeover

Mike Mayo was a 31-year-old analyst at Lehman Brothers Holdings Inc. in 1994 when he wrote a report predicting KeyCorp shares would trail rivals as the firm considered restructuring. He’s still pushing for the overhaul.

In a research note today titled “20th Anniversary Blues,” Mayo, now 50 and at CLSA Ltd., labeled KeyCorp one of the “least optimized” big U.S. regional banks. The stock has slid 18 percent since the Cleveland-based lender merged two decades ago with Society Corp. to create what the analyst calls a “disjointed” footprint. Now in a dozen states from New York to Oregon, KeyCorp should cut costs or exit markets, he said.

“They’ve gone from terrible to poor,” Mayo said in an interview. “It speaks to a broader corporate issue about how companies can be run where underperformance happens for two decades.”

While Mayo, who has clashed with bank leaders including JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon, is reprising his criticism of KeyCorp, he’s no longer bearish on the stock. He said it will outperform as the firm disburses a larger portion of profits to investors than rivals do.

The lender, run by CEO Beth Mooney since 2011, rose the most in the KBW Bank Index last year, and returned 76 percent of earnings to shareholders. The stock is poised to generate excess capital over eight years equal to the firm’s current market valuation of almost $12 billion, Mayo estimated.

Expense Ratio

Jack Sparks, a spokesman for KeyCorp, declined to comment on Mayo’s analysis.

Net income climbed 6.1 percent to $910 million last year. While fourth-quarter costs were higher than the bank had forecast, the firm has said expenses will decline this year and that it expects to achieve a cash efficiency ratio -- a gauge of management’s ability to control costs -- of 60 percent to 65 percent. That compares with 64.6 percent in 2013, excluding certain one-time expenses.

KeyCorp could do better, Mayo said. The firm’s expenses have climbed at more than twice the rate of revenue since the merger in March 1994 created what’s now the 14th biggest U.S. bank, according to the analyst. While KeyCorp has taken steps that include closing branches, the firm should consider more aggressive measures, such as selling businesses or withdrawing from some geographies, he said.

“This isn’t sustainable,” Mayo said. KeyCorp’s “lousy” efficiency reflects flaws in the firm’s business model or poor execution, said the analyst, who owns shares of KeyCorp so that he can attend the annual shareholders meeting and voice his concerns directly to management.

Expense Goals

Mooney told investors last month the bank’s cost-cutters had found $241 million in annual savings, beating their $200 million goal and doing it three months ahead of schedule. The CEO used the word “efficiency” eight times during her introduction to the quarterly conference call and said the focus on controlling expenses is a lasting “cultural change.”

“I would reiterate that 60 percent to 65 percent is not the end of where we see the path for Key as we’ve become a more efficient company,” she said in response to questions from Mayo. “There continue to be opportunities within vendors and sourcing.”

The stock has climbed 50 percent during Mooney’s tenure as CEO. It slipped 3 percent this year through yesterday to $13.01 in New York trading, the ninth-worst performer in the 24-company KBW Bank Index. Mayo’s 12-month price target is $14.

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