KeyCorp Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Performance: Earnings per share were $0.35. Revenues were up 21% year-over-year, expenses up ~6% excluding charitable contribution. Pre-provision net revenue (PPNR) increased $44 million sequentially, fifth straight quarter of PPNR growth, up over 60% since Q1 2024.
• Loan Growth: Achieved full-year plan to grow commercial loans by ~$3 billion in 2025, with backlogs in institutional and middle market building.
• Deposit Management: Prioritized beta management, reduced deposit costs below 2%, cumulative down beta in the mid-50% range.
• Fees: Investment banking had the second best first half in history. Commercial payments fee equivalent revenue grew high single digits. Sales production in the mass affluent segment was a record in H1. Commercial mortgage servicing balances were at record levels.
• Credit Metrics: Net charge-offs, criticized loans, and delinquencies declined. Nonperforming assets were stable, and overall credit migration improved for the sixth consecutive quarter.
• Investments: On track to increase frontline bankers and client advisers by ~10% this year, investing ~$100 million in tech, with strong retention rates.

Segment Performance

• Net Interest Income: Tax equivalent net interest income was up 4% sequentially and 28% year-over-year. Net interest margin increased by 8 basis points to 2.66%.
• Noninterest Income: Increased 10% year-over-year. Investment banking fees were $178 million, up 41% year-over-year. Commercial mortgage servicing fees grew ~15%, service charges and corporate services fees rose ~11% and 12% respectively. Assets under management reached a record $64 billion.
• Loans: Average loans were up $1.4 billion sequentially. C&I loans grew $1.7 billion, CRE loans grew $0.5 billion. Achieved full-year plan to grow commercial loans by ~$3 billion in 2025.
• Deposits: Average deposits declined less than 1% from the prior quarter. Interest-bearing deposit costs decreased by 9 basis points, and cumulative deposit betas reached 55%.

Guidance

• Net Interest Income: Revised full-year net interest income growth to 20%-22% (previously ~20%). Fourth quarter exit rate NII expected to grow 11% or better, NIM to ~2.75%.
• Loan Growth: Average loans now expected to be down 1%-3% full-year, period-end loans up ~2%, commercial loans growing ~5%.
• Fees: Expect 5% or better fee growth, with upside dependent on investment banking pipelines.
• Expenses: Hold expense growth in the low to mid-single-digit range.
• Capital: CET1 ratio was 11.7% at quarter end, marked CET1 ratio 10%, target marked CET1 9.5%-10%, aiming for the high end in the near term.

Risks

• Macro Uncertainty: Dynamic macro environment with geopolitical, tariff, and trade concerns.
• Leveraged Companies: Monitoring leveraged companies as a risk, with only 2%-3% of loans in this category.
• Medicare-Dependent Entities: Hospitals and other entities dependent on Medicare funding are monitored.
• Deposit Competition: Expect increased deposit competition in the second half, potentially impacting deposit pricing and growth.

Question and Answer

• Q: Ryan Nash on client sentiment, eagerness to borrow/transact, and financial outlook impact A: Chris Gorman noted clients are cautiously optimistic, consumer is in good shape, commercial balance sheets healthy, 50% of large borrowers see current environment as growth opportunity; Clark Khayat discussed revised NII guidance, strong first half performance, potential upside from bonus depreciation and CapEx.
• Q: Robert Siefers on deposit pricing strategy and capital repurchase appetite A: Clark Khayat mentioned loan-to-deposit ratio flexibility, deposit costs improved, room for pricing, excess liquidity position; Chris Gorman said capital is at the high end of the target, will resume share repurchases in a crawl-walk-run approach.
• Q: Ebrahim Poonawala on NIM outlook and balance sheet size A: Clark Khayat is confident NIM can reach 3% by end-2026, balance sheet size can grow without significant expansion due to liquidity from mortgage runoff and C&I growth.
• Q: Christopher McGratty on deregulatory impact on capital allocation A: Chris Gorman said regulatory investment in plumbing is done, can focus on hiring frontline and technology, with a favorable regulatory environment.
• Q: Kenneth Usdin on loan line utilization and hold rate A: Chris Gorman noted line utilization up 0.5%, surprised by lower than expected forward buying of tariffs, hold rate above historical at 22% due to market dislocation.
• Q: Manan Gosalia on pricing competition and credit reserve A: Christopher Gorman said loan pricing is flat, competitive but relationships are key; Clark Khayat said the reserve is driven by loan growth, credit quality, and macro, with room to reduce if the economy strengthens.
• Q: L. Erika Penala on loan growth guide and balance sheet mix A: Clark Khayat discussed the loan growth guide, balance sheet mix with mortgage runoff offset by C&I growth, and potential upside from CapEx and bonus depreciation.
• Q: John Pancari on C&I loan growth industries and bank M&A A: Christopher Gorman said C&I growth is broad-based in renewables, affordable housing, health care, and public sector; bank M&A is expected to pick up, with non-bank acquisitions part of the strategy.
• Q: Matthew O’Connor on banker hiring progress and consumer lending strategy A: Christopher Gorman said hiring is front-ended, and the bank is leaning into HELOCs as a consumer lending strategy with ~$2-3B opportunity.