There are literally thousands of publicly traded stocks for investors to choose from. So, for one to make its way into your portfolio and stay there it should earn its spot through exceptional management, returns, and future prospects.
As an investor, and given the fact that exceptional companies, and banks in particular, do indeed exist, there's simply no reason to compromise on this front. With this in mind, I'm going to give you three reasons why KeyCorp (NYSE:KEY) doesn't even come close to making the grade.
1. Suspiciously fast loan growth
It's always tempting to applaud a bank's success at growing its loan book -- even I find myself falling into this trap. But when you sit back and think about it, this has got to be one of the easiest things in the world to do. A loan is nothing more than money -- cold, hard cash. Who doesn't want to be on the receiving end of that?
Let that settle in for a second, and you'll soon realize that rapid loan growth is one of the biggest red flags in the financial industry. Indeed, virtually every major bank failure in history was preceded by a period of this very thing.
With this in mind, I couldn't help but notice when KeyCorp's chief executive officer Beth Mooney recently shared that the bank's loan book expanded by 11% on a year-over-year basis in the third quarter driven by commercial, financial, and agricultural loans.
Now, let me be clear, I'm not saying that KeyBank is going to fail. I don't think that's the case by any stretch of the imagination. What I am saying, however, is that double-digit loan growth like this is often associated with an institution that's playing too hard and fast with its depositors' money.
2. Ingrained culture of irresponsible lending
How could I possibly deride KeyCorp's hard won accomplishment at growing its loan book? Let's just say that its history of credit management leaves it unentitled to the benefit of the doubt -- click here for a graph of how it destroyed shareholder value between 2008 and 2012.
Speaking of loans, specifically, you can see this in the chart below, which compares KeyCorp's net charge-off ratio since 2004 to the best banks in the business, M&T Bank (NYSE:MTB), New York Community Bancorp (NYSE:NYCB), and US Bancorp (NYSE:USB).
Suffice it to say, KeyCorp's willingness to participate in the euphoria of an asset bubble -- which, mind you, is precisely what bankers aren't supposed to do -- should leave investors more than a bit concerned about the quality of the loans that are fueling its present growth.
3. Run by hired guns
With the above in mind, it should come as no surprise that KeyCorp's management leaves a lot to be desired. To be fair, I'm not referring to the intellectual abilities of its top executives, but rather to the fact that the most senior of them are hired guns.
You can choose your pick among them, most of whom spent the formative years of their careers elsewhere, but I'm referring specifically to CEO Mooney and CFO Don Kimble, who joined KeyBank in 2006 and 2013, respectively.
I bring this up for three reasons. First, it suggests to me that KeyCorp isn't being led by executives with long tenures and thus deeply vested interests in the company. Second, it's indicative of the bank's inability to develop leadership from within. And third, outside leadership is often willing to take risks that those brought up in a company simply aren't. The textbook example, though extreme, is Jon Corzine at MF Global, the commodities brokerage firm that went bankrupt soon after he assumed the helm.
On this note, let me leave you with one thought: It isn't a coincidence that the top executives of the nation's best banks -- be it, M&T Bank, Wells Fargo, New York Community Bancorp, or US Bancorp -- all have decades of experience with the same organization.