KeyCorp's (KEY) sale of its investment unit is an effort at addition by subtraction, but exactly what it's adding remains fuzzy.
On Thursday, the $90 billion-asset Cleveland company announced it would sell its Victory Capital Management and Victory's broker-dealer affiliate to Crestview Partners for $246 million in cash and debt.
Streamlining is welcome, but the sale of a fee-income generator in a low interest rate environment is curious, analysts say.
"Why sell it when fee income is so valuable? Why not wait for rates to rise?" says Christopher Mutascio, an analyst at KBW.
KeyCorp's fee income makes up about 45.5% of its earnings, and the Victory sale would drop that to 44%. The largest banks tend to have an even split in revenue, while community banks tend to run about 70% interest income and 30% fee income.
KeyCorp managed to strengthen its net interest margin last year, mostly because of expiring certificates of deposit it issued at the onset of the economic downturn. But it could run into pressure depending on how long the Federal Reserve keeps short-term rates low.
R. Scott Siefers, an analyst at Sandler O'Neill, was also surprised to see the company sell the unit, mostly because its possible sale had begun to resemble an urban legend.
"People have been talking about [a Victory sale] as long as I've been following the company. I'd concluded that if they were going to they would have," says Siefers, who has covered KeyCorp for a decade. "I'd be curious to know why now? Do they see better returns elsewhere?"
The sale could slightly help the company in meeting its efficiency goals. KeyCorp's efficiency ratio was 71% at yearend, while Victory's was 78.6%. Beth E. Mooney, KeyCorp's chief executive, has set a goal of 60% to 65% as it enters 2014.
"Asset management operates on a higher efficiency ratio," Mutascio says. "But they are losing income in the deal and the goal is largely dependent on revenue."
Victory had revenue of $112 million in 2012 and expenses of $88 million. KeyCorp is expecting after-tax gains of $145 million to $155 million and says it would ask regulators for permission to use the funds to repurchase shares of its common stock. For shareholders, the deal means two cents less of net income that would be offset by the repurchase.
"It is kind of a wash at the end of the day," Siefers says. "Their ability to repurchase nets out any lost earnings."
The deal would simplify KeyCorp and give its executives more time to seek other ways to sharpen its focus on basic banking.
"To me, this is indicative of Mooney's intention on really focusing on the bank' relationship-banking business and divest the part of the business that are not core," says Mark Palmer, a research analyst at BTIG, an institutional brokerage.
KeyCorp did not respond to an interview request, but Mooney underscored Palmer's comments in a press release.
"The divestiture is consistent with our strategic focus on businesses that leverage the competitive advantages of our core-relationship banking model," she said.
The sale could have some merger and acquisition implications. Though the additional capital will be used for buybacks, Keycorp's existing capital base could be used for bankrolling improvements to its branch network.
KeyCorp is often criticized for having a far-flung network that stretches from Alaska to Florida. Last year the company acquired 37 former HSBC branches in western New York for $110 million from First Niagara Financial Group to bolster its presence in that region. Analysts want to see more deals like that. KeyCorp could also sell some branches, analysts say.
"They need to look at the branch network as a portfolio, and they should either look to increase its penetration or perhaps exit markets," Palmer says. "It doesn't help to be No. 9 on the deposit market list."
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