Q3 2023 Earnings Summary
- KeyCorp reported their best-ever results in the Shared National Credit review, demonstrating strong credit quality in their loan portfolio.
- Management has proactively reduced expenses by $200 million (about 4%) in the first quarter, and is committed to further cost reductions and simplifying the business to improve efficiency.
- KeyCorp is optimistic about the medium-term capital markets outlook, expecting increased activity in 2024 to benefit their investment banking and capital markets businesses.
- Declining revenue and uncertainty about achieving positive operating leverage: Revenue was down 17% year-over-year in the third quarter, while expenses remained flat. Management is uncertain about delivering positive operating leverage in 2024.
- High dividend payout ratio raises concerns about dividend sustainability: The company has a dividend payout ratio exceeding 70%, and there is a risk of a dividend cut as management is reevaluating the dividend in the context of various scenarios.
- Near-term challenges in capital markets business due to higher rates and geopolitical risks: Management expects additional headwinds in the capital markets division in the near term, impacting revenue growth prospects.
-
Net Interest Income and RWA Reduction
Q: Will further RWA reductions beyond $10B impact NII bottoming?
A: Management confirmed they've reduced $9 billion of RWAs so far and are on track to hit the $10 billion target. They believe this reduction suffices and anticipate only marginal impact on NII, emphasizing that the underlying business is strong and they're ready to resume growth. -
Dividend Stability
Q: Is there a risk of cutting the dividend?
A: Management's views on the dividend are unchanged. They are confident in maintaining it, focusing on long-term management and considering factors like credit quality and capital generation. They've increased CET1 capital by 50 basis points this quarter through RWA reductions and other actions. -
Expense Outlook
Q: Can expenses stay flat despite revenue declines?
A: Management is committed to keeping expenses flat, targeting around $4.4 billion. They've already taken out $200 million of expenses this year and continue to focus on personnel, real estate, and third-party contracts to rationalize costs. -
Capital Markets Outlook
Q: What is the outlook for capital markets revenue amid higher rates and geopolitical risk?
A: In the near term, challenges persist due to higher rates and geopolitical issues. However, management feels good about the medium-term outlook, expecting increased activity as rates stabilize and private equity firms begin transacting. -
Credit Quality and Criticized Loans
Q: Why have criticized loans increased recently?
A: The increase from 3.3% to 3.9% is due to proactive grading of the portfolio. Sectors like transportation, healthcare, and consumer products are being closely monitored, especially for customers exposed to rate increases. Management does not see additional loss content from this increase. -
Hedging Strategy Impact on NII
Q: How does the hedging strategy affect NII?
A: New $6.7 billion pay-fixed swaps were added for AOCI protection, and $7.5 billion of 2024 pay-fixed swaps were terminated. This strategy aims to reduce NII at risk to higher rates by half in a 200 basis point rate rise scenario. -
Loan Growth and RWA Optimization
Q: Will you resume loan growth next year after RWA reductions?
A: Management plans to continue RWA optimization but not as aggressively as this year and aims to balance this with loan growth opportunities. They believe RWAs are the raw material for expanding the client base. -
Impact of Rising Rates on Capital
Q: How do rising rates affect AOCI and capital levels?
A: Rising rates have increased AOCI losses, impacting capital levels. Management has taken steps to mitigate this but recognizes they can't offset all effects due to rate magnitude.