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    KeyCorp (KEY)

    Q3 2024 Earnings Summary

    Reported on Jan 6, 2025 (Before Market Open)
    Pre-Earnings Price$17.70Last close (Oct 16, 2024)
    Post-Earnings Price$17.20Open (Oct 17, 2024)
    Price Change
    $-0.50(-2.82%)

    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

    1. 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.

    2. 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.

    3. 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.

    4. 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.

    5. 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.

    6. 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.

    7. 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.

    8. 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.

    9. 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.

    10. 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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