Recommendations for the Survival of KeyCorp

Presented to:Dr. Raymond FrostDr. Michael GrayDr. Time HartmanDr. Valerie Perotti

Dr. Ed Yost

Presented By:Team 2

Big Red Key ConsultantsSeth AxthelmJill Cremeans

Ryan EllisEric HedrickKelly Jones

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 KEYA 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.

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

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,

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

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. SmartMoney.com 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

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 Wingspan.com and

X.com 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

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 Amazon.com, Buy.com, 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. Passport.com offers an e-wallet recognized

everywhere on the web. Flooz.com 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

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 Palm.net, 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.

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

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

International Services

IRA Services

Merchant Services

Wealth Transfer Plans

Global Treasury Management Services

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 KeyMerchants.com 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.

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).

APPENDIX B

Adapted from Dr. G. Kaye Rakes’ lecture

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.

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.

.

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