KEYCORP quarterly report, Q2 FY2022

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KeyCorp (NYSE: KEY) — Q2 2022 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2022. Financial statements are unaudited; the independent accountant performed an interim review, not an audit. Comparisons below are generally with Q2 or first half 2021, or with December 31, 2021 for balance-sheet items.

Business context and results

KeyCorp is a regional banking holding company operating through Consumer Bank and Commercial Bank, serving retail, small-business, middle-market, institutional, and commercial real estate clients. It reported strong loan growth and higher net interest income, while earnings declined year over year as prior-year credit-reserve releases did not recur and fee income weakened.

  • Q2 revenue: Taxable-equivalent revenue was $1.792 billion, up about 1% from $1.773 billion. GAAP net interest income was $1.097 billion, up 8% from $1.017 billion; taxable-equivalent net interest income was $1.104 billion. Net interest margin (taxable-equivalent) was 2.61%, up 9 basis points year over year.
  • Q2 earnings: Continuing-operations income attributable to common shareholders was $504 million, or $0.54 diluted EPS, versus $698 million, or $0.72 diluted EPS, a year earlier. Total net income attributable to Key was $533 million versus $729 million.
  • Credit costs: Provision for credit losses was $45 million, compared with a $222 million benefit in Q2 2021. Net charge-offs were $44 million, or 0.16% of average loans. The allowance for loan and lease losses was $1.099 billion, 0.98% of period-end loans.
  • Fees and expenses: Noninterest income was $688 million, down 8% from $750 million; investment banking and debt placement fees fell 31%, and cards and payments income fell 25%. Noninterest expense was $1.078 billion, essentially flat versus $1.076 billion. The cash efficiency ratio was 59.5%, compared with a 54%–56% long-term target range.
  • First-half results: Net income attributable to Key was $981 million versus $1.351 billion; diluted EPS was $1.00 versus $1.34. Taxable-equivalent revenue was $3.488 billion versus $3.523 billion. Net interest income (TE) rose to $2.124 billion from $2.035 billion, while noninterest income declined to $1.364 billion from $1.488 billion. Provision was $128 million versus a $315 million benefit.

Balance sheet, liquidity, capital, and cash flow

  • Loans and deposits: Loans were $112.4 billion at June 30, up from $101.9 billion at year-end 2021. Deposits were $145.9 billion, down $6.7 billion from year-end, reflecting seasonal and public-sector outflows. Average Q2 loans were $109.1 billion, up $8.3 billion year over year; average deposits were $147.5 billion, up $3.1 billion.
  • Funding and liquidity: Wholesale funding was $22.7 billion, versus $12.8 billion at year-end. The consolidated loan-to-deposit ratio was 78%. Key reported $34.7 billion of liquid assets and $38.0 billion of unused secured borrowing capacity at the Federal Reserve Bank of Cleveland and the FHLB. KeyCorp held $3.2 billion in cash, which management said was sufficient for projected obligations. Management attributed lower liquidity to loan growth, deposit outflows, and securities market-value declines.
  • Debt and capital: Long-term debt was $16.6 billion, up from $12.0 billion at year-end. KeyCorp issued $1.35 billion of senior notes in May. At June 30, regulatory ratios were 9.17% CET1, 10.37% Tier 1, 11.98% total capital, and 8.64% leverage. KeyBank met the regulatory “well capitalized” PCA thresholds. Common equity was $14.4 billion versus $17.4 billion at year-end; tangible common equity to tangible assets was 5.3% versus 6.9%, affected in part by accumulated other comprehensive losses.
  • Cash flow, first half: Operating activities provided $803 million, investing activities used $4.177 billion, and financing activities provided $3.139 billion. Cash and due from banks declined $235 million to $678 million. Financing included a $6.707 billion deposit decrease, net proceeds from long-term debt issuance of $5.020 billion, and $417 million of dividends paid.
  • Shareholder returns: The Q2 common dividend was $0.195 per share. Share repurchases in the quarter were limited to employee equity compensation program activity.

Material changes and management outlook

  • Q2 net interest income and margin benefited from higher rates, higher earning-asset balances, and favorable balance-sheet mix; growth was partly offset by the exit of indirect auto lending and lower PPP fees.
  • Commercial and consumer loan growth was broad-based. Commercial loans outstanding rose 8.7% from year-end, and consumer loans rose 14.2%, led by residential mortgage and Laurel Road. Commercial real estate was $17.8 billion; multifamily was the largest property category.
  • Nonperforming loans fell to $429 million from $454 million at year-end; the nonperforming-loan ratio declined to 0.38% from 0.45%. Management forecast 2022 net charge-offs averaging 15–25 basis points, below its long-term through-cycle target of 40–60 basis points.
  • Long-term targets include positive operating leverage, a 54%–56% cash efficiency ratio, and 16%–19% return on average tangible common equity. Management said positive operating leverage was achieved sequentially in Q2 and reiterated priorities of organic growth, dividends, and prudent repurchases; the filing does not provide full-year earnings or revenue guidance.
  • Key acquired GradFin in May for $72 million, including $10 million of contingent consideration; the acquisition added $58 million of goodwill and $12 million of intangible assets. Key also continued digital and sustainable-finance initiatives.

Risks, contingencies, and unusual items

  • Management cited elevated risk of slower economic growth because of inflation and supply-chain stress. Credit-loss estimates depend on forecasts and could vary considerably if economic conditions deteriorate.
  • Available-for-sale securities had $4.181 billion of gross unrealized losses at June 30, compared with $853 million at year-end. Management attributed the declines primarily to rates and market conditions, and said it did not intend, and was not likely to be required, to sell before recovery; no credit-loss allowance was recorded on these securities.
  • Interest-rate simulations showed net interest income down 5.70% under a 200-basis-point decline and down 1.56% under a 200-basis-point increase. The declining-rate result was outside the Board-approved tolerance, though management said it was consistent with risk appetite and expected to return within tolerance as deposit rates increased. Actual sensitivity depends on rates, deposit repricing, customer behavior, and balance-sheet changes.
  • LIBOR transition remains an operational and contract-remediation risk ahead of the cessation of U.S. LIBOR tenors after June 30, 2023. Key disclosed $23.5 billion of loans and $71.5 billion of derivative notional maturing after that date that were directly or indirectly LIBOR-dependent.
  • Outstanding guarantees had $17.8 billion of maximum potential undiscounted payments and $307 million of recorded liabilities; the company assessed payment/performance risk as low. Litigation is ordinary-course; Key said it did not expect known matters to have a material adverse effect on financial condition, while noting outcomes could exceed reserves or materially affect a particular period.
  • Other key risks identified include commercial and industrial and commercial real estate concentrations, funding access and cost, cybersecurity and third-party disruptions, regulatory changes, and adverse economic conditions. Key reported no material cyber-related operational disruption to date and effective disclosure controls at quarter-end.

Important facts for investors to verify

  • Whether loan growth and higher rates sustain net interest income as deposit costs rise and funding mix changes.
  • Whether deposit outflows and greater wholesale borrowing persist, and whether reported liquidity remains adequate under stress.
  • How securities unrealized losses, AOCI, and tangible capital evolve if rates remain elevated or markets weaken.
  • Whether credit quality and reserve needs remain consistent with the 15–25 basis-point 2022 net charge-off outlook, particularly in C&I and commercial real estate.
  • Whether fee income recovers from reduced capital-markets activity and lower cards and payments income, and whether expenses move toward the cash-efficiency target.
  • Progress on LIBOR contract remediation, GradFin integration, and the resolution of material legal, guarantee, and regulatory exposures.