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    KeyCorp (KEY)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$16.21Last close (Jul 17, 2024)
    Post-Earnings Price$15.85Open (Jul 18, 2024)
    Price Change
    $-0.36(-2.22%)

    What went well

    • KeyCorp's mass affluent business is experiencing significant growth, adding 30,000 new customers and $3 billion in assets, driving strong performance in trust and investment services.
    • Investment banking revenues are expected to be strong, with guidance maintained at $600-650 million for 2024, supported by a robust M&A pipeline and strong middle-market franchise.
    • Middle-market loan pipelines have increased by 50% quarter-over-quarter, indicating potential stabilization and growth in loan balances in the second half of the year.

    What went wrong

    • KeyCorp is lowering its loan growth guidance despite strong backlogs, which may negatively impact future revenue growth.
    • Net interest income may decline more than anticipated if interest rates are cut, with guidance indicating NII could be down closer to 5%.
    • Increasing Allowance for Credit Losses (ACL) ratio due to declining loan balances and economic uncertainty, potentially signaling credit quality concerns.

    Q&A Summary

    1. NII Guidance and Loan Growth Impact
      Q: What's the downside risk to NII if loan growth weakens?
      A: Management expects the structural repricing of assets to boost NII in late 2024, with $5.5 billion in Treasury maturities and $3.2 billion in swaps maturing in the second half of 2024. Even if loan growth is lighter than guided, they believe they can achieve their NII targets unless loan growth is materially lower. They also see additional asset repricing opportunities of about $20 billion in 2025, providing tailwinds for NII.

    2. Capital Position and CET1 Management
      Q: How are you managing capital and CET1 levels amid RWA declines?
      A: Management feels good about their capital position. They acknowledge potential regulatory changes like Basel III Endgame but mention they have a clear path to desired CET1 levels. They do not believe their AOCI position impacts day-to-day operations and expect to maintain a mid-70s loan-to-deposit ratio.

    3. Credit Quality in C&I Portfolio
      Q: Any concerns about credit degradation in C&I loans?
      A: Normal migration from criticized to nonperforming loans is occurring as expected. Some clients are impacted by higher rates, particularly in consumer goods, business services, and equipment sectors. However, their C&I portfolio is strong, with 53% investment-grade and 70% secured loans.

    4. Expense Outlook and Operating Leverage in 2025
      Q: How much of the NII benefit will flow to the bottom line in 2025?
      A: While not providing specific 2025 guidance, management indicated that expenses will rise as they continue to invest in the business. They have been investing while reducing expenses elsewhere and expect expenses to increase due to business growth rather than deferred expenses.

    5. Loan Growth Outlook and Pipelines
      Q: Given lower loan growth guidance, where are pipelines strengthening?
      A: Despite tepid loan demand, pipelines are strengthening in areas like renewables, affordable housing, and healthcare. Middle-market loan pipelines are up over 50%. Management remains disciplined and is not compromising on loan structures despite competition.

    6. Investment Banking Fees and Pipeline
      Q: What's the outlook for investment banking revenues in the second half?
      A: Management reaffirmed guidance of $600 million to $650 million in investment banking revenues for the year, expecting $300 million to $350 million in the second half. They have strong pipelines, particularly in M&A, which is crucial for their middle-market clients.

    7. Deposit Costs and Funding Mix
      Q: How are rising deposit costs impacting NII?
      A: Deposit costs are expected to continue rising. Management guided to a mid-50s beta if there are no rate cuts, with costs drifting up. They are improving funding mix by reducing reliance on wholesale funding like FHLB advances and brokered CDs.

    8. Merger Environment and M&A
      Q: What's your appetite for mergers or acquisitions?
      A: Management does not foresee mergers with depository institutions in the near future due to regulatory hurdles. They anticipate eventual consolidation but are currently focusing on acquiring entrepreneurial niche businesses.

    9. Consumer Loan Growth Outlook
      Q: What's the outlook for consumer loan growth?
      A: Consumer lending is pressured due to low volumes in mortgages and student loans. The consumer loan book is expected to decrease at a normalized rate unless rates decline significantly to stimulate refinancing.

    10. Allowance for Credit Losses Ratio
      Q: How do you view the current ACL ratio and reserve levels?
      A: The ACL ratio has been increasing due to factors like loan growth and economic outlook. Management considers it premature to adjust reserves significantly until there's more economic clarity. They will continue to evaluate reserves based on these factors.

    11. NII Impact of Rate Cuts
      Q: How would rate cuts affect NII guidance?
      A: With two rate cuts, management expects NII to be closer to the lower end of the guidance range, around a 5% decline. They believe rate cuts could boost loan demand and economic activity, benefiting the bank.

    12. Share Buybacks and Capital
      Q: What are the plans for resuming share buybacks?
      A: There are no plans for share buybacks this year. Management is awaiting clarity on regulatory changes like Basel III Endgame before considering buybacks.

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