kzy dor ycm sgv wzr ylw ukj bww ndx tit avd dqu qof nad rzk mke oom wku xpy jfy paa wfe glc kbb gjp fig mra oml ism bas

Earnings call: KeyCorp reports record investment banking in Q1 2024

KeyCorp (NYSE: NYSE:) has announced its financial results for the first quarter of 2024, reporting earnings of $183 million, or $0.20 per share. The company’s revenue remained flat sequentially, but investment banking achieved its best first quarter ever. Retail relationship households and commercial clients saw growth, with customer deposits increasing by 2% year-over-year.

The bank maintained controlled expenses at $1.1 billion and reported low nonperforming assets and credit losses. Strategic initiatives, including a partnership with Blackstone (NYSE:) and the launch of Key Private Clients, have bolstered the bank’s position, with the latter adding over $2 billion of household assets in a year. KeyCorp also received an outstanding rating from the OCC for its efforts under the Community Reinvestment Act.

Key Takeaways

  • KeyCorp’s first-quarter earnings were $183 million, with a per-share value of $0.20.
  • Investment banking fees grew by 17%, reaching a record $170 million for the quarter.
  • Customer deposits rose by 2% compared to the previous year.
  • Expenses were managed at $1.1 billion, with personnel expenses remaining stable year-over-year.
  • The bank launched Key Private Clients, accumulating over $2 billion in assets.
  • KeyCorp’s capital position strengthened, with CET1 at 10.3%.

Company Outlook

  • KeyCorp anticipates meeting its net interest income guidance for 2024.
  • The bank is focused on growing its loan portfolio, particularly in transactional business and capital-intensive industries.
  • KeyCorp is investing in capital-light businesses like payments, investment banking, wealth management, and business banking.

Bearish Highlights

  • Corporate services income decreased by 9%.
  • Cards and payment fees saw a 5% decline.
  • Loan growth has been challenging due to low demand and client interest.

Bullish Highlights

  • Commercial mortgage servicing fees increased by 22% year-over-year.
  • Trust and Investment Services grew by 6%, with assets under management rising by 7% to $57 billion.
  • The bank’s strategic partnership with Blackstone is expected to support more clients and expand business operations.

Misses

  • Despite strong performance in some areas, KeyCorp experienced weak loan growth due to low investment and economic uncertainty.

Q&A Highlights

  • CEO Chris Gorman discussed the bank’s servicing business focus, strategic industry reviews, and the labor market’s impact on the economy.
  • KeyCorp is closely monitoring real estate, healthcare, and consumer services industries for loan reviews.
  • Gorman emphasized the importance of deepening client relationships, particularly in deposits and payments.

Chris Gorman, CEO of KeyCorp, highlighted the company’s commitment to business banking and the deepening of relationships with customers, emphasizing the role of payments and strategic advice for smaller commercial businesses. The bank has taken a conservative approach to credit ability, excluding secondary sources of repayment in its assessments. The bank is preparing for a potential recession by stress testing loans and focusing on a higher-for-longer interest rate environment. Despite the current challenges in loan growth, KeyCorp remains optimistic about future opportunities for expansion, particularly in a downturn. For further details or inquiries, KeyCorp has provided contact information for follow-up questions.

InvestingPro Insights

KeyCorp’s recent earnings announcement has highlighted both the strengths and challenges faced by the company. To provide additional context to these financial results, let’s dive into some key metrics and insights from InvestingPro.

InvestingPro Data shows that KeyCorp has a market capitalization of $13.44 billion, with a Price/Earnings (P/E) Ratio of 16.15. This suggests that investors are willing to pay $16.15 for every dollar of earnings, which is a moderate valuation compared to some peers in the banking industry. The company has also experienced a significant price uptick over the last six months, with a 40.55% total return, indicating strong investor confidence in the bank’s performance and future prospects.

Two InvestingPro Tips that are particularly relevant to KeyCorp’s financial standing include:

1. KeyCorp has raised its dividend for 13 consecutive years, showcasing a commitment to returning value to shareholders consistently. This is supported by a current dividend yield of 5.7%, which is attractive to income-focused investors.

2. Despite the positive dividend track record, analysts have revised their earnings downwards for the upcoming period. This could reflect concerns about the bank’s ability to sustain its earnings growth in the face of economic headwinds.

For investors looking for a deeper analysis of KeyCorp’s financial health and future outlook, there are additional InvestingPro Tips available at https://www.investing.com/pro/KEY. And remember, by using the coupon code PRONEWS24, you can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking even more insights to inform your investment decisions.

Full transcript – Keycorp New (KEY) Q1 2024:

Operator: Thank you, everyone, for standing by. Welcome to the 2024 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp’s Director of Investor Relations. Please go ahead.

Brian Mauney: Thank you, operator, and good morning, everyone. I’d like to thank you for joining KeyCorp’s first quarter 2024 earnings conference call. I’m here with Chris Gorman, our Chairman and Chief Executive Officer; and Clark Khayat, our Chief Financial Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. In the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning’s call. Actual results may differ materially from forward-looking statements and those statements speak only as of today, April 18, 2024, and will not be updated. With that, I will turn it over to Chris.

Chris Gorman: Thank you, Brian. I’m on Slide 2. This morning, we reported earnings of $183 million or $0.20 per share which incorporates $0.02 per share impact from an additional FDIC special assessment charge this quarter. I would characterize our underlying results as solid. Revenue was essentially flat sequentially despite expected first quarter seasonality as investment banking reported its best first quarter result in our company’s history. Fees were up 6% against both the prior quarter and prior year. Retail relationship households were up 2.5% year-over-year and commercial clients were up 6%. Customer deposits were up 2% year-over-year and essentially flat on a sequential basis. We continue to reduce our reliance on higher cost brokered CDs and wholesale borrowings. Expenses remained well controlled at $1.1 billion. Nonperforming assets and credit losses remained low. Additionally, we continued to build our credit reserves this quarter. Our capital ratios, including tangible common ratios were flat to improved across the board, despite the impact of higher interest rates on the fair value of our available-for-sale securities. We ended the quarter with a common equity Tier 1 ratio of 10.3%, up 120 basis points from a year ago, representing our fastest rate of organic capital build over a 12-month period since the industry began tracking this metric. I’m also encouraged by the momentum we are seeing in areas where we have a differentiated advantage and have been investing. While only one quarter, I am encouraged by the strong broad-based results we saw in our capital markets business, across M&A, equity and debt capital markets and our commercial mortgage group. We also are seeing broad momentum across our targeted industry verticals, such as health care, power, industrials and renewables. While I would expect to see some pullback in fees in the second quarter, our pipelines are up from a year ago and from year-end levels. Market conditions are clearly starting to normalize. We also continue to raise significant capital on behalf of our clients. In the first quarter, we raised over $22 billion, holding 12% on our balance sheet and distributing the balance in the capital markets. To this end, last month, we announced a strategic forward flow origination partnership with Blackstone. This partnership will allow us to accelerate growth and manage credit concentration risk within our differentiated commercial platform and is another example of how we are delivering best-in-class execution for our clients. This deal also further validates our distinctive underwrite-to-distribute model, in that one of the largest private credit providers has recognized our platform for its ability to originate, soundly underwrite and service at volume with our high-quality clients. As markets evolve, we will continue to evaluate the potential for arrangements with other leading providers like this one, which allow us to offer a distinctive experience for our clients while concurrently managing our risk. Turning to Wealth Management. We recently launched Key Private Clients where we have the opportunity to penetrate a large growing mass affluent segment within our consumer base and with our commercial business owners. In this mass affluent segment, we enrolled another 6,000 households in this quarter and doubled production volumes compared to last year. This new business has added over $2 billion of household assets in just over a year. Overall, our assets under management have now surpassed $57 billion. Before I turn it over to Clark, I want to touch briefly on credit quality. As I mentioned earlier, our nonperforming loans, net credit losses and delinquencies remain at low historical standards with credit losses below our full year 2024 and through-the-cycle targets. In the first quarter, we saw an uptick in criticized loans, which was driven by our belief which, by the way, we have held for some time now, that we will remain in a higher-for-longer environment as inflation remains sticky. With that in mind, this quarter, we performed a deep dive on over 90% of our clients that we believe would be most impacted under a higher-for-longer scenario, encompassing over 80% of our non-investment grade commercial exposures. Performing this deep dive confirmed our view that there will be low loss content in these loans. Approximately 96% of accruing criticized commercial loans are current and 93% are current when also including non-accruing loans. Over 85% of our criticized real estate loans have recourse. I continue to feel very good about our ability to hit our net charge-off guidance of 30 to 40 basis points this year. In summary, while it’s still early in the year, we are on pace to deliver against the commitments that we detailed at the beginning of this year. Key is back to playing offense. And I remain excited about our future and our ability to generate sound profitable growth moving forward. I also want to take a moment to thank our teammates for their continued commitment to our clients and our communities. I am very proud to share with you that for the 11th consecutive exam cycle, since the passage of the regulation in 1977, Key received an outstanding rating from the OCC for meeting or exceeding the terms of the Community Reinvestment Act. This achievement reflects our collective commitment to our purpose and an enormous amount of hard work and dedication from every teammate at Key. With that, I’ll turn it over to Clark to provide more details on the results of the quarter. Clark?

Clark Khayat: Thanks, Chris, and thank you, everyone, for joining us today. I’m now on Slide 4. For the first quarter, we reported earnings per share of $0.20, including $0.02 impact from the FDIC special assessment. This quarter’s $29 million pretax assessment represented a 15% add-on to the charge we had taken in the fourth quarter relating to the bank failures last spring. As expected, our taxable equivalent net interest income declined 4.5% sequentially within the range of down 3% to 5% that we provided in January. Noninterest income increased 6% compared to both the prior year and quarter, primarily driven by strong investment banking performance. Reported expenses were down and excluding selected items, expenses were up slightly linked quarter and essentially flat year-over-year at approximately $1.1 billion. Provision for credit losses of $101 million was roughly flat to the fourth quarter and included $81 million of net loan charge-offs and $20 million of credit reserve build. Our common equity Tier 1 ratio increased to 10.3%, while tangible book value declined 1% sequentially, reflecting the impact of higher rates on AOCI this quarter. Moving to the balance sheet on Slide 5. Average loans declined 2.6% sequentially to $111 billion and loans ended the quarter at about $110 billion, down approximately $2.7 billion from year-end. The decline reflects the expected follow-on impacts of intentional actions we took in 2023 to reduce low-return lending-only C&I relationships and the runoff of residential mortgages and student loans as they pay down and mature. Lower balances are also a function of lower client demand driven by the uptick in rates in the quarter and the return of capital markets activity, which moved some client assets to more attractive off-balance sheet structures. We also remain disciplined and intentional about what we’re putting on our balance sheet. We’re very active with clients and prospects and still expect new loan origination to come back throughout 2024. On Slide 6. Average deposits declined about 1.5% sequentially, in line with recent historical seasonal patterns. And within that decline, we reduced brokered deposits by roughly $1 billion. Client deposits were up 2% year-over-year. Both total and interest-bearing cost of deposits rose by 14 basis points during the quarter, primarily reflecting repricing of existing CDs and money market deposits as they come up for maturity and some continued migration out of noninterest-bearing. When adjusted for the noninterest-bearing deposits in our hybrid commercial accounts, our percentage of noninterest-bearing to total deposits dropped from 25% to 24% linked quarter. Our cumulative interest-bearing deposit beta was just below 52% since the Fed began raising interest rates, up about 3 percentage points from last quarter. On the bottom left of the page, we split out for you our deposit mix by product type and for interest-bearing by business, including how much of our commercial book is indexed or managed to benchmark rates. We hope you’ll find this information useful as you think through potential beta sensitivities. Moving to net interest income and margin on Slide 7. Taxable equivalent net interest income was $886 million, down 4.5% from the prior quarter. Approximately $40 million of benefit from fixed rate asset repricing, mostly from swaps and short-dated U.S. treasuries, was more than offset by lower loan volumes, higher deposit cost and deposit mix migration. Day count impact was about $7 million. Net interest margin declined by 5 basis points to 2.02% driven by higher deposit costs, lower-than-expected loans and changes in funding mix. Both our net interest income and margin continue to reflect headwinds from prior balance sheet positioning. Our short-dated swaps in U.S. treasuries reduced net interest income by $309 million and our NIM by about 70 basis points this quarter. That said, we affirm our prior commitments that our NIM bottomed in 3Q 2023 and that this first quarter of 2024 reflects the low point for net interest income. Turning to Slide 8. Non-interest income was $647 million, up 6% quarter-over-quarter and year-over-year. Compared to the prior year, the increase was primarily driven by investment banking fees, which grew 17% to $170 million, a record first quarter. Strong performance was broad-based across products and industries. Commercial mortgage servicing fees rose 22% year-over-year, reflecting growth in servicing, special servicing and active special servicing balances. At March 31, we serviced about $660 billion of assets on behalf of third-party clients. Finally, Trust and Investment Services grew by 6% year-over-year as assets under management grew 7% to $57 billion. We’re seeing strong momentum in Key private clients as well as tailwinds from higher market levels. Conversely, on a year-over-year basis, corporate services income declined by 9% given elevated LIBOR to SOFR related transaction activity in the first quarter a year ago. And the 5% decline in cards and payment fees reflects slowing spend volumes and lower interchange rates in credit card and merchants. On Slide 9, total non-interest expense for the quarter was $1.1 billion and included $29 million related to the FDIC special assessment increase. Excluding selected items in all periods, expenses were flat compared to a year ago and up 1.5% from fourth quarter. Personnel expenses were flat year-over-year as a 7% decline in headcount offset impact from inflation in merit and higher incentive compensation associated with our strong fee revenue results and the impact of appreciation of our stock price associated with equity awards. Linked quarter, higher personnel costs also reflects seasonal benefits costs in addition to the factors just listed. Moving to Slide 10. Credit quality remained solid. Net charge-offs were $81 million or 29 basis points of average loans, below our target of 30 to 40 basis points for the full year 2024. Delinquencies increased just 2 basis points this quarter and non-performing loans increased 15%, but remained low at 60 basis points of period-end loans. As Chris mentioned, criticized loans increased and represented 6% of loans at quarter end. Roughly two-thirds of the increase came from our C&I portfolio with the rest primarily in commercial real estate. Our internal ratings are driven by primary repayment sources. As loans were moved to criticized, we reaffirmed our collateral coverage, reappraised properties, further engage with borrowers to understand operating pressures, if any and analyze secondary payment sources on these loans. Based on that thorough review, we feel good about the loss content on these loans, and as Chris shared, remain comfortable with our prior loss guidance for 2024 of 30 to 40 basis points. On Slide 11, given this was a fairly unique quarter in terms of the ins and outs, we provided you with a walk of how we derived a roughly $20 million build in our credit allowance this quarter. We added roughly $117 million to account for the quarter’s credit migration, partially offset by a $98 million release to account for an improved macro outlook. Even with this quarter’s proactive deep dive, our net upgrades to downgrades ratio across the entire commercial book improved this quarter as the velocity of downgrades have slowed. As a result, our allowance for credit losses continued to build and represented 1.66% period-end loans at the end of March. When you analyze our levels of reserves by loan type, you’ll find that we compare similarly or better versus our peers and we feel particularly well reserved in our commercial real estate, including a 3% ACL against non-owner-occupied CRE loans. Turning to Slide 12. We continue to build our capital position with CET1 of 24 basis points to 10.3% or 330 basis points above our required minimum, including our stress capital buffer. Our marked CET1 ratio, which includes unrealized AFS and pension losses, increased 13 basis points to 7.1%, and our tangible common equity to tangible assets ratio held steady, down just 2 basis points at 5.04%. This outcome despite the roughly 40 basis point increase in five-year rates during the quarter reflects work we have done over the past year to reduce our exposure to higher rates. This includes reducing the size of our securities portfolio, reducing the portfolio duration and putting on roughly $7 billion of paid fixed swaps, while terminating about $7.5 billion of fixed cash flow swaps last fall. We’ve reduced our DVO1 by 27% over the past 12 months. Our AOCI was negative $5.3 billion at quarter end, including $4.3 billion related to AFS. As we shared with you in the past, the right side of this slide shows Key’s go-forward expected reduction in our AOCI mark based on two scenarios. The forward curve as of March 31, which assumes six rate cuts through 2025, and another scenario where rates hold at March 31 levels through the end of next year. In the forward curve scenario, the AOCI mark is expected to decline by approximately 32% by the end of 2025, which would provide approximately $1.7 billion of capital build through that time frame. In the flat scenario, we still accrete $1.3 billion of capital driven by maturities, cash flows and time. Slide 13 provides our outlook for 2024 relative to 2023. In short, our guidance is unchanged from what we shared in January. If there’s one commitment, we think will be a little more challenging to hit, it will be ending loan balances given the impact of rate increases on client demand and our own selectivity of loans. But as we’ll show you in a minute, we don’t believe this will impact our ability to deliver on our net interest income commitments, both for the full year and the fourth quarter exit rate. On Slide 14, we updated the net interest income opportunity from swaps and short-dated treasuries maturing. As forward rates have moved higher this quarter, this cumulative opportunity has increased to $975 million from the roughly $900 million we estimated last quarter. Of course, some of this incremental benefit will be offset by higher funding costs and a higher-for-longer environment. As of the end of the first quarter, we’ve realized a little over 30% of this opportunity to date, which is shown on the left side of the slide in the gray bars. This leaves about $650 million annualized net interest income opportunity left that we expect to capture over the next 12 months. Moving to Slide 15. We wanted to lay out for you the path of how we intend to get from the $886 million of reported net interest income this quarter to a $1 billion plus number by the end of the year. In the top walk, we’ve laid out the drivers of growth, assuming rates generally follow the forward curve and the Fed cuts twice later this year once in September and again in December. In this scenario, we see about $120 million benefit from the swaps and U.S. Treasuries in line with what we showed you on the previous slide. We also have another roughly $1.1 billion of projected fixed rate cash flows rolling every quarter, currently yielding in the low 2% range that will get reinvested at higher rates. This offsets the immediate impact that rate cuts would have on our variable rate loans and other short-term floating rate investments. We see some modest benefit in year from lower funding costs, particularly from our index commercial deposits and wholesale funding. We’d also expect the net interest margin to improve meaningfully to the 2.4% to 2.5% range in the fourth quarter with about 75% of the improvement driven by the treasuries and swaps and the other 25% through lower funding costs. In the bottom walk, we hold rates flat to where they are at March 31. In this scenario, we get more earning asset repricing benefit because variable rate loans and other short-term instruments do not reprice lower. That is partially offset by deposit betas continuing to creep a little higher. As we’ve said, we expect to support clients and prospects to drive high-quality loan growth throughout the year. Should loan demand remain softer than expected, we would still expect to meet our Q4 net interest income guidance in either scenario I just described. With that, I will now turn the call back to the operator for instructions for the Q&A portion of our call. Operator?

Operator: [Operator Instructions] And our first question is from the line of Ken Usdin from Jefferies. Please go ahead.

Ken Usdin: Thanks. Good morning. Clark, I’m wondering if you can kind of start where you just finished and just looking at those two scenarios on Slide 15. I hear you that it still seems like there’s a lot of ways to get to that $1 billion plus. Just wondering how you can help us understand the variance of those outcomes, maybe a way to think about how much those two cuts mean on their own or some of the other kind of moving parts that would change that? Or is it really just like a pretty narrow answer whatever the cut scenario is in terms of where that fourth quarter exit lands?

Clark Khayat: Yes. Thanks, Ken and great question. I would point you to 15 and just say, if you look at the two ends, the swap and UST roll-off, that’s a pretty predictable number. We think we’ve been good about disclosing the details there. That’s, I think, pretty straightforward math. It will be a little bit better in a no cut than in a cut scenario, as you know, but it’s within a bound range when you think about two cuts versus zero. And then on the other side, the impact from loan growth, which, again, we think is coming, but will be a little bit back-end loaded has a relatively minimum in-year impact. So the range of outcomes on loan growth, while we – we’d rather have more in year, I don’t think is a huge driver in this number. So it really is those two pieces in the middle and the trade between how much more you get from asset repricing, net of loan yields, if there are cuts versus what the impact of funding is and those sort of work to offset each other a little bit, but in a way that we think is relatively muted for the course of the year. And then just the other point I’d make is the $886 million well on the low end for the quarter was within the guide. And obviously, when we gave you the guide for Q1, we had in mind hitting not only the full year guide, but importantly, the fourth quarter exit rate and we continue to confirm our ability to do that. Is that helpful?

Ken Usdin: Yes, it is. Thank you. And as a follow-up on that loan growth point, I’m just wondering in the prepared remarks, Chris talked about the new agreement with Blackstone. And I’m just wondering that dynamic and how that plays into the combination of loan growth, investment banking fees and kind of like what that means for how you originate versus how you distribute?

Chris Gorman: Well, good morning, Ken, so it’s a good question. Let me hit the loan growth kind of head on. We have always demonstrated an ability to grow loans. Having said that, sort of three things all have to be present for us to grow loans. One, there has to be demand. Right now, there is not a lot of loan demand out there. So that’s point one. You see it in kind of flat utilization among other things and not a lot of investment. The second thing is, it has to be in our clients’ best interest for us to, in fact, provide those loans. And you probably noticed that we raised $22 billion, but only put 12% on our balance sheet, and that’s because we can better serve our clients, whether it’s through the forward flow arrangement with Blackstone that you referenced or a variety of other markets. And the third thing is that they have to – the loans that are available to put on our balance sheet have to fit our risk profile and they have to fit our return requirements. And right now, there’s not a lot of loans like that from our perspective. Having said that, what’s interesting about bank loans is because there’s excess capacity, the best time to make bank loans is when there’s a downturn. And our house view is, we are going to see a downturn, and that will be a great time for us to really use our balance sheet. Your question, though, the implications of your question really are broader than just the loan growth. And let me just spend a little bit of time talking about how we’re positioning Key. We think that no matter how things play out, all banks like Key are going to have to carry more capital. And as a consequence of that, what we’re focusing on is really serving our clients through capital-light type businesses, specifically payments, which we’ve invested in for a long time, investment banking, which we referenced, our wealth business, which we think we have an opportunity to really grow, and lastly, something that we frankly haven’t capitalized on the degree that we could or should have to date, and that’s business banking. We’re a really good commercial bank. We’ve never really capitalized on the opportunity, in my opinion, to gather the deposits. That’s a business bank is a very deposit-centric business. So I just wanted to give you some insight of how we’re thinking about the business model going forward and how we continue to reposition Key.

Ken Usdin: Thank you, Chris.

Chris Gorman: Sure.

Operator: Thank you. And our next question is from John Pancari from Evercore. Please go ahead.

John Pancari: Morning.

Chris Gorman: Hi, John.

John Pancari: Just on that loan growth topic, I know you had also indicated you do expect new loan origination to pick up as you look through 2024. I mean in what areas do you think that you’re going to be able to see the better opportunities begin to emerge? I know demand is modest as you just said, in loan utilization weaker. So what areas do you see that anecdotal evidence of a pickup that could drive accelerating originations and balance sheet growth as you look through 2024?

Chris Gorman: Sure. So the first area that I would say would be people doing strategic things. So sort of the whole transaction business, which is just starting to get legs under it. We have a significant backlog, for example, in M&A. That would be an opportunity, John. Other businesses that are really capital-intensive where we have leadership positions in are things like renewables. I was out calling with our renewables team last week, incredible amount of opportunity. By the way, this is partially inflationary because there’s a ton of stimulus around green energy. That’s a huge opportunity. Affordable housing, still a huge unmet need that is very, very capital intensive. And then I think you’ll start to see people really start to invest in property, plant and equipment. If we continue to get an acceleration in inflation, you’re going to see people start to go a little long on inventory. Those are the areas where I think there’ll be opportunities for loan growth. We’re not really seeing those right now, but I think they’ll develop over the course of the year, John.

John Pancari: Got it. Thanks for that Chris. Just related to that, is any of the weakness related to bond market disintermediation right now?

Chris Gorman: For sure. When you have record issuance of investment-grade debt and you have spreads that continue to grind in, there’s no question that, that plays a role.

John Pancari: Okay, thanks. And then lastly, on the IB and capital markets revenues, I know you indicated that you do expect some pullback in fees in the second quarter. In what areas is that in the IB area, just given the levels that you saw this quarter? And maybe if you can help quantify the magnitude of that pullback that you could see in the second quarter.

Chris Gorman: Yes. So let me kind of start at the top. From a backlog perspective, we are at record backlogs in our M&A business. Our backlogs are above where they were a quarter ago and they’re above where they were at year-end. Having said that, when the 10-year is gyrating around as it is, if the 10-year was just at 4.6%, I think there’d be a lot of transactions. But I think any time there’s this kind of volatility, it causes pause on certain transactions. And so that was really the premise of my comment as we look at what will come out of the backlog in the second quarter. And I’m sure because the first quarter was actually hospitable to getting transactions done, I’m sure some that would have been in the second quarter actually went into the first quarter.

John Pancari: Okay, great. Thank you.

Chris Gorman: Sure.

Operator: Thank you. Next question is from Scott Siefers from Piper Sandler. Please go ahead.

Scott Siefers: Good morning. Thanks for taking the questions. Chris, I was hoping you could address in a bit more detail the decision to build the reserve a bit more. It sounds like from your prepared remarks, you’re just sort of trying to be out in front of anything you might see in a higher-for-longer environment rather than anything you’re actually seeing today. Is that the right way to think about it? Or what are sort of the nuances in there?

Chris Gorman: Yes. Actually, it was completely proactive. I just – I’m of a mindset that we’re in this higher-for-longer. And as a consequence, we have been stressing all of our portfolio. And we – any time we do that, we start with anything that’s leveraged because that’s most vulnerable. And we also focus a lot on real estate. And so as we go through and we make assumptions that perhaps these rates will stay where they are for some time, that’s what’s driving it. And also we made some assumptions about – my view is we probably will have a recession. And that’s part of the – my macro view is part of the calculus as well.

Scott Siefers: Okay. Perfect. Thank you. And then maybe we can go to expenses for a quick second. So just curious around how you’re thinking about expenses sort of holistically for the year insofar as we definitely are getting a more normalizing investment banking environment, which is great, but there could be cost accompanied with that. Within the expense outlook, what kind of provisions have you made for that IB recovery? And would you still be kind of comfortable with the guide even if that recovery comes back even more powerfully than it’s currently contemplated?

Clark Khayat: Yes. Hey Scott, it’s Clark. Thanks for the question. So look, we feel good on the guide kind of relatively stable, plus or minus 2%. That incorporates, as we talked about progression towards normalization. If we get something fuller, I think we can absorb that. Obviously, we weren’t expecting coming into the year to additional FDIC charge. So that’s an extra component. We will continue to look at ways to absorb that intelligently. But we think we can cover the impact of a strong investment banking year, which again, we expect to see even if the second quarter is a little bit later. So we did count, we think for that pretty well.

Scott Siefers: Perfect. Okay, good. Thank you very much.

Operator: And the next question is from Manan Gosalia from Morgan Stanley. Please go ahead.

Manan Gosalia: Hi good morning.

Chris Gorman: Good morning.

Manan Gosalia: I wanted to follow up on the Blackstone partnership and just in general, with partnerships with private credit. In terms of underwriting the loans, do you underwrite the loans? And is it your sole decision? Does private credit partner come in? And how does it impact spreads in term and structure as you do more of these relationships?

Clark Khayat: Hey Manan, it’s Clark. Thanks for the question. First of all, I think it’s just important to understand the rationale behind the partnership, and that is largely to support more clients not to manage capital or move loans off the balance sheet. It’s really for us, largely in our specialty finance area. That’s been growing very aggressively. It’s been an outstanding business, but we do think thoughtfully about managing credit concentrations, and this is the opportunity to do that and not limit the amount of clients we can serve. So I think that strategic rationale is really important. As it relates to underwriting, we basically run the business, do the underwriting, Blackstone has an option to participate in these credits if they fit their box. But obviously, if we entered and announced a relationship, we’ve been very deep with them on what the box looks like and what it reflects. And we think our business reflects market conditions as does their appetite. So we would expect this to go well. It’s a one-year deal, and we will test the relationship over the course of the year. We hope it goes very positively because if it does, we’re supporting a lot more clients and prospects in growing our business. And again, given our we think differentiated distribution model; we don’t necessarily always need to grow the balance sheet to grow the business. But this is a case where we would expect to actually do both. We’d expect to continue to grow this portfolio, but moderate some of that growth with a partner, we’ll get a modest asset management fee to do that one that we think makes sense to both sides and again we’ll test it through the year and if there’s more opportunities to do this with Blackstone or others will investigate those were they allow us to serve more clients and serve them better.

Manan Gosalia: So in addition to the fee side, does it also help you with deposits because you can have more relationships with larger corporates?

Clark Khayat: Yes, I mean last I check, Blackstone wasn’t in the business of taking deposits or providing payment services and we are, so we like those kind of deals.

Manan Gosalia: Fair enough. Okay, and then as a follow-up on the loan review, can you chosen more light on what you learned in specific industry as you know, which of the industries that are seeing more pressure, and then in your role as a special service as well on the commercial real estate side can you shed some more light on what you are seeing there?

Chris Gorman: Sure. Let me start if I could on what we are seeing in our servicing business. Our servicing business as you can imagine we look at what goes at in and out of active special servicing and as you can well imagine office continues to be the largest area by far. We have seen some multifamily start to go into our active special servicing. Those are typically deals that we’re done it very low cap rates that were highly leveraged and as a consequence are very sensitive to the significant rise in interest rates. As it relates to our strategic reviews I mentioned we start with anything that’s leveraged, but a few industries that I would bring out to your attention, one, obviously is real estate we spend a lot of time like in a real estate very sensitive to interest rates. The other one is health care. Health care is an area where we have a very significant strategic hold and there’s no question that there’s going to be a lot of consolidation in health care because a lot of health care companies are under a myriad of cost pressures. And the other thing – area where we saw some was just consumer services broadly. Those are the areas.

Manan Gosalia: Great. Thank you.

Chris Gorman: Sure.

Operator: The next question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Hey good morning.

Chris Gorman: Good morning. Hey Ebrahim.

Ebrahim Poonawala: I just had one follow-up, Chris. When you think – when you talked about your outlook for a recession, the stress testing on your loan book for the higher-for-longer, I guess the markets have generally been wrong expecting higher rates to push the economy into a recession. I guess from your perspective, bottoms up, when you assume higher-for-longer, do you see a lot of pain within your loan book six, 12, 18 months out that causes you to have that view? And I’m just trying to wonder – are higher-for-longer enough in a world where the economy could continue to surprise to the upside in terms of growth. Just how do you think about it, especially when you’re stress testing these loans?

Chris Gorman: So in terms of just higher-for-longer, as you look at our book and you look at 2024, higher-for-longer works just fine for us. That would – from an NII perspective, that would be the best outcome just from pure NII. I will tell you, I’d like to see a perfect scenario for Key would be a couple of cuts late in the year because I think that would be good for business, fees, deposits, transactions, et cetera. As I think about the economy, my sort of word of caution here is if you look at the labor market, the labor market is very strong by any metric. And I just think everyone assuming that there’s going to be a soft landing without damaging the labor market. I hope the markets are right about that. I’m not so sure. So that’s kind of – that’s sort of my thinking if that’s helpful.

Ebrahim Poonawala: That’s helpful. And I guess just bigger picture, I mean, I think it’s been an interesting last 12 months for Key in terms of RW [ph] optimization expense focus, et cetera. Remind us, as we look forward strategically, like the one or two things you’re most focused on? Is it still in terms of optimizing the balance sheet expenses growth, like how – what should we be thinking about as you think about just coming out of this and where the next leg of growth comes for the banks?

Chris Gorman: Sure. So coming out – so there’s no question that 2023 was a reset year for Key for all the reasons that you just pointed out, and I’m really proud of what we did shrinking RWAs by $14 billion, taking out about $400 million of expenses. Having said that, as I mentioned in my prepared remarks, we now, Ebrahim, are playing offense. And what that involves is us leaning into areas where we already have, I think, a good competitive position, payments, investment banking, wealth, and I mentioned business banking as well. Because I think as we go forward, the loan-to-deposit ratios are going to be really, really important. We, as you know, have taken our loan deposit ratio down to 77 [ph]. I think kind of mid-70s is where people are going to have to be as you lean into these businesses that are really kind of fee-centric businesses. So that’s where we’re leaning in. That’s where we’re investing.

Ebrahim Poonawala: Got it. Thank you.

Chris Gorman: Thank you.

Operator: Thank you. The next question is from Mike Mayo from Wells Fargo Securities. Please go ahead.

Mike Mayo: Hi.

Chris Gorman: Hey, Mike.

Mike Mayo: Look, Chris, I know Capital Markets is your baby from times past. I guess when I look at 17% year-over-year growth, that was still lagging the big five U.S. players. So I’m just – good time to reminder of who is KeyBanc Capital Markets? What’s your mix among advisory, underwriting, equity underwriting? What’s your typical size of the client? What are your key metrics for KeyBanc Capital Markets? And where do you stand with regard to those metrics?

Chris Gorman: Sure. That’s a great question. Obviously, we, on a percentage basis, are more canted towards advisory. These are middle market companies, a lot of them aren’t going to the equity markets very often. And if there are huge equity deals, those are always led by both bracket firms. So ours is heavily canted towards M&A. The good news there, Mike, is that we’ve talked before, M&A pulls through a lot of the other things that we do, financing, hedging, et cetera. So we feel good about where we’re positioned. But the difference probably as you go – if you went through all the numbers, the difference would be that some of the largest banks, obviously, are the players in investment-grade issuance and the players in large equity issuance.

Clark Khayat: Yes. And on – Mike, it’s Clark. The only other point I’d add there is that a lot of the volume in the first quarter was $10 million plus deals or very, very large cap. And while we do some work with them, we are a middle market-focused bank. So I think that’s some of the delta and things like M&A.

Mike Mayo: And then when you talk about the multiplier effect from mergers because you said backlogs are up quarter-over-quarter, backlogs are up year-over-year. I guess you expect some good growth this year after the second quarter. How can you quantify that multiplier effect? Is that like 1.2x, 1.5x, 2x, does it vary?

Chris Gorman: It would be the latter. It varies, Mike. But I did say that – our M&A backlog is at record highs. And for us, that is the most important. Because if you think about it, if you have the relationship, the M&A relationship by definition, you’re talking to in these middle market businesses, the decision maker. So, I feel good about how we’re positioned. But keep in mind, these markets things are not yet normalized. They’re getting back to normal, but they’re not yet normalized. And as I mentioned earlier, it isn’t the absolute level of interest rates that I think is – has a dampening effect. I think the volatility in interest rates forces people to the sideline and to wait things out. And so we need some settling in of rates. It doesn’t much matter, frankly, where that is. As I said, a four, six tenure would be just fine to transact. But what we can’t have is just extreme volatility.

Mike Mayo: And then last one on that. Where is KeyBanc Capital Markets revenue when you look out over, say, a 10-year horizon? Because I know the whole industry was down by almost half last year and you’re kind of bouncing off low levels. But specifically for you guys, where are you?

Chris Gorman: Well, I mean I think if you look at our normalized investment banking, if you figure $600 million to $650 million in sort of normalized kind of times. And as you know, because you’ve followed us for some time, that’s been a double-digit CAGR. And there’s no reason why we can’t get back to that level of growth if you think about 10 years and you look at the 10 years prior.

Mike Mayo: All right. Thank you.

Chris Gorman: Hey, thank you Mike.

Operator: Thank you. Our next question is from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Gerard Cassidy: Hi, Chris. Hi, Clark.

Chris Gorman: Good morning.

Clark Khayat: Hey, Gerard.

Gerard Cassidy: Clark, you mentioned about the loan portfolio, how you purposely exited single credit relationships and Chris, you talked about building the business bank deposit base better. Can you guys give us some more color on these types of credits that you’ve pushed out, were they syndicated loans since it was only a loan relationship? And then the second, getting back to that business bank. Chris, how does that differ from the commercial banks? I think you said it’s two different business lines.

Chris Gorman: Yes. So let me take the first one first, Gerard. So in a lot of cases, well, we have a relationship strategy, and we had these relationship review sessions where we see what kind of penetration we get. And often, we let bankers many times, it starts by sort of lagging into being a participant in a sector that we’re really, really good, and we think we can do a lot of things and have a lot of capabilities. And it’s just a matter of being really disciplined. And if we actually provide a loan, and I’ve often said a properly graded loan can’t return its cost of capital. And so it actually is destroying value unless you can cross-sell. We’re really proud of what we can do. But if we can’t penetrate that client, we need to exit that client to free up the capital to put it someplace where we can make the kind of returns. And so that was just the exercise. Obviously, it had a huge amount of attention and our time frame of acceptance contracted a bit last year when we were going through the exercise. As it relates to business banking, it is the same business as middle market, except that you need to be really focused on the payments piece because, as I said, they’re mostly deposit-centric businesses. And that’s the reason that we restructured in November of last year and put our payments business together with our middle market business. And we think that’s going to be critical to being able to go down market and really serve these smaller commercial businesses that we think we have a differentiated product offering.

Gerard Cassidy: And Chris, when you talk about the deepening of the relationship with these customers, that may only have a loan or deposit relationship. Aside from payments, what are those other products that you can use to deepen that relationship to make it more profitable?

Chris Gorman: Well, sure. Well, it starts with – and certainly through last year’s exercise, the first thing that we went to customers and said, we need your deposits. So it starts as simple as getting the deposits. And I think 86% or so of our businesses, we have multidimensional relationships. The next thing that we focus on is payments. We’ve been investing in payments for a long time and for these middle market businesses. It’s not just moving money around, but it’s providing information, embedded banking and so forth. And then, of course, we have the ability to help them hedge. We have the ability to raise capital for them. And then obviously, the ultimate is being able to give them strategic advice. We’re fortunate that because we’re structured around industries, we can do all of those things, but we can’t do those things if the company isn’t receptive to our ideas.

Gerard Cassidy: Very good. And then as a follow-up question, I know you guys addressed what you did in the deep dive for looking at the portfolios. In the criticized loan increase, can you give us the number one, two or three reasons a loan moved into criticized? Was it a loan-to-value degradation? Or was it a debt service coverage? What was kind of the main factors that pushed them into criticized?

Chris Gorman: It’s debt service coverage. So – with the first thing we focus on is debt service coverage, and for purposes of this we completely de-link any secondary source of repayment and we assume that the only source of repayment is the primary source, and that, of course, is straight up cash flow.

Gerard Cassidy: Appreciate it. Thank you, Chris.

Chris Gorman: Sure.

Operator: Thank you. Our final question will come from the line of Peter Winter from D.A. Davidson. Please go ahead.

Peter Winter: Thanks. Good morning.

Chris Gorman: Good morning, Peter.

Peter Winter: Chris, you mentioned in your opening remarks that you’re ready to play offense again, but sounded a little bit cautious on period-end loan growth. Can you just talk about the loan commitments, loan pipelines and how you’re thinking about loan utilization in the second half of the year?

Chris Gorman: Yes. So I don’t think those things are incongruent. We clearly are playing offense. We’re out hiring people. We’re focusing on the business that I’m mentioning. Having said that because of our business model we are not seeing huge loan demand and so if you think about utilization, we’re basically flat at 32% and we’ve been flat at 32% for the last few quarters. Our loan book is building, and there’s no question that our backlog is not – is higher than it was, but it’s not at historical standards.

Peter Winter: Got it. Okay.

Clark Khayat: And Peter, I might just say, sorry, it’s Clark. I might just say thematically, and I think Chris has hit this a couple of times, but maybe just to summarize a little bit. I think for us, when we say we’re playing offense we think that looks like disciplined loan growth in our targeted verticals, which we’ve been, I think very consistent about over time. I think it’s funded by quality deposit growth from commercial and consumer clients. And it’s monetized through a series of we think leading fee platforms that build that broader relationship. So we think that’s the recipe. And when we’re doing those things and they don’t always come together and they don’t always come necessarily in that order. But when we’re doing and running our business in the relationship manner that we intend to, that’s what it feels like.

Peter Winter: Got it. And then can I ask if the outlook is a pretty strong momentum in the margin for this year, and you’ve mentioned a more normalized margin is closer to 3%. Would you expect to get near that level maybe towards the end of next year?

Clark Khayat: Yes. I’m focused on confirming guidance for this year, Peter, but it’s a totally fair question. I do think it’s a function a little bit of the shape of the curve and absolute rates. But as I’ve said before, I think based on the business model we have in a normal kind of upward sloping to at least flatter yield curve, I think that’s achievable. So it is a function, I can’t predict where that yield curve is going to be in 2025. But I think as our positions burn off, we get more to the type of balance sheet we want to have and you get a little bit more normalized rate environment, regardless maybe of even absolute levels of rates, but just direction of the curve, I think that’s very achievable.

Peter Winter: Got it. Thanks for taking the question.

Clark Khayat: Yes. Thank you.

Operator: We do have a couple of other questions that just queued up. Steve Alexopoulos from JPMorgan. Please go ahead.

Janet Lee: Hello. This is Janet Lee on for Steve Alexopoulos. Just following-up on John’s question earlier on investment banking and capital markets; are you maintaining your stance that you are progressing towards this normal level of $600 million to $650 million range for IBs this year? Because if I look at absent a double-digit decline in IB fees in the second quarter. It looks like you’re on pace to exceed that normal level. Is that a fair way to describe? And where is that decline in IB fees expected in the second quarter, mostly coming from? Is that debt capital markets, commercial mortgage, can you provide more insight?

Clark Khayat: Yes. So this is Clark, Janet. So we would be consistent with where we were before, which is kind of that $600 million to $650 million range. We think that feels right. We do think there’s upside to that. But as Chris mentioned, we’ll be down in the second quarter, I think that’s a function, not necessarily any one area because the rate volatility, I think is causing some hesitancy in a few different places. That doesn’t change our outlook for the year, but I don’t think at this point, we’re totally prepared to say that will go to kind of a full normalized view.

Janet Lee: Okay. And just one follow up on your loan review. I understand that office CRE is a very small portion of your overall portfolio. And as you’ve done the reappraisals on the properties on I guess, including office, if you have, like what percentage of decline you’re generally seeing on your office? And what’s happening to the updated cash flows from the landlords? Any insight you could share on that?

Clark Khayat: Yes. I think we’ll have to come back a little bit on office just to make sure we have those numbers right. It’s not a huge portfolio, and while we’re watching it, I just don’t have those details in front of me.

Janet Lee: Got it. Thanks for taking my questions.

Clark Khayat: Sure.

Operator: We do have a question from Gerard Cassidy from RBC Capital Markets. Please go ahead.

Gerard Cassidy: Thank you. I have a quick follow-up for you guys. Clark, can you show – you talked about the Blackstone relationship. And I think you mentioned that they’ll participate in the specialty finance originations. How does this relationship differ from the other relationships you guys have had? Chris, obviously you’ve always pointed out the originate-to-distribute model is more of your key metrics here. And I was just curious how this one with Blackstone is going to differ from what you’ve already had in place for years?

Chris Gorman: Yes. So this is just a lot more formalized in that we actually work together, and we actually service it and we’re together focused on this certain asset class. But to your point, we’ve been distributing the preponderance of everything we originate forever, including to a lot of the credit funds. So it’s just – it’s a formalization and most importantly it’s a forward flow agreement. So whereas we’ve always participated on a deal-by-deal basis, this is an arrangement as we go forward.

Clark Khayat: And Gerard, just on the concentration point because it is a concentration management tool, this allows us to do it kind of at origination and not in this book historically. We didn’t do a lot of syndications. We would do securitizations on a client-by-client basis, but that takes time as you know. So this allows us to do it kind of on the fly as we’re going and manage that concentration.

Gerard Cassidy: I got it. And then just a quick follow-up on it. Have you guys just worked with Blackstone in the past before this agreement? Or is this your first initial foray with them?

Chris Gorman: No, we’ve worked on a transactional basis with Blackstone in the past for certain.

Gerard Cassidy: Got it. Okay. Thank you.

Chris Gorman: Thank you, Gerard.

Operator: Thank you. And we have a question from John Pancari from Evercore. Please go ahead.

John Pancari: Sorry for the follow-up. Just one quick follow-up. Chris, you – I believe you just mentioned in discussing your criticized assets that you delink secondary source of repayment when you’re considering the credit ability to repay in your criticized status. So does that mean you exclude and don’t consider any recourse agreement that you have with either financial sponsors or the underlying borrower?

Chris Gorman: That’s correct. So we’re looking at straight up cash-on-cash. What’s the cash flow? What’s the ability to service the debt based on the cash flow?

John Pancari: Okay, so we got recourse.

Chris Gorman: That’s right.

John Pancari: Sorry. Go ahead.

Chris Gorman: Yes. So it’s a conservative perspective for sure. I’ll give you an example. We have – because I just looked through all these. We have a company that has a market cap of, say, $24 billion, but they’re having some near-term operational challenges. They, for example, would be on the list of criticized assets, just to give you an idea.

Clark Khayat: Yes. And just to be clear, as Chris said it’s the primary repayment for the risk rating, which is what gets the classified. We then take into account the secondary pieces when we think about ultimate loss content.

John Pancari: Right. Okay. Got it. Thanks Clark. All right. Appreciate it.

Operator: And we have a question from Mike Mayo from Wells Fargo Securities. Please go ahead.

Mike Mayo: Just a big picture question. You stressed weak loan growth and I’m just wondering is that a sign the economy is not as strong as people think it is? I mean you’re in a lot of different states in the U.S. Or is it simply your commercial clients saying, “Hey, we want the borrowers going to wait for rates to drop”?

Chris Gorman: I think it’s both, Mike. I think I have not seen a lot of people making significant investments in property, plant and equipment and I’m not seeing people make significant investments in inventory, in technology and in people. So I think it’s a combination of both. I think rates clearly have an impact, but I think uncertainty as to the path and direction of the economy is also a factor.

Mike Mayo: Okay. So this is more concern among the decision makers about what’s their ultimate cost of capital due to the volatility in rates than it is some underlying, hey, we’re going into a recession right now.

Chris Gorman: No, I think it’s both. I’m not saying that they think we’re going to go into recession, but I think there’s just a lot of uncertainty about the path of the economy. Will the Fed engineer a soft landing, kind of very similar to the conversation we’ve been having this morning.

Mike Mayo: Okay. All right. Thank you.

Chris Gorman: Sure, Mike.

Operator: And at this time, there are no further questions in queue. Please continue with your closing remarks.

A – Chris Gorman: Well, thank you, operator. Again, thank you for participating in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team (216) 689-4221. This concludes our remarks. Thank you.

Operator: Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

antaranews

Leave a Comment