KeyCorp (KEY) Q2 2024 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2024. KeyCorp operates as a large accelerated filer with two primary reportable segments: Consumer Bank and Commercial Bank. The company continues to execute a strategy focused on balance sheet optimization, maintaining a moderate risk profile, and growing client deposits. The reporting excludes the education lending business, which is classified as discontinued operations.
Key Financial Metrics
| Metric | Q2 2024 | Q2 2023 | YTD 2024 | YTD 2023 |
|---|---|---|---|---|
| Net Income (Attributable to Key) | $274 million | $287 million | $493 million | $599 million |
| Diluted EPS | $0.25 | $0.27 | $0.45 | $0.57 |
| Net Interest Income (TE) | $899 million | $986 million | $1,785 million | $2,092 million |
| Net Interest Margin (TE) | 2.04% | 2.12% | 2.03% | 2.29% |
| Noninterest Income | $627 million | $609 million | $1,274 million | $1,217 million |
| Noninterest Expense | $1,079 million | $1,076 million | $2,222 million | $2,252 million |
| Provision for Credit Losses | $100 million | $167 million | $201 million | $306 million |
| Total Assets | $187.45 billion | $196.85 billion | $187.45 billion | $194.08 billion |
| Total Loans | $107.1 billion | $112.6 billion | $107.1 billion | $112.6 billion |
| Total Deposits | $145.7 billion | $145.6 billion | $145.7 billion | $145.6 billion |
| CET1 Capital Ratio | 10.50% | 10.02% | 10.50% | 10.02% |
| Tangible Common Equity Ratio | 5.17% | 4.50% | 5.17% | 4.50% |
Material Changes vs. Prior Period
- Net Interest Income (NII): NII (TE) decreased $87 million (8.8%) year-over-year in Q2 2024. This decline was driven by lower average loan balances (down $11.7 billion) due to balance sheet optimization and higher funding costs as the mix shifted from noninterest-bearing to interest-bearing deposits. The Net Interest Margin compressed 8 basis points to 2.04%.
- Noninterest Income: Increased $18 million (3.0%) to $627 million. Growth was led by higher trust and investment services income (driven by $57.6 billion in assets under management) and increased commercial mortgage servicing fees. This was partially offset by lower service charges on deposit accounts.
- Provision for Credit Losses: Decreased significantly by $67 million (40.1%) to $100 million, reflecting a more stable economic outlook and the impact of balance sheet optimization, despite some credit portfolio migration.
- Asset Quality: Nonperforming loans increased to $710 million (0.66% of total loans) from $431 million (0.36%) in Q2 2023. Net loan charge-offs rose to $91 million (0.34% of average loans) from $52 million (0.17%) in the prior year quarter.
- Capital: The Common Equity Tier 1 (CET1) ratio improved to 10.50%, up 48 basis points from the prior year, reflecting strong capital generation and balance sheet management.
Guidance, Outlook, and Risks
Full Year 2024 Expectations:
- Average Loans: Down 7% to 8% vs. 2023.
- Net Interest Income (TE): Down 2% to 5% vs. 2023.
- Noninterest Income: Up 5%+ vs. 2023.
- Noninterest Expense: Relatively stable (excluding specific one-time items).
- Net Charge-offs: 30 to 40 basis points of average loans.
- Effective Tax Rate: Approximately 20%.
Management Commentary: Management highlighted a 5% year-over-year increase in client deposits and strong growth in the Key Private Client platform, adding over 31,000 households and $2.9 billion in assets since launch. The company remains focused on positive operating leverage and maintaining a moderate risk profile.
Risks and Contingencies:
- Commercial Real Estate (CRE): The company notes continued pressure on CRE market fundamentals, particularly in the office sector, though office exposure represents only 5% of the CRE portfolio.
- Regulatory Capital: KeyCorp is subject to proposed Basel III endgame rules which could impact risk-weighted assets and capital requirements starting in 2025.
- FDIC Special Assessment: The company recorded a $5 million expense in Q2 2024 related to the FDIC special assessment to recover losses from the SVB and Signature Bank failures.
- Interest Rate Risk: While exposure to declining rates has improved, the company remains sensitive to the timing and magnitude of Federal Reserve rate cuts.
Investor Verification Checklist
- Loan Portfolio Migration: Verify the trend in criticized loans within the Commercial and Industrial (C&I) and CRE portfolios, as nonperforming loans have risen notably.
- Deposit Beta and Cost: Monitor the cost of interest-bearing deposits and the beta assumptions used in NII simulations, as funding costs remain elevated.
- CRE Exposure Details: Review the specific geographic and property-type breakdown of the $17.3 billion CRE portfolio, particularly non-owner-occupied assets.
- Regulatory Capital Impact: Assess the potential impact of the proposed "Basel III Endgame" rules on KeyCorp's risk-weighted assets and capital ratios.
- Noninterest Income Sustainability: Evaluate the sustainability of growth in trust and investment services income relative to market volatility and asset under management flows.