KeyCorp (KEY) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Net Interest Income Growth: Reported growth from what is believed to be the cycle's low in Q1, with confidence in meeting full-year NII commitments.
• Deposit Growth: Sequential growth of 1% in deposits, with a deceleration in deposit cost increases. Non-interest bearing deposits stabilized at 20% of total deposits.
• Wealth Management and Commercial Payments Strength: Record production volumes in wealth management with significant client and asset growth. Commercial deposits grew by 9% year-over-year, with cash management fees growing at approximately 10%.
• Investment Banking Outlook: Despite a quarter-over-quarter decrease, the outlook remains positive with higher pipelines compared to previous periods and expectations of a stronger second half.
• Loan Demand and Capital Position: Optimism for stabilization and potential growth in loan demand in the latter half of the year. The Common Equity Tier 1 ratio improved to 10.5%.

Pessimistic Highlights

• Earnings Decline: Earnings per share down $0.02 from the year-ago quarter.
• Investment Banking Fees: Second quarter fees were below those of the first quarter.
• Loan Demand: Broadly tepid loan demand with a competitive pricing environment.

Company Outlook

• Net Interest Income Pivot: Anticipation of NII headwinds turning into tailwinds going forward.
• Loan and Deposit Guidance: Updated loan guidance reflects lower demand, with average loans expected to be down 7% to 8% in 2024. Deposit guidance revised to stable from a previous expectation of a decrease.
• 2024 Financial Outlook: Unchanged P&L guidance across major line items despite updated loan and deposit expectations.

Q & A Highlights

• Q: Can you discuss the downside risk on NII if loan growth ends up being weaker or negative in the back half, and implications for 2025 versus 2024? (Ebrahim Poonawala, Bank of America Securities)

  A: We expect loan pipelines to strengthen, contributing to NII growth. If loan growth is slightly short, we'll still meet our full-year NII target. Two rate cuts this year would have a near-term impact on NII but expected to recapture in 2025. (Clark H. I. Khayat)

• Q: On Slide 10, you look at NPLs and criticized picking up sequentially. Can you discuss your outlook on C&I and any specific areas of credit degradation? (Ebrahim Poonawala, Bank of America Securities)

  A: Normal migration from criticized to nonperformers is as expected. The C&I book is largely investment grade and secured. Seeing impacts in consumer goods, some business services, and equipment businesses, but healing in healthcare. (Christopher M. Gorman)

• Q: Can you discuss the impact of the swap and treasury maturities on NII and the expected positive operating leverage for next year? (John Pancari, Evercore)

  A: The structural roll-off in swaps and treasuries will significantly contribute to NII growth. Operating leverage is expected to be positive, with expenses growing in 2025 due to continued investment in the business. (Clark H. I. Khayat)

• Q: Regarding investment banking, how are you thinking about the back half of the year given the strong pipeline? (Matthew O’Connor, Deutsche Bank)

  A: We expect investment banking revenues to be in the range of $300 million to $350 million in the back half of the year, consistent with our guidance of $600 million to $650 million for the full year. (Christopher M. Gorman)

• Q: On the consumer lending side, given the pressure in the second quarter, what's the outlook for consumer loan growth? (Peter Winter, D.A. Davidson)

  A: Consumer loan growth has been under pressure due to low yields in the mortgage and student loan markets. We continue to support clients but expect some loan categories to continue declining at a normalized rate. (Clark H. I. Khayat)