Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- KeyCorp (KEY, Financial) reported earnings of $237 million or $0.25 per share, up $0.05 sequentially.
- Net interest income grew from the first quarter, and the company remains confident in meeting NII commitments for 2024.
- Deposits grew by 1% sequentially, with non-interest bearing deposits stabilizing at 20% of total deposits.
- Wealth management business added 5,600 households and over $600 million of household assets in the second quarter.
- Commercial payments saw a 9% year-over-year growth in commercial deposits and a 10% growth in cash management fees.
Negative Points
- Earnings per share were down $0.02 from the year-ago quarter.
- Investment banking fees were below those of the first quarter, although the outlook remains positive.
- Loan demand remains tepid, with a 2% sequential decline in average loans.
- Credit costs included a $10 million build to the allowance for credit losses.
- The Fed's stress test results implied a preliminary stress capital buffer of 3.1%, up 60 basis points from 2022, which KeyCorp (KEY) found inconsistent with their internal stress tests.
Q & A Highlights
Q: Can you provide more details on the downside risk for Net Interest Income (NII) if loan growth ends up being weaker or negative in the back half of the year?
A: Clark Khayat, Chief Financial Officer, explained that while the structural roll-off of swaps and treasuries will drive much of the NII increase, the variable will be loan balances. If loan growth is slightly lower than expected, they should still meet their targets. However, if it is significantly lower, it could impact 2025 more than 2024. He also noted that rate cuts could drive more client activity and loan demand, which would be beneficial in the long term.
Q: What are you seeing in terms of credit quality, particularly in the C&I (Commercial and Industrial) portfolio?
A: Christopher Gorman, Chairman and CEO, mentioned that the normal migration from criticized to non-performing loans is playing out as expected. He noted that the C&I book is 53% investment grade and 70% secured. Areas impacted by higher rates include consumer goods and business services, while healthcare is showing improvement. Clark Khayat added that they expect some normalization in net charge-offs in the back half of the year.
Q: Can you elaborate on the types of deposits that are growing and their spreads?
A: Clark Khayat, Chief Financial Officer, stated that they are focused on growing operating and checking accounts. They have also added CDs to prepare for anticipated liquidity changes. He noted that they have opportunities to optimize funding by reducing brokered CDs and FHLB advances. They are also seeing positive client engagement in their commercial book, particularly with hybrid accounts.
Q: How confident are you in the strength of your loan pipelines, and what areas are showing the most promise?
A: Christopher Gorman, Chairman and CEO, expressed confidence in their loan pipelines, noting that they are up 50% in the middle market. He mentioned that while some deals may fall through, others will materialize quickly. Areas showing promise include renewables, affordable housing, and healthcare, where they are market leaders.
Q: How are you managing your capital position in light of the recent stress test results and potential regulatory changes?
A: Christopher Gorman, Chairman and CEO, stated that they feel good about their capital position and have a clear path to meet regulatory requirements. He noted that they are prepared for potential changes in liquidity and capital ratios but do not see a need for immediate action. They are also focused on maintaining a mid-70s loan-to-deposit ratio.
Q: What is your outlook for investment banking fees in the second half of the year?
A: Christopher Gorman, Chairman and CEO, confirmed that they expect investment banking fees to be in the range of $300 million to $350 million for the second half of the year. He noted that their M&A pipeline remains strong, and they are seeing positive trends in commercial mortgage activity.
Q: How are you thinking about expenses for 2025, given the expected revenue growth?
A: Christopher Gorman, Chairman and CEO, mentioned that expenses will likely increase in 2025 as they continue to invest in the business. He emphasized that they have not deferred expenses and have been investing in technology and growth areas like private client services and payments. Clark Khayat added that while investment will remain stable to up, the lack of clear takeout to fund it will be the difference.
Q: What are the parameters for resuming stock buybacks?
A: Christopher Gorman, Chairman and CEO, stated that they need to have a firm understanding of the Basel III endgame and its phase-in period before considering stock buybacks. He noted that they are focused on improving their balance sheet and will revisit buybacks at the appropriate time.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
