KeyCorp, established in 1958 and based in Cleveland, Ohio, is a prominent bank-based financial services company in the United States, with consolidated total assets of approximately $188.3 billion as of December 31, 2023. The company operates mainly through its principal subsidiary, KeyBank National Association, offering a broad spectrum of financial services to individual, corporate, and institutional clients through its two primary business segments: Consumer Bank and Commercial Bank . The Consumer Bank segment provides a variety of products and services, including deposit and investment products, personal finance, lending, and wealth management . The Commercial Bank segment caters to the financial needs of middle market and large corporate clients, offering lending, equipment financing, and commercial real estate services .
- Commercial Bank - Focuses on meeting the borrowing, cash management, and capital markets needs of middle market clients, and provides lending, equipment financing, and banking products to large corporate and institutional clients. It is a significant national commercial real estate lender and third-party servicer of commercial mortgage loans.
- Consumer Bank - Offers deposit and investment products, personal finance and financial wellness services, lending, mortgage and home equity, student loan refinancing, credit card services, and business advisory services. It also provides wealth management and investment services to institutional, non-profit, and high-net-worth clients.
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What went well
- KeyCorp expects a 20% improvement in Net Interest Income (NII) in 2025, driven by securities portfolio repositioning, fixed asset repricing, and effective management of deposit betas .
- M&A backlogs increased by 10% quarter-over-quarter, signaling strong future investment banking fees due to heightened private equity activity .
- Anticipates commercial loan growth in areas like affordable housing and renewables, offsetting the decline in consumer loans, supported by growing pipelines and increased capital markets activities .
What went wrong
- Increase in Non-Performing Loans (NPLs) and Net Charge-Offs (NCOs): The company experienced an unexpected increase in NPLs, which management believes is "sort of peaking" and noted it's "kind of broad-based" . Net charge-offs were elevated due to three credits, and while these are not expected to recur, it raises concerns about potential credit quality issues .
- Higher Deposit Betas Impacting Net Interest Income (NII): The initial deposit beta on the first rate cut is expected to be in the "low to mid-30s," higher than previously modeled, which may pressure net interest income growth . The company had to take "more deposit action than we had previously planned," indicating challenges in managing funding costs .
- Uncertainty in Loan Growth and Expense Management: The company acknowledges the need for commercial loan growth, stating that pipelines suggest growth but "it's been telling us that for a quarter or two" . Additionally, higher expenses due to investments are anticipated, but the company advises not to annualize the fourth-quarter expense run rate into 2025, suggesting potential pressure on future earnings .
Q&A Summary
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Net Interest Income Outlook
Q: Are you still expecting over 20% NII improvement next year?
A: Yes, we expect about 20% NII improvement in 2025, assuming a constructive macro environment and completion of our balance sheet repositioning. Half of this growth comes from the impact of the repositioning, and the other half from continued fixed asset repricing, modest commercial loan growth, and managing deposit betas effectively. -
Deposit Betas Trajectory
Q: How do you see deposit betas evolving going forward?
A: We anticipate deposit betas in the low to mid-30% range for the first rate cuts, slightly higher than previously planned due to more aggressive deposit actions. On the way down, betas may not match the levels seen on the way up, given the lower absolute level of rates and the magnitude of movement. -
Capital Markets Revenue Outlook
Q: What is your outlook for capital markets revenue in 2025?
A: We are optimistic about 2025, expecting continued momentum from our strong pipelines, especially as the private equity universe begins to transact more actively. This could lead to higher investment banking fees and potentially a record year for capital markets revenue. -
Loan Growth Expectations
Q: What are your expectations for loan growth, particularly in C&I loans?
A: We anticipate loan stability with modest growth, offsetting consumer loan declines with commercial loan increases. Growth will come from areas like affordable housing, renewables, and increased transaction financing as M&A activity picks up. However, utilization rates remain low due to clients managing working capital efficiently. -
Expense Outlook for 2025
Q: How should we think about expenses in 2025?
A: We plan to target low to mid-single-digit expense growth in 2025. While we are investing in unique opportunities and expecting higher incentive compensation due to revenue growth, we remain disciplined on expenses and do not intend to annualize the elevated Q4 expenses. -
Credit Quality and NPLs
Q: What's behind the increase in NPLs and net charge-offs?
A: The rise in net charge-offs was due to three credits, two in consumer products and one in equipment manufacturing, which were previously reserved for. We view NPLs as peaking and expect them to remain flat going forward, with no significant read-through to broader credit issues. -
Private Equity and Disintermediation
Q: How is private equity activity affecting your business?
A: The private equity universe, which drives about one-third of investment banking fees, is starting to transact, leading to a pickup in M&A activity. Capital markets activity, including private credit, is disintermediating bank lending to some extent, but we're participating by distributing paper to these markets. -
Rate Sensitivity and Balance Sheet Repositioning
Q: How has your rate sensitivity changed after the balance sheet repositioning?
A: We've improved our rate sensitivity by moving out of higher-cost wholesale funding into lower-cost deposits and investing proceeds at favorable rates and durations. This strengthens our position as swaps roll off and aids our rate sensitivity going forward. -
Bank M&A Outlook
Q: What's your stance on bank M&A given your increased capital levels?
A: With strong capital levels post-restructuring, we're well-positioned to take advantage of potential consolidation in the industry. While we expect consolidation to happen, it's not our current focus, but we're prepared if opportunities arise. -
CRE Special Servicing Resolutions
Q: How are you resolving issues in special servicing, particularly in CRE?
A: Resolutions vary by sector; in office, properties are trading at significant discounts due to capitulation. In multifamily, especially in the Southeast, we're attracting new capital and restructuring loans, as many projects were recently financed with aggressive assumptions.
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Given your guidance for low to mid-single digits expense growth in 2025, can you provide more clarity on the specific drivers of these expense increases and how you plan to manage expenses while investing in growth initiatives, especially considering the non-recurring expenses expected in the fourth quarter?
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You anticipate over 20% net interest income improvement next year, with half depending on the completion of your securities portfolio repositioning pending regulatory approval. Can you elaborate on the risks associated with obtaining this approval and what contingencies you have if the repositioning cannot be executed as planned?
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With the significant capital raised from Scotiabank’s investment and your CET1 ratio increasing to around 12% on a pro forma basis, how do you plan to deploy this additional capital strategically? Specifically, how are you evaluating potential bank M&A opportunities amid industry consolidation, and what criteria must be met for you to pursue an acquisition?
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Despite your assertion that non-performing loans are peaking and expected to remain flat going forward, there was a recent increase attributed to broad-based factors. Can you provide more detail on the specific sectors or credits contributing to this increase, and what proactive measures are you taking to mitigate further credit deterioration?
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Considering that increased capital markets activity and private credit are disintermediating traditional bank lending and impacting loan growth, how is KeyCorp adapting its business model to address this competitive pressure, and what strategies are in place to ensure sustainable loan growth in this environment?
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: FY 2024
- Guidance:
- Net Interest Income (NII): Expected to fall in the middle of the full-year guidance range of down 2% to 5%, with about 150 basis points of positive impact from the Scotiabank investment and securities portfolio restructuring .
- Net Interest Margin (NIM): Expected to be around 2.4% for the fourth quarter .
- Loan Forecast: Year-end loan forecast was tweaked by 1% to down 5% to 6% .
- Average Deposit Growth: Positively revised to up 1% to 2%, with client deposits expected to grow by 3% to 4% .
- Fee Growth: Expected to grow 6% or better for the year, excluding the past quarter's securities portfolio restructuring .
- Expenses: Expected to be up approximately 2% for the year .
- Net Charge-Off Ratio: Expected to be closer to the high end of the 30 to 40 basis point range for the full year .
- Provision for Credit Losses: Expected to be around $400 million for the full year .
- Capital Markets Revenue: Expected to hit the high end of the full-year target for investment banking fees of $600 million to $650 million .
- Noninterest Income: Expected to be up 3% year-over-year .
- Noninterest Expenses: Expected to remain well controlled .
- Nonperforming Loans and Assets: Expected to peak and then decline .
- Deposit Beta: Expected to be in the low to mid-30s for the first rate cut .
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q4 2024 and FY 2024
- Guidance:
- Net Interest Income (NII): Confidence in delivering NII commitments for both the full year 2024 and the fourth quarter exit rate .
- Deposits: Anticipated continued growth in client deposits, up 5% year-over-year .
- Loan Growth: Expected normalization in net charge-offs, tending towards the higher end of the 30 to 40 basis point range .
- Investment Banking Fees: Expected a stronger second half of the year, hitting the high end of the full-year target of $600 million to $650 million .
- Credit Quality: Expected moderation in the pace of increase in criticized loans .
- Capital Position: Continued building of capital position, with CET1 up 20 basis points to 10.5% .
- Net Interest Margin (NIM): Expected to improve to the 2.4% to 2.5% range in the fourth quarter .
- Expenses: Anticipated to remain relatively stable, with a guide of plus or minus 2% .
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: Q4 2024 and FY 2024
- Guidance:
- Net Interest Income (NII): Expected to achieve over $1 billion by the end of the year, with NIM improving to the 2.4% to 2.5% range in the fourth quarter .
- Loan Balances: Acknowledged challenges in ending loan balances due to rate impacts .
- Credit Losses: Reaffirmed guidance for net charge-offs to be 30 to 40 basis points for the full year .
- Capital Ratios: Aim to maintain a CET1 ratio of 10.3% .
- Allowance for Credit Losses: Expected to continue building, representing 1.66% of period-end loans .
- Noninterest Income: Expected some pullback in fees in the second quarter .
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: N/A
- Guidance: The documents do not provide information from the Q4 2023 earnings call for KeyCorp, so I cannot determine the specific guidance metrics or period.
Competitors mentioned in the company's latest 10K filing.
- National and super-regional banks
- Smaller community banks within the various geographic regions
- Savings associations
- Credit unions
- Mortgage banking companies
- Finance companies
- Mutual funds
- Insurance companies
- Investment management firms
- Investment banking firms
- Broker-dealers
- Other local, regional, national, and global financial services firms
- Nonbanks, including large technology companies
Recent developments and announcements about KEY.
Corporate Leadership
Board Change
Jacqueline Allard and Somesh Khanna have been appointed to the Board of Directors of KeyCorp, effective December 27, 2024. The board size has been increased to fifteen members. Ms. Allard will serve on the Technology Committee, and Mr. Khanna will serve on the Risk Committee.