Release Date: October 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- KeyCorp (KEY, Financial) received an initial $821 million investment from Scotiabank, which was used to reposition their securities portfolio, potentially adding over $40 million to quarterly net interest income in the fourth quarter.
- Net interest income increased by 7% quarter over quarter, driven by proactive management of funding costs and maturing low-yielding swaps and treasuries.
- Investment banking and debt placement fees were strong, reaching $171 million, with pipelines remaining at historically elevated levels.
- Assets under management in the wealth segment reached an all-time high of $61 billion, up 16% from the prior year.
- KeyCorp (KEY) demonstrated a conservative credit risk profile with non-performing assets and loans remaining stable and criticized loans declining by $132 million.
Negative Points
- KeyCorp (KEY) reported a negative earnings per share of $0.47, impacted by a $0.77 loss from securities portfolio repositioning.
- Average loans declined by 2.5% sequentially, reflecting continued weak client demand and intentional runoff of low-yielding consumer loans.
- Non-interest income was negative $269 million due to a $918 million loss related to securities repositioning.
- Net charge-offs increased to $154 million, driven by three specific credits in consumer goods and equipment manufacturing.
- The company anticipates a higher deposit beta on the initial Fed rate cut than previously modeled, which could impact future net interest income.
Q & A Highlights
Q: Can you provide an update on the rate sensitivity of KeyCorp given recent balance sheet changes?
A: Clark Khayat, Chief Financial Officer, explained that KeyCorp has been moving towards a more stable rate sensitivity over a 12-month period. The company has taken proactive measures to manage deposit costs and funding, which should help maintain a favorable rate profile. The recent repositioning of securities at better-than-expected yields will aid in improving rate sensitivity going forward.
Q: Are you still expecting a 20% improvement in net interest income (NII) next year?
A: Clark Khayat confirmed the expectation of a 20% NII improvement, assuming a constructive macro environment and completion of the second tranche of the Scotiabank investment. The improvement will be driven by the securities repositioning, fixed asset repricing, and effective deposit beta management.
Q: What is driving the increase in M&A backlogs, and is there any disintermediation from lending to capital markets?
A: Chris Gorman, Chairman & CEO, noted that the private equity universe is starting to transact more actively, contributing to the increase in M&A backlogs. There is some disintermediation from lending to capital markets, as evidenced by KeyCorp raising $28 billion last quarter, which impacts traditional bank lending.
Q: Can you provide insights into the resolution of special servicing balances, particularly in the office and multifamily sectors?
A: Chris Gorman explained that in the office market, there is some capitulation with properties trading at significant discounts. In the multifamily sector, particularly in the Southeast, new capital is being attracted for restructuring, as many projects were financed with aggressive assumptions.
Q: What are your expectations for deposit betas and non-interest bearing deposits going forward?
A: Clark Khayat stated that deposit betas are expected to be in the low to mid-30s following recent rate cuts. Non-interest bearing deposits are stabilizing and may start to increase as rate cuts continue. The use of hybrid accounts is expected to support this stabilization.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
