KeyCorp (KEY) Earnings

Management highlights

- Overall Q2 2026 Performance * Reported earnings per share of 44 cents, up 26% year over year * Total revenue grew 7% year over year; pre-provision net revenue grew 9% year over year * Total deposit costs declined 2 basis points sequentially to 1.63%, with cumulative interest-bearing deposit beta steady at 56% * Disciplined capital deployment: Repurchased over $340 million of common stock in Q2, on pace to hit the full-year target of at least $1.3 billion in repurchases * CET1 ratio was 11.2% at quarter end; marked CET1 ratio was 9.8%, maintaining the 9.5% to 10% marked capital target - Strategic Updates * Announced the acquisition of Clearwater UK, a strategic extension of the firm's middle market M&A advisory franchise to serve international clients; the transaction is expected to close in H2 2026 * Priority fee-based businesses (investment banking, commercial payments, wealth) grew 8% year over year in H1 2026 * Relationship households increased 3% year over year; commercial clients increased 2% year over year; commercial loan pipelines are up 6% year over year * Wealth management's mass affluence strategy (launched 2023) has added 59,000 new households, $4 billion in AUM, and nearly $8 billion in total client assets, with less than 10% penetration of the firm's existing mass affluence customer base - Credit Performance * Asset quality remains strong; the modest sequential increase in non-performing loans reflects three idiosyncratic credits (real estate, consumer goods, agriculture) that are not expected to result in meaningful incremental losses * Net charge-off ratio was 42 basis points annualized, with year-to-date charge-offs at the low end of the full-year 40-45 basis point outlook * Criticized loans remained stable at 4.9% annualized; non-performing assets increased to 74 basis points annualized, with management expecting several large non-performing loans to resolve by the end of 2026

Guidance

- Full year 2026 revenue growth guidance was raised to 7% to 8%, from the prior guidance of approximately 7% - Full year 2026 net interest income growth guidance was raised to 9% to 11%, from the prior guidance of 9% to 10% - End-of-year 2026 net interest margin is now guided to 3% to 3.05%, on track to hit the 3%+ year-end target, supported by $9 billion of low-yielding fixed asset repricing in H2 2026 and 2%+ average client deposit growth in the second half - Full year 2026 average total loan growth guidance was raised to 4% to 5%, from the prior guidance of 2% to 4%; average commercial loan growth is now expected to reach 8% to 10% for the full year - Full year 2026 non-interest expense growth remains guided at 3% to 4%, with management expecting revenue to grow twice as fast as expenses in 2026, delivering positive operating leverage - Investment banking full year guidance is maintained at mid-single-digit fee growth, with Q3 2026 investment banking fees expected to increase 20%+ quarter over quarter - Management reaffirmed the target of achieving return on tangible common equity (ROTCE) exceeding 15% by the end of 2027, on the path to the long-term target of 16% to 19%; no change to this target was announced - Commercial mortgage servicing fees for the remainder of 2026 are expected to run $50 to $60 million per quarter

Segment performance

Key Corp does not break out separate formally defined product segments in this transcript; below is the performance of its core business lines: 1. Commercial & Industrial (C&I) Lending: Period-end C&I loans increased $2.1 billion (3%) sequentially, with full year 2026 average commercial loan growth now guided to 8% to 10% (up from prior 2% to 4% guidance). 58% of C&I loans are investment grade, with the largest industry contributions from utilities, power and renewables, real estate, and technology. 2. Net Interest Income (NII): Tax equivalent net interest income increased 9% year over year and 2% sequentially. Net Interest Margin (NIM) expanded 2 basis points sequentially to 2.89%. 3. Non-Interest Income: Increased 2% year over year overall: - Investment Banking: Q2 2026 fees were $169 million; first half 2026 fees reached $366 million, up 4% year over year. Investment banking pipelines are up 9% sequentially and at historically elevated levels, with M&A pipelines hitting a new record. - Trust & Investment/Wealth Management: Income grew 9% year over year. Assets under management (AUM) reached a new record of $74 billion, with wealth management fees growing approximately 14% year over year. - Commercial Payments: Drove 5% year over year growth in deposit service charges; total gross payment fees increased 12% year over year. - Corporate Services Fees: Increased 5% year over year, driven by higher loan commitment fees. - Commercial Mortgage Servicing Fees: $49 million, down $21 million year over year, due to lower deposit placement and special servicing fees. Management expects fees to run $50-$60 million per quarter for the rest of 2026. 4. Consumer Lending: Ongoing planned runoff of low-yielding consumer loans partially offset commercial loan growth in the quarter.

Risks & headwinds

- Macroeconomic environment remains uncertain, with ongoing economic uncertainty that led management to add a qualitative reserve build offsetting part of a larger quantitative reserve release in Q2 - Interest rate volatility: Any Federal Reserve rate hikes would increase deposit costs, requiring proactive balance sheet management; however, management believes the firm is prepared to manage hikes and maintain guidance targets - Middle market M&A activity has not yet recovered in line with large-cap M&A, creating near-term pressure on investment banking fee growth, and 40% of the firm's investment banking fees are tied to private equity sponsor activity which has been slow to rebound - Rising personnel, technology, and inflation-related expenses create pressure on operating margins, requiring disciplined expense management - Emerging second-order risks from AI growth: Management is monitoring exposure to software companies and professional services that may face disruption from AI adoption, though current direct exposure is limited - The competitive deposit environment remains intense, with modestly increased pricing pressure compared to earlier in the year - The consumer sector remains choppy due to overlapping pressures from COVID, Amazon competition, and tariffs, leading to increased selectivity for new consumer credits

Analyst Q&A

• Q: What factors held back NIM growth more than expected in Q2, and what drives confidence in hitting the 3% to 3.05% end-of-year NIM target? /

  A: Stronger-than-expected loan growth in Q2 brought in higher credit quality, lower-spread loans, and seasonal deposit troughs in May created a larger funding need than expected. Management chose to use short-term wholesale funding rather than reprice client deposits, as they expect 2%+ commercial operating deposit growth in H2. $9 billion of low-yielding fixed asset repricing in H2, moderating loan growth after a strong first half, and new lower-cost deposit growth will offset modest spread pressure and drive NIM expansion to the guided range by year end.

• Q: Why is Key Corp willing to accept near-term NIM dilution to add higher-quality, lower-spread clients, and how does this align with long-term return targets? /

  A: Management says growing higher-quality investment grade clients is not in conflict with hitting the 15%+ ROTCE target by the end of 2027. Most new commercial relationships start with lending, but the firm targets clients where it can cross-sell higher-margin fee-based services (payments, advisory, hedging, wealth) over 12 to 18 months. Growing the targeted client base directly supports long-term return targets, and the firm maintains discipline to exit relationships that fail to hit return hurdles.

• Q: When will middle market M&A activity recover, and what is the outlook for private equity-driven deal flow, which makes up 40% of Key Corp's investment banking fees? /

  A: Middle market activity is lagging the large-cap M&A recovery, as private equity sponsors have delayed exits to optimize returns. The firm's current investment banking pipelines are 31% year-over-year and 9% quarter-over-quarter, with most pushed out deals still active. Management expects a large step-up in closed deals in H2 2026, as sponsors need to exit holdings to raise new funds, and a higher-for-longer rate environment actually encourages deal closing versus waiting for expected rate cuts.

• Q: Where does Key Corp see risk from AI growth, and has it mapped out second-order credit exposure to the AI boom? /

  A: Management notes that the AI boom has created massive, multi-year demand for power generation and distribution buildout, which is a large growth area for Key Corp's commercial lending. The firm currently has less than $300 million in direct exposure to software companies, which it views as the most at-risk segment to AI disruption. It is also monitoring potential disruption to professional services (law, consulting, accounting) and conducts quarterly portfolio reviews to identify emerging hot spots, including second-order AI risks.