KeyCorp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Scotiabank Investment: Received initial $821 million from Scotiabank, used ~$700 million to reposition securities portfolio, expecting over $40 million to add to quarterly net interest income in Q4. Anticipate receiving regulatory approval for the second tranche by Q1 2025.
• Net Interest Income: Up 7% quarter-over-quarter, driven by maturing low-yielding short-term swaps and treasuries, and proactive funding cost management. Client deposits grew 4% year-over-year and 2% sequentially, with proactive deposit repricing to mitigate Fed rate cut impact.
• Fee-Based Growth: Strong investment banking fees ($171 million in Q3), robust commercial payments with core treasury services growing, record commercial mortgage servicing quarter, and wealth AUM at record levels.
• Credit Profile: Conservative credit profile, with criticized loans declining and NPLs peaking, indicating a stabilizing credit situation.

Segment Performance

• Net Interest Income: Tax equivalent net interest income was $964 million in the third quarter, up 7% quarter-over-quarter. The net interest margin increased 13 basis points.
• Investment Banking: Investment banking and debt placement fees totaled $171 million in the third quarter, with strong activity in loan syndications, debt, and equity originations. Pipelines remain at historically elevated levels. The full-year target for investment banking fees is $600 million to $650 million.
• Commercial Payments: Commercial deposits were up 5% year-over-year and 2% sequentially, with core treasury service activities growing in the low-double-digits. Third-party commercial mortgage servicing posted a record quarter, and active special servicing balances reached $7.5 billion.
• Wealth: Assets under management reached $61 billion, up 16% year-over-year. Sales production was a record, and the mass affluent segment continued to grow.
• Credit: Nonperforming assets and provision for credit losses were flat. Net charge-offs increased, but criticized loans declined, and NPLs were seen as peaking.

Guidance

• Net Interest Income: Expected to benefit from the Scotiabank investment and securities repositioning. Full-year net interest income guidance adjusted, with net interest margin expected around 2.4% in Q4.
• Loans: Full-year loan forecast revised to down 5%-6%.
• Deposits: Average deposit guidance revised to up 1.2%-2%, with client deposits expected to grow 3%-4%.
• Fees: Fees expected to grow 6% or better excluding the securities portfolio repositioning. Expenses expected up ~2% this year. Net charge-off ratio expected near the high end of the 30-40 basis point range.

Risks

• Fed Rate Cuts: Impact on deposit betas and net interest income, with uncertainty in how rate cuts will affect the rate sensitivity profile.
• Commercial Real Estate: Uncertainty in the office market with limited new capital and potential challenges in multifamily special servicing resolutions.
• Credit Issues: Potential for idiosyncratic credit problems affecting charge-offs, though the credit profile is conservative.

Question and Answer

• Q: Scott Siefers asked about updated rate sensitivity and NII improvement next year.

A: Clark Khayat and Chris Gorman discussed rate sensitivity, deposit betas, and components of NII improvement for next year, including the impact of the Scotiabank investment and securities repositioning.

• Q: Mike Mayo asked about M&A backlogs and disintermediation.

A: Chris Gorman talked about increased M&A activity and disintermediation from lending to capital markets, noting private equity transacting and capital markets activity.

• Q: Gerard Cassidy asked about special servicing resolution.

A: Chris Gorman discussed office and multifamily special servicing resolutions, noting differences in market conditions for each sector.

• Q: Nathan Stein asked about C&I net charge-offs and NIM outlook.

A: Chris Gorman and Clark Khayat discussed the industries of the charged-off C&I credits and provided long-term NIM outlook expectations.

• Q: Zach Westerlind asked about deposit betas and noninterest-bearing deposits.

A: Clark Khayat discussed deposit beta trajectory and trends in noninterest-bearing deposits, including adjustments for hybrid accounts.

• Q: Manan Gosalia asked about long-term deposit betas and 2025 expenses.

A: Clark Khayat and Chris Gorman talked about deposit beta cycles over the cycle and expense discipline for 2025, emphasizing continued cost control.

• Q: Mike Mayo asked about NPLs.

A: Chris Gorman stated NPLs are peaking and expected to be flat in the near term.

• Q: John Pancari asked about 2025 capital markets revenue and loan growth.

A: Chris Gorman and Clark Khayat discussed 2025 capital markets outlook and loan growth expectations, including commercial loan growth opportunities.

• Q: Peter Winter asked about Q4 loan trends and bank M&A.

A: Clark Khayat and Chris Gorman talked about Q4 loan trends (stabilizing) and bank M&A potential, noting dry powder for potential consolidation.

• Q: Scott Siefers asked about Q4 expense outlook.

A: Clark Khayat discussed Q4 expense lift, emphasizing not to annualize the number and tying expenses to revenue drivers.