KeyCorp’s Simple Recipe for Lower Overdraft Income: Get More Customers

KeyCorp is betting it can make up for the drop in overdraft revenue by growing its customer base.

The Cleveland-based company said Thursday that starting in the fourth quarter, it will lose about $25 million per quarter in depository service fee revenue due to overdraft changes it announced earlier this year.

But Key is making “tangible progress” toward meeting the three benchmarks it has set for attracting new customers and doing more business with existing customers, CEO Chris Gorman told analysts.

KeyCorp, the parent company of KeyBank, said Thursday it was on track to meet three criteria for customer growth by 2025. The Cleveland-based company set the targets at its Investor Day in March.

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Those goals, which Key set out at its Investor Day in March, are to increase the number of retail relationship households by 20%, increase the number of commercial and investment bankers by 25%, and multiply by five the number of homes on Laurel Road. Laurel Road, Key’s digital bank for doctors, dentists and nurses, had about 48,000 households in 2021, and the bank is looking to increase that number to 250,000.

Fee revenue from lost overdrafts is “revenue that we’ll have to offset elsewhere by continuing to grow the business in areas where we can grow it, and that’s primarily by growing our customers,” Gorman said in an interview. following the business. call for third quarter results.

Key did not provide numbers to show “tangible progress” is being made. Gorman told analysts the company was “on track to achieve all three metrics” by 2025, although he also noted there had been a slight slowdown in banker hiring due to the market uncertainty.

KeyCorp, the parent company of KeyBank, with assets of $190.1 billion, is among a small number of banks that have explained how they plan to offset the reduction in fee income following the vague changes to the overdraft policy over the past year.

In January, Citizens Financial Group ankle the cost of its overdraft revisions to $40 million a year. Executives told analysts the Providence, Rhode Island-based company would likely more than make up the shortfall through cost savings and growth in other types of commission income.

In the same month, Regions Financial in Birmingham, Alabama, said it expected to lose $50 million to $70 million this year in overdraft income. The company would partly compensate by considering more non-banking acquisitions, Chief Financial Officer David Turner said at the time.

Key announcement its overdraft reviews in April and made them effective in mid-September. According to an American banker analysis by August, 17 of the 20 largest US commercial banks, including Key, had either waived insufficient funds charges or planned to do so by the end of the year.

In addition to eliminating insufficient funds fees, Key reduced the price of overdraft fees from about $33 to $20 and reduced the maximum number of overdraft fees customers can incur daily from five to three. The bank also said customer accounts that are overdrawn by $20 or less at the end of the day will not be charged overdraft fees.

In 2019, Key’s consumer overdraft fees totaled $148.6 million, according to data from the bank’s appeals reports. That figure dropped significantly to $101.7 million in 2020 as banks, including Key, waived those fees in the first year of the pandemic, then rose to $116.3 million in the year. last.

The full impact of Key’s changes does not yet appear on the filing service fee line of the company’s income statement. For the third quarter, these charges totaled $92 million, up from $91 million in the same quarter last year, but down $4 million from the second quarter of this year.

Overall, non-interest revenue fell 14.3% from the third quarter of 2021 to $683 million, Key said Thursday. The decline included a 57.6% reduction in consumer mortgage income, which was impacted by lower sales margin gains, and a 34.5% drop in investment banking and investment banking fees. debts.

The underwear in the investment banking sector marks the third consecutive quarterly decline for this division, which was affected due to the overall decline in activity in the capital markets.

For the third quarter, Key reported net income of $513 million, down 16.7% from the same period last year. Earnings per share totaled 55 cents, three cents below the average estimate of analysts polled by FactSet Research Systems.

Non-interest expense of $1.1 billion remained roughly flat compared to the same quarter in 2021.

Key expects these costs to increase by 1% to 3% during the fourth quarter. The guidance is based on expectations of higher incentive compensation due to an upturn in investment banking activity, as well as combined one-time charges of $20 million related to a pension settlement and building consolidation expenses, said Chief Financial Officer Donald Kimble.

The projected increase in spending surprised some analysts on Thursday, but Kimble said the company remains “very focused on generating positive operating leverage” going forward.

“We plan to do it this year,” Kimble said on the call. “And we haven’t given guidance for 2023 or beyond yet, but we plan to continue to do so for the next few years as well.”