Sign in

    KeyCorp (KEY)

    Q1 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$14.43Last close (Apr 17, 2024)
    Post-Earnings Price$14.30Open (Apr 18, 2024)
    Price Change
    $-0.13(-0.90%)

    What went well

    • KeyCorp's M&A backlog is at record highs, positioning the company well for future growth in investment banking fees.
    • After reducing RWAs by $14 billion and expenses by $400 million in 2023, KeyCorp is now "playing offense", focusing on expanding fee-based businesses where it has competitive advantages, such as payments, investment banking, wealth management, and business banking.
    • Management expects net interest margin to improve meaningfully, potentially returning to normalized levels closer to 3%, as balance sheet optimization continues and the rate environment normalizes, enhancing profitability.

    What went wrong

    • Weak loan growth due to clients delaying investments in property, plant, and equipment, influenced by high interest rates and economic uncertainty. The CEO stated: "I have not seen a lot of people making significant investments in property, plant and equipment... I think it's a combination of both [high rates and uncertainty]."
    • Uncertainty about the economic outlook and potential recession poses risks to the company's performance. The CEO acknowledged: "I think there's just a lot of uncertainty about the path of the economy. Will the Fed engineer a soft landing..."
    • Expected pullback in investment banking fees in Q2 due to rate volatility impacting transactions. The CEO noted: "Any time there's this kind of volatility, it causes pause on certain transactions... as we look at what will come out of the backlog in the second quarter."

    Q&A Summary

    1. Net Interest Income Outlook
      Q: Will you achieve your net interest income targets?
      A: Management is confident in meeting their net interest income guidance, expecting to reach a fourth-quarter exit rate of over $1 billion. They view swap and U.S. Treasury roll-offs as predictable contributors, and believe loan growth will have minimal impact in the year. The range of outcomes is relatively muted, even under different interest rate scenarios.

    2. Loan Growth Expectations
      Q: Where do you see loan growth picking up?
      A: They expect loan demand to increase in areas like strategic transactions, renewables, affordable housing, and investments in property, plant, and equipment. While current demand is modest, they anticipate opportunities will develop over the course of the year.

    3. Investment Banking Revenue Outlook
      Q: How do you see investment banking fees trending?
      A: They expect some pullback in fees in the second quarter due to rate volatility causing hesitancy in transactions. However, they have record backlogs in M&A, with backlogs higher than a quarter ago and at year-end. As markets stabilize, they believe activity will normalize and fees will grow.

    4. Credit Quality and Reserve Build
      Q: Why did you increase your credit reserves?
      A: The reserve build was a proactive measure, reflecting their view of a "higher-for-longer" interest rate environment and the potential for a recession. They stressed the portfolio, focusing on leveraged loans and real estate, to prepare for future challenges.

    5. Blackstone Partnership
      Q: How does the Blackstone partnership fit into your strategy?
      A: The partnership allows them to support more clients without overextending their balance sheet. They underwrite the loans, and Blackstone has the option to participate if the loans fit their criteria. This helps manage credit concentrations and leverages their originate-to-distribute model.

    6. Expense Management
      Q: Can you manage expenses with an investment banking recovery?
      A: They believe they can absorb the impact of a strong investment banking year within their expense guidance of relatively stable expenses, plus or minus 2%. They are focused on intelligently managing costs, including unexpected charges like the FDIC assessment.

    7. Growth Strategy Focus
      Q: What's your focus for future growth?
      A: They are now playing offense by leaning into areas where they have competitive positions, such as payments, investment banking, wealth, and business banking. They aim to grow through capital-light businesses and emphasize deposit-centric growth to improve loan-to-deposit ratios.

    8. Economic Outlook
      Q: Do you expect a recession?
      A: Management anticipates a recession and believes the best time to make loans is during a downturn. They are cautious due to uncertainty about the economy and the strength of the labor market.

    9. Criticized Loans Monitoring
      Q: How are you handling criticized loans?
      A: They are closely monitoring criticized loans, focusing on debt service coverage by assessing cash flow as the primary repayment source. They delink any secondary repayment sources to take a conservative approach in their assessments.

    Related Publications