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  1. 1. Recommendations for the Survival of KeyCorp Presented to: Dr. Raymond Frost Dr. Michael Gray Dr. Time Hartman Dr. Valerie Perotti Dr. Ed Yost Presented By: Team 2 Big Red Key Consultants Seth Axthelm Jill Cremeans Ryan Ellis Eric Hedrick Kelly Jones
  2. 2. INTRODUCTION In this day and age a financial service company’s main priority is its stock price. KeyCorp’s stock price has been hovering around 18, a very dangerous all time low. The primary reason for this low stock price is that there is not a consistent revenue growth. Another reason is that Key operates at a much higher cost than it should. An arguable third reason is that fee income potential has not yet been fully realized. At this point, however, your low stock price is not just an issue – it is an emergency. There is no doubt that the actions taken in the next few months will make or break Key’s future. We feel that there are only two options available to you right now. Either prepare to sell Key or make major adjustments to thrive independently. In order to stand alone, we have come up with three main categories to begin focusing on: internal restructuring, expansion of services to other geographic regions, and upgrading technologies. We have also made suggestions to make Key stand out above the rest with some technological innovations. We realize that you have recognized this problem and have made some attempts to fix it. It is our belief that our recommendations better address this concern and will take you and your company in a positive direction. LOOKING TO SELL KEY A responsible decision for Key to make is to sell. This would give some control to you as the board of directors. It will allow you to control some of the variables to a certain extent such as who the buyer is and some of the terms by which you are acquired. If you are forced into a buyout situation you will lose any previous leverage that you would have gained by planning the sale. This maintains the employees’ and stockholders’ best interest. For the employees, there would be no more layoffs. The stockholders would benefit greatly from an increased price after Key is bought out buy a more powerful and efficient bank with good Wall Street status. The low valuation Key has consistently carried in relation to other similar banks would normally indicate them as a good acquisition candidate. In this case, though, they are not a standout. There are other banks such as Bank One, National City, and First Union that carry a very low valuation as well and would provide a “super-bank” with equal or greater additional market share.
  3. 3. There are steps that need to be taken if Key is going to successfully sell into a good situation. A “super-bank” does not want to acquire a bank the size of Key for its diversity of services or because it has a few branches in Alaska. What we are implying is that a company with enough power and leverage is not after Key’s services or its distant branches. Key will be bought for the opportunity of entrance into the markets where they are powerful and have large share. This means that in order to make Key attractive to potential buyers you must sell as many of the small and less significant divisions and sections as possible. Suggestions • Sell McDonald and Company • Cease any future plans for acquisitions • Sell any division that would be easily detached • Court perspective buyers MAINTAIN INDEPENDENT OPERATION If you are intent on maintaining independence then you must be prepared to undertake extensive restructuring. As you are probably aware, once Wall Street has stamped you as a dog, it is extremely difficult to get out of the doghouse. Even bringing performance to a level that is even with peers won’t get the job done. You must now outperform them to restore your standing with Wall Street. In the simplest terms, you must identify strengths and weaknesses and then pour resources into the strengths while eliminating the weaknesses. The following are the major areas that need to be dealt with along with our suggestions. Revenue Growth Revenue growth can only increase if efficiency is increased. That simply means that more money must come in and less money must be spent. For example, areas such as Alaska and New Hampshire have relatively few banks and the cost to run these banks is relatively high. The inefficiency in this case results in expenses with no gain. (Nihiser Interview, 2000). The unfortunate solution to this is to close some branches and lay off more employees. We also believe it would be beneficial to Key to look for some smaller regional banks to buy some of the branches that are far from the northeast central location. These locations are less powerful and hold less market share than those in your northwest mainstay. In addition, it is more expensive
  4. 4. and less effective to advertise to these areas. Finally, McDonald and Company must be evaluated and changes must be made. Since being acquired in 1998, they have yet to provide any real value to Key’s bottom line. The current trend of stagnation is unacceptable. The purpose of acquiring an investment firm is to add diversity to your company as well as revenue. It isn’t doing the latter. Fee Income Capital markets need to have primary focus. We have been flat and even declining in this area. This is completely unacceptable because of Key’s large customer base of companies in the middle market range that capital markets services are directed toward. A possible solution would be to hire some highly specialized private placement loan personnel. It would be an expense that would more than pay for itself. An overall increase of fee income must be Key’s focus. This will decrease your susceptibility to variables such as interest rates and market conditions. It is imperative that fee income is greater than half of all income; this should be addressed aggressively and quickly. (Payne Interview 2000). Spotlight Positives Key offers one of the widest ranges of services of any financial service company in the super regional arena. You need to advertise this fact as much as possible to create a positive buzz in relating to investors. In the long run, Key has maintained an excellent record of credit quality. Credit risk is something that has hurt bank stock prices in general over the years. The fact that Key excels in this area is a point that can be emphasized to increase favor with Wall Street. Expansion Walking into the 21st century is a difficult and sometimes scary concept for many banks to grasp onto. Banks struggle over whether or not to keep the same image they have always endured or change certain lines of services, promotions or structures inside the bank. For a large, super regional bank such as Key to keep up with competition and survive in the massive industry of banking, they will continue to adopt and portray a fresh and updated image while at the same time expanding throughout the United States. (Russ Interview, 2000) Currently Key Bank has close to 1,000 branches ranging in 14 states. The main regions where Key has branches located include the Pacific Northwest, Midwest and Northeast parts of the United States. New York and Ohio contain roughly half of Key’s branches while states such as Alaska, Florida and New Hampshire embody about 3% of the branches. (Nihiser Interview,
  5. 5. 2000). Key could cut costs by spinning off their unprofitable branches and re-evaluate what parts of the United States are rapidly growing and what parts are slowly dying with their customer base. Right now, the South and Southwest parts of the country are the largest expanding regions with an 80% increase in population in the last 15 years while areas such as Alaska and New Hampshire are growing at a rate of only 21% over the same time period (Population by State 1998). We feel that costs could be cut by eliminating some of the branches in random states (such as Alaska and New Hampshire) and by beginning to expand more into the south and eventually into the rapidly growing southwest. Also, many e-commerce companies are based out of California, Nevada and Arizona and a large portion of the country’s wealth is accumulated in these three states. It is widely known that Silicon Valley is a gold mine for just about any business, so it could be beneficial for Key to take a look at this area especially. However, before jumping right out West, Key should first look to expand down South to states like Kentucky, Tennessee, Georgia and the Carolinas. These states have a combined population growth rate of about 50% in the last 15 years (Population by State 1998) By expanding down South at a gradual yet aggressive pace, their deposit base will grow and profit will flourish, thus making stock prices escalate to higher levels. Key does not necessarily need to expand with ‘bricks ‘n’ mortar’ stores everywhere they plan on going, but rather start out slowly with a couple ‘bricks’ branches around states which are closer to the cumulus of where they are currently located. Another hot trend that many banks are beginning to gear towards is Supermarket banking. This concept has combined “consumers’ two main pocketbook destinations in one location” (Banking Now Part of the Grocery Mix 1998). Susan O'Dell, a consumer consultant in Beamsville, Ontario states that: Bankers and supermarkets are a strategic good fit--both are intimately associated with home, family and future. Retailers everywhere are looking for innovative ways to extend the value of their relationship with customers. It's going to take some time to determine how successful this union of two major institutions will be. Banks aren't noted for possessing a retail style, and grocery stores will want to establish quickly if this added value service translates into new and sustained business (Banking Now Part of the Grocery Mix 1998). Overall, it would greatly benefit Key to take advantage of placing itself in an arena such as supermarket banking for the sheer fact that this is where many banks are heading. A move such as this will increase your customer base by exposing your company and its services to many
  6. 6. potential customers. If Key does not capitalize on a service such as this it will be left in the dust in this specific area. Technology There is no doubt about it, Key has no choice but to expand online. Changes must be made for customers to access more services online. Essentially there are two routes that Key can take in order to compete on the Internet. We recommend expanding services to those already offered online. Another option is to create a totally new banking company that is internet-only, also known as a pure play company. Expand Services Already Online Expansion of services already offered by Key is a better route to examine at the present time. It is much more cost effective plan and Key has a stronger starting base in this area. Key already offers several services to the customers online that are an extension of the services offered in the branches. recently rated online banks on the services offered and the ease of use. Key scored very high in the areas of security, information offered, and customer service. (The Best (and Worst) Online Bankers 1999). The two areas where Key suffered were products and services offered online and fees. Five bank products were considered important when rating the banks, those are: unlimited check writing, overdraft protection, credit cards, CDs, savings bonds, as well as other minor services. In the area of products and services online, Key was rated as average, only offering half of the criteria evaluated. Before Key expands into areas other than banking, all banking services must be offered online first. The next step will then be for Key to add in online trading, insurance, loans, taxes, and all other products financial institutions are currently offering. In a time when e-commerce is moving as quickly as it is, the banking industry continues to move slowly, Key must offer all services possible that the customer wants and needs to keep up with e-commerce.. Besides expanding services that are standard within the industry Key must also try to develop new ideas to add on to the existing services. Here are some recommendations for add- ons to the already existing services to possibly add in the future. Interactive meetings with financial advisors via online chats, emails, video conferencing, and interactive financial programs, to give the customer help whenever they need counseling or advice in the financial
  7. 7. arena. Key could create an email or paging service that alerts customers when account balances are low or they are in danger of bouncing a check. This service could also notify customers when deposits have gone through as well as give notification of important updates from Key. Also by increasing speed of transaction postings online to real-time, it would set Key apart from the rest of the competition offering a service that few other banks present. Each of these recommendations would differentiate Key from all other banks. Pure Play Here is a possible route to take if you feel that expanding your services already online is not an option. Creating an internet-only bank is a new trend that several banks are attempting.. Several banks have started spin-off banking companies on the web such as and that are independent of the parent company. For Key, starting a new Internet site is an option worth considering. There are several benefits to having a stable Internet site. Key would be able to offer more attractive rates on savings, checking, loans, and other interest bearing accounts. This could potentially bring an entirely new customer base as well as helping Key expand globally. Key would also be able to target a younger audience that will soon be joining the workforce. The downside to starting a pure play company is that it is expensive. Key would have to contract a consulting firm to create and develop the new site or consider merging or starting a partnership with a pure play bank already online. Starting an Internet bank is a good option for many banks, but not necessarily the best option for Key at the present time. Innovative Technology All banks are now trying to figure out ways to offer their services online better than everyone else. The rush is so great to get online that the only thing that many banks are doing to keep up is getting online. Key can be set apart from the industry by thinking of other ways to offer innovative services that customers can use and can grow to need on a daily basis. Here are a few recommendations that Key can consider for the future to help stand out in the industry. Merge or partnership with ISP – A strategic alliance with an Internet Service Provider, such as Verio, one of the largest ISPs in northeastern Ohio, would be an ideal step to take in the race to be the best. By doing so several new options would be available to offer to customers. First
  8. 8. would be a possibility of free Internet access. Every time a new customer opens an account, an incentive for customers to interact with the bank online would be free Internet access. Another possible spin-off of that recommendation would be to offer a new personal computer with each new account opened. This recommendation holds endless possibilities of services that could be offered on a personal computer. Essentially Key could eventually be thought of as a financial institution and an ISP, a combination that is unprecedented. E-Wallet – A new trend that is developing in various financial institutions is the idea of an “e- wallet”. An e-wallet is a separate account which a user can deposit digital cash and use for online shopping or bill paying. Users would be able to spend their digital cash at large e- commerce sites such as,, and many other online companies. Soon all online companies will accept e-wallet accounts, so if Key becomes a presence now it will be a benefit in the long run to be seen as a traditional player in this area. Some companies have already started similar digital cash services. offers an e-wallet recognized everywhere on the web. allows customers to email money via online coupons. Possible strategic alliances with companies such as these could prove to be beneficial and cost effective to diversify services that Key can offer. Smart Card – Another innovate development, the smart card, allows for money to be downloaded onto a credit card with a special computer chip. The smart card offers a replacement for cash. Offering this service has several possibilities for customers. First, in connection with offering a personal computer with new accounts, a smart card can then become a personal ATM by allowing money to be downloaded onto the card via the personal computer, eliminating customer needs of ATMs. Key has a chance to be a leader in the movement towards a cashless economy by implementing the smart card. Palm-Held Computers – Wireless networking is a very new technology that allows computers, cell phones, pagers, palm-held computers, and many other devices to connect to the Internet from anywhere. A totally new innovation that Key can offer is real-time banking on a palm-held computer. From the palm-held computer customers could check balances, be notified of deposits, pay bills, be notified when bills have been paid, get investment information, invest
  9. 9. online, along with several other services that may not have to do with banking such as, airline tickets, order dinner, find an ATM, email a friend, anything is possible. Eventually cash could be downloaded onto the smart card with the palm-held computer. This service, when initially offered, could prove to be expensive, so possibly only offer this service to VIP customers initially. Partnerships or mergers with both palm makers, such as 3com makers of the palm pilot, and ISPs, such as, which offers wireless service to palm pilots, would be an advisable venture. This could possibly reduce costs and create possibilities for all customers to have access to this service. There are still barriers that need to be addressed in this field as far as security and cost of wireless service. 128-bit encryption needs to be developed for wireless networks to ensure security and to gain customer trust. The first to offer a complete package to the customer will become a leader in this service. Key has a chance to have its name known synonymously with palm-held computer banking, our recommendation is not to pass up this opportunity. “Banks need to be open-minded about their partners and creative in their desire to offer services. Not all proposals will look good in the cold light of the boardroom but they may still contain the idea that will conquer the world’s banking market.” (Banking in the year 2020, 1999) CONCLUSION Although it is not glaringly apparent which route to take, it is absolutely imperative that immediate action is taken. To conclude, you must decide between selling Key or undergoing major changes to compete alone, and you must do it quickly.
  10. 10. A Brief History of Key History Key Bank is the 2nd largest bank based in Ohio. It is Cleveland based and boasts 969 full service institutions in 13 states. **** Key offers 2,600 ATM’s, a convenient 24-hour telephone banking center, and online banking with personal profiles. The company’s assets are worth about $83 billion. Key Bank provides investment management, retail and commercial banking, consumer finance, and investment banking and services. (Key Website 2000). Services Key offers a wide variety of products and services to meet the individual customer’s needs. Services are broken down to cover the areas of personal finance, small business, and the corporate market. Elaborate Checking Service  Offers six account options to appeal to customers with different needs and desires.  KeyMoney ATM card  Cash Reserve Credit to protect a customer from overdrafts. Insurance  Life  Disability  Long-term care  Auto  Home  Boat, Watercraft, and RV  Individual and Group Health Insurance  Property and Casualty Insurance Investment Options  Stocks
  11. 11.  Fixed Income Products o Certificates of Deposit, Commercial Paper, Corporate Bonds, Mortgage- backed securities, Municipal Bonds, Preferred Stock, Treasury bills, notes, and bonds, and Zero Coupon Issues.  Retirement Planning  Education Planning  Estate Planning  Options  Mutual Funds  Relationship Advisors o Offer services such as Asset Management, Brokerage Services, Insurance Management, and Private Banking.  Capital Market  Housing Capital  Equity Capital  Public Sector Loans  Auto  Education  Home Equity  Marine  RV  Installment  Lines of Credit  Community Development  Term Loan Products  Government Loans  Leasing options Savings Plans Other Services  Cash Management  Free Resources
  12. 12.  International Services  IRA Services  Merchant Services  Wealth Transfer Plans  Global Treasury Management Services
  13. 13. Where is Key Bank Now? Key Bank has made many partnerships to expand their customer base and expand their service options. (Key Web Page 2000). Partnerships  Texaco and ARCO for ATMs  Several National Insurance Carriers  Econex (an e-commerce service provider) to launch their site. This will “enable its base of over 400,000 small business customers to open web storefronts and conduct secure, cost-effective e-commerce.”  McDonald Investments, Inc., which just completed a merger with Trident Securities (a privately-held investment company). This merger will allow Key to extend its product line into the conversion business and gain a broader geographic region.  Indocam International Services, S.A. which monitors Key’s International Assets ***The buzz about KeyCorp was that they were looking to merge with Nations Bank. That will not be happening. According to Nancy J. Nihiser of Key Bank, “Nations Bank has merged with BankAmerica to form Bank of America.” Also, “Key is more interested in a complimentary services company such as an insurance company or investment firm.”*** Key is in the process of some restructuring. (Key Web Page 2000).  Key Plans to outsource certain technology services because they can be completed more cost effectively by external providers.  Key will perform site consolidation initiatives at the corporate level and in several businesses in order to improve the company’s expense base and enhance efficiency and customer service.  Key will discontinue the use and “write-off” of software to reduce some of the company’s expenses.
  14. 14.  Key is negotiating the potential sale of Key’s Credit Card operations to exit low growth businesses. Key also wants to form a strategic alliance with a credit card firm. Key has many plans in the works. • KeyCorp has just made a major agreement with Associates First Capital to sell off their $1.3 billion credit portfolio for a gain of about $330 million. In addition to the sale, KeyCorp had to promise to get out of the market. (KeyCorp Will Sell Off $1.3B Card Portfolio To Associates December 1999).  KeyCorp has signed an agreement with the U.S. Postal Service to place ATMs in the lobbies. (Post Office to Try ATMs November 1999). Key will place the ATMs in three urban locations in Maryland and three rural locations in Florida to study the “potential for distributing social Security payments, federal retirement payments, and other benefits”. (Key Web Page 2000).  KeyCorp will spin off its program Key Equity Capital to take advantage of its new investment opportunities and capitalize on one of its stronger performing divisions. “It will broaden its investment portfolio by adding merchant banking and technology funds, expanding its commitment to mezzanine financing, and more aggressively pursuing partnerships with other investment groups that have expertise in financing high tech, telecommunications and other high-growth sectors.” (Key Web Page 2000).  KeyCorp has signed an agreement for Relativity Technologies Inc. to modernize its customer service system. The plan is to replace Key’s current system with Relativity’s RescueWare. This will “increase flexibility and access speed for 14,000 users at KeyCorp’s call centers and branches” which in turn will generate cost savings. (KeyCorp Replacing Customer System December 1999).
  15. 15. APPENDIX B Net Income Net Non-interest Income Expense Net Interest Income Non-interest Non-interest Interest Interest Income Expenses Income Expense Loan Time Fees Personnel Income Deposit Investment Certificate of NSF Benefits Income Deposit Capital [Losses] Requirements Credit Data [Reserves] Cards Processing Mortgage Facilities Points Credit Life Advertising Adapted from Dr. G. Kaye Rakes’ lecture
  16. 16. GLOSSARY Bill -same as Treasury Bill. Also, paper currency or an invoice of charges for products and services. Bond-A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. A bond is generally a promise to repay the principal along with interest on a specified date (maturity). Broker-An individual or firm, which acts as an intermediary between a buyer and seller, usually charging a commission Certificate of Deposit (CD)- Short- or medium-term, interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans. Low risk, low return. There is usually an early withdrawal penalty. See also brokered CD, term CD, time deposit. Commercial Bank-An institution that accepts deposits, makes business loans, and offers related services. Commercial Paper -An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. See also paper, collateral surety, debt instrument, Euro commercial paper, paper dealer, prime paper. Corporate bond -A bond issued by a corporation. Such bonds usually have a par value of $1,000, are taxable, have a term maturity, are paid for out of a sinking fund accumulated for that purpose, and are traded on major exchanges. Initial Public Offering (IPO) -The first sale of stock by a company to the public. Investment Bank-An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities, but which does not accept deposits or make loans. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. Merchant- An individual whose occupation is to buy items at wholesale prices and sell them at retail prices. Mezzanine Financing-Late-stage venture capital, usually the final round of financing prior to an IPO. Money Management-The process of managing money, including investments, budgeting, banking, and taxes.
  17. 17. Mortgage-Backed Security-Security backed by a pool of mortgages, such as those issued by Ginnie Mae and Freddie Mac. Municipal bond-Bond issued by a state, city, or local government to finance operations or special projects; interest on it is often tax-free. Note-A short-term debt security, usually with maturity of five years or less. Also, a legal document that obligates a borrower to repay a mortgage loan at a specified interest rate during a specified period of time or on demand. Preferred stock -Capital stock, which provides a specific dividend that, is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Usually does not carry voting rights. Treasury Bill-A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having maturity of one year or less. Exempt from state and local taxes. Treasury Bond-A negotiable, coupon-bearing debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of more than 7 years. Interest is paid semi-annually. Exempt from state and local taxes. Treasury Note-A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of between 1 and 7 years. Also called U.S. Treasury Note. Venture Capital (VC)-Funds made available for startup firms and small businesses with exceptional growth potential. Managerial and technical expertise is often also provided. Zero-Coupon Bond-A bond, which pays no coupons, is sold at a deep discount to its face value, and matures at its face value. Under U.S. tax law, the imputed interest is taxable as it accrues coupon. The interest rate on a fixed income security, determined upon issuance, and expressed as a percentage of par. .
  18. 18. REFERENCES Banking in the Year 2020. (1999). Retrieved 9 February 2000 from Banking Now Part of the Grocery Mix. (1998). Retrieved 14 February 2000 from Investing Definitions. (2000). Investor Words. Retrieved 14 February 2000 from Key Bank Web Page. (2000) Retrieved 13 February 2000 from KeyCorp-Announced Restructuring Will Cut Costs…And Then What?. (1999). First Union Securities.Retrieved 10 February 2000 from KeyCorp Disappoints Again, Estimates Reduced. (1999). Lehman Brothers. Retrieved 10 February 2000 from KeyCorp Replacing Customer System.( December 1999). American Banker. OhioLINK. Retrieved 9 February 2000 from KeyCorp Stock Report. (2000). Standard & Poor's. Retrieved 14 February 2000 from KeyCorp Stock Update. (1999). Tucker Anthony Cleary Gull. Retrieved 10 February 2000 from KeyCorp Will Sell Off $1.3B Card Portfolio To Associates. (December 1999). American Banker. OhioLINK. Retrieved 9 February 2000 from Nihiser, Nancy (Vice President of Personal and Investment Banking, KeyCorp). Performed by Kelly Jones on 12 February 2000. Payne, David. Personal Interview. Performed by Eric Hedrick on 14 February 2000. Population by State. (1998). Retrieved 14 February 2000 from Post Office to Try ATMs. (November 1999). Credit Union Journal III. OhioLINK. Retrieved 9 February 2000 from Rakes, Dr. G. Kaye. Personal Interview. Performed by Eric Hedrick on 9 February 2000. Russ, Ron (Financial Advisor). Personal Interview. Performed by Ryan Ellis on 8 February 2000.
  19. 19. The Best (and Worst) Online Bankers. (1999) Retrieved 9 February 2000 from