KeyCorp Q3 FY2025 earnings call

• Steady progress in achieving higher profitability and returns with earnings per share of 41¢ and return on assets surpassing 1%. - PPNR up $33 million q/q or 5% for sixth straight quarter of improvement. - NIM reached 2.75% ahead of schedule. - Asset quality metrics positive with NPAs and criticized loans declining. - Franchise momentum accelerating with relationship households and commercial clients growing, wealth AUM at record $68B, and commercial pipelines higher. - Received Fitch upgrade to A minus and positive outlook from Moody's.

Net interest income continued to benefit from strong business dynamics across deposits and loans. Deposit balances were up while the cost of deposits was down. Loans were remixed from low-yielding consumer mortgages into relationship C&I loans. Noninterest income was up high single digits, with wealth assets under management reaching a record $68 billion and mass affluent sales production setting a record. Investment banking pipelines were up meaningfully, and commercial payments fee-equivalent revenue grew in the high single-digit range. Pre-provision net revenue was up $33 million quarter over quarter or 5%, marking the sixth straight quarter of improving PPNR. Revenues, adjusting for last year's securities portfolio repositioning, grew 17%.

• Full-year net interest income growth revised to ~22% (up from prior 20%-22% range). - 4Q NII exit rate expected to grow 13%+ compared to 2024, with 4Q NIM in 2.75%-2.8% range. - Fees expected to grow 5-6%. - Expenses expected to fall in mid-range of年初 provided guidance. - GAAP tax rate ~22% in 4Q, full-year GAAP and tax equivalent effective rates ~21-22%.

• Macro environment uncertainty could impact capital distribution and balance sheet restructuring decisions. - Uncertainty regarding the impact of interest rate movements and market conditions on financial metrics.

Q: Can you provide more detail on drivers to 15% RoTCE goal and why RoTCE can't be higher in medium term?

A: Clark Khayat explained drivers include NIM improvement via mechanical lift and organic activity, fee growth, expense management, and capital base. 15% is a milestone, and 16-19% is long-term goal.

Q: Thoughts on bank M&A?

A: Chris Gorman said focus is on organic growth, capital priorities are supporting clients, tuck-in deals, dividend, and share repurchases; bank M&A is on tight screen, needs to be on strategy, fit culture, and check financial metrics including tangible book value dilution.

Q: Credit and loan book growth?

A: Chris Gorman discussed loan book with C&I growing nicely and others shrinking, replacement of runoff with home mortgage and student loan refinance when rates drop.

Q: Buyback pacing beyond 4Q?

A: Clark Khayat said timing considerations include being above 10% mark, dividend payout range, and macro uncertainty; $100M in 4Q likely low level moving forward.

Q: Stock multiple and bank M&A pricing?

A: Chris Gorman emphasized focus on RoTCE, buying $100M of stock in 4Q, and being sensitive to tangible book value dilution; focus on driving RoTCE up.

Q: Balance sheet restructuring conditions?

A: Clark Khayat said will look at opportunistic moments to use capital for share repurchase or monetize differently, assuming good macro environment.

Q: Upgrade impact on capital distribution?

A: Clark Khayat said upgrade enables bidding on conduit deals, and rating agencies' understanding is important input for capital distribution decisions.

Q: Expense and operating leverage?

A: Clark Khayat discussed expense growth, fee-based operating leverage, and sensitivity to rate backdrop with focus on five-year rate and deposit portfolio management.

Q: Deposit growth and NIM trajectory?

A: Clark Khayat talked about commercial deposit growth from rational competition and C&I loan growth, consumer deposit mix shift from CDs to MMDAs, and consumer business growth potential.

Q: Hiring and investment stage?

A: Chris Gorman said hiring in wealth, middle market, and institutional bank is ongoing, with 12-18 month lag for full production stride but some teams outperforming.

Q: Regulators and consumer banking view?

A: Chris Gorman noted positive shift in regulator focus to safety and soundness, and KeyCorp's view on consumer banking with 943 branches and investment in retail deposit base.

Q: Investment Banking capital markets strategy?

A: Chris Gorman said focus on energy, healthcare sectors, and deeper investment in sectors they're in, with potential to invest in financial services.