KeyCorp Q4 FY2025 earnings call

Management Statement and Operational Highlights:

• KeyCorp demonstrated continued progress in achieving higher returns on capital, with fourth quarter earnings of $0.43 per share and revenue exceeding $2 billion, growing 12% year over year on an adjusted basis.
• Committed to returning capital to shareholders, repurchasing $200 million of common stock in the fourth quarter. Maintained peer-leading capital ratios with a 10.3% marked CET1 ratio.
• Full-year results included record revenue, with net interest income and fee revenue growing greater than projected. Invested in technology and talent, adding frontline banker staff and $100 million in technology.
• Board changes announced, including nomination of Tony D'Spirito and Chris Henson, and transition of lead independent director role, reaffirming commitment to corporate governance and shareholder value.

Segment Performance:

• Net Interest Income: Fourth quarter tax equivalent net interest income was up 15% year over year. Full-year net interest income outperformed guidance, with commercial loan growth stronger and deposits better.
• Non-Interest Income: Fourth quarter non-interest income increased 8% year over year, reflecting broad-based growth across high-priority fee-based businesses. Full-year non-interest income grew 7.5%.
• Loans: Average loans were relatively flat sequentially, with a $1 billion increase in C&I loans offset by runoff of low-yielding consumer loans. Commercial loans grew in sectors like power and utility and middle market.
• Deposits: Average deposits increased ~$300 million sequentially, with $2 billion of commercial client deposit growth offset by decline in brokered CDs. Total deposit cost declined.
• Credit Quality: Net charge-offs were 39 basis points in the fourth quarter, full-year net charge-offs were 41 basis points, with nonperforming assets, criticized loans, and delinquencies all trending positively.

Guidance:

• Expect revenue to be up about 7% in 2026, driven by net interest income growth of 8% to 10% and non-interest income growth of 3% to 4%.
• Expenses expected to be up 3% to 4% in 2026, implying substantial positive operating leverage.
• Average loans expected to grow 1% to 2% in 2026, with commercial loans growing at about 5%.
• Full-year net charge-off ratio expected to remain stable at 40 to 45 basis points.
• Tax rate expected to be approximately 22% or 23% on a taxable equivalent basis.

Risks:

• Macro-economic uncertainty, which could impact financial performance.
• Potential impact of geopolitical risks on various sectors.
• Monitoring of specific sectors like consumer discretionary, health care, and agriculture for potential credit risks.

Q: Regarding the capital plan and strategic priorities, what are the key areas focused on for 2026?

A: Chris Gorman mentioned focusing on middle market and payments, the investment bank, and wealth (mass affluent). Also focused on return of capital, positioning the business for growth, and investing in AI and technology.

Q: On investment banking fees, how are the assumptions underpinning the fee guide and why is there conservatism?

A: Clark Khayat stated that investment banking fee guide is 5% due to competitive market, careful hiring of bankers, and limited visibility on middle market M&A continuing beyond the first quarter.

Q: About average earning assets, what's causing the current level and when to expect growth?

A: Clark Khayat explained it's due to seasonality, remixing of loans from consumer to commercial, and will see growth throughout the year with commercial loans continuing to be strong.

Q: On margin NII expectation and deposit beta assumption, what's the outlook?

A: Clark Khayat said deposit beta expected to be low to mid-fifties throughout 2026, with remixing of brokered deposits into client deposits.

Q: About bank acquisitions and middle market M&A, Chris Gorman stated KeyCorp is keen on complimentary fee-based and capability-enhancing acquisitions but not focused on bank acquisitions, and middle market M&A is expected to improve with more sponsor activity as uncertainty clarifies.