KeyCorp 2023 Q3 Form 10-Q Summary
Business context and reporting period
KeyCorp is a U.S. bank holding company operating through its Consumer Bank and Commercial Bank. This unaudited quarterly report covers the three and nine months ended September 30, 2023; comparisons are primarily with the corresponding 2022 periods. The independent accountant performed a review, not an audit, of the interim statements.
Financial results and condition
| Metric | Q3 2023 | Comparison |
|---|---|---|
| Net interest income, GAAP | $915 million | Down from $1.196 billion in Q3 2022 |
| Net interest income, taxable-equivalent | $923 million; net interest margin 2.01% | Down $280 million; margin down 73 basis points from Q3 2022 |
| Noninterest income | $643 million | Down from $683 million; 41% of total revenue versus 36% |
| Provision for credit losses | $81 million | Down from $109 million |
| Noninterest expense | $1.110 billion | Near $1.106 billion in Q3 2022 |
| Net income attributable to Key | $303 million; diluted common EPS $0.29 | Down from $542 million and $0.55 |
| Common shareholders’ income from continuing operations | $266 million | Down from $513 million |
For the first nine months, net interest income (TE) was $3.015 billion, down $312 million year over year; noninterest income was $1.860 billion, down $187 million; provision for credit losses was $387 million, up from $237 million; and noninterest expense was $3.362 billion, up from $3.254 billion. Net income attributable to Key was $902 million versus $1.523 billion; diluted common EPS was $0.85 versus $1.55. Operating cash flow was $1.866 billion, investing cash flow $825 million, and financing cash flow negative $2.812 billion. Cash and due from banks ended at $766 million.
At September 30, total assets were $187.9 billion, loans $115.5 billion, deposits $144.3 billion, and long-term debt $21.3 billion. Deposits increased $1.7 billion and loans decreased $3.9 billion from December 31, 2022. Estimated uninsured deposits were $61.5 billion, or 43% of deposits; $13.5 billion were collateralized by government-backed securities. Wholesale funds were $24.8 billion, down from $28.8 billion at year-end.
Capital ratios were estimated at 9.8% CET1, 11.4% Tier 1, 13.8% total risk-based capital, and 8.9% leverage. KeyCorp reported $81.3 billion of available contingent liquidity and an 81% loan-to-deposit ratio. The allowance for loan and lease losses was $1.488 billion, or 1.29% of period-end loans; nonperforming loans were $455 million, 0.39% of loans. Q3 net charge-offs were $71 million, or 0.24% of average loans, versus $43 million and 0.15% a year earlier.
Material changes versus comparable periods
- Higher deposit and borrowing costs, a shift to more expensive funding, and lower PPP loan fees pressured net interest income and margin. Average Q3 loans rose $3.2 billion year over year, while average deposits were up $596 million.
- Noninterest income declined, reflecting lower deposit service charges, investment banking and debt placement fees, and corporate services income. Deposit service-charge reductions followed the bank’s client-friendly overdraft and NSF fee changes.
- Provision expense fell year over year in Q3 as management cited a more stable economic outlook and balance-sheet optimization. For the nine-month period, provision increased, alongside higher net charge-offs and economic and portfolio changes.
- Credit quality showed signs of normalization: nonperforming loans increased to $455 million from $387 million at year-end 2022, and the allowance rose $151 million. Commercial real estate allowance growth was notable; office represented 5% of CRE loans, while multifamily represented 49% of nonowner-occupied CRE.
- The cash efficiency ratio was 70.3% in Q3 and 68.4% for the first nine months, versus 58.0% and 59.9%, respectively, in 2022. Q3 return on average tangible common equity was 12.4%, below the stated long-term target range.
- Available-for-sale securities had $7.1 billion of gross unrealized losses at September 30; total AOCI was negative $6.6 billion. Management attributed securities losses largely to interest rates and said it did not expect to be required to sell the securities before recovery.
Outlook, commentary, risks, and unusual items
Management’s full-year 2023 expectations versus 2022 were average loans up 6%–9%, average deposits flat to down 2%, net interest income (TE) down 12%–14%, noninterest income down 7%–9%, and noninterest expense relatively stable. It forecast full-year net charge-offs of 25–30 basis points and an effective tax rate of 18%–19%. For Q4 versus Q3, it expected average loans down 1%–3%, deposits and net interest income relatively stable, noninterest income up 1%–3%, expenses relatively stable, net charge-offs of 25–35 basis points, and an 18%–19% tax rate. “Relatively stable” means plus or minus 2%. Expense expectations exclude the proposed FDIC special assessment, efficiency-related expenses, and an expected pension settlement charge.
Long-term targets include a 54%–56% cash efficiency ratio, 16%–19% return on average tangible common equity, and net charge-offs of 0.40%–0.60% through a credit cycle. Q3 actual cash efficiency and tangible-equity return were above the efficiency target range and below the return target range, respectively. Management emphasized expense discipline, relationship-based deposits, balance-sheet optimization, and continued credit discipline.
The proposed FDIC special assessment was estimated to cost Key approximately $176 million, with recognition expected upon final issuance of the rule; the amount and timing remained subject to final terms. S&P downgraded KeyCorp and KeyBank debt ratings in August; Fitch and Moody’s issued further downgrades in October, after quarter-end. The filing warns downgrades could raise funding costs, trigger collateral or funding requirements, and reduce lender or counterparty access.
After quarter-end, Key terminated $7.5 billion of receive-fixed swaps on October 11; $265 million of related AOCI losses are expected to be recognized in earnings over five quarters. On October 27, it redeemed $1.1 billion of senior bank notes, citing reduced exposure to higher rates and lower interest expense; the extinguishment loss was immaterial. Other risks include commercial and industrial concentration, CRE weakness—particularly office—economic slowdown, funding and liquidity conditions, regulatory changes, cyber and operational threats, and litigation. A securities-related putative class action was filed in August; the company said it was too early to assess materiality. It was also negotiating with the SEC over a record-keeping investigation and did not expect a material adverse effect on financial condition.
Important facts for investors to verify
- Track deposit pricing, funding mix, net interest margin, and delivery against the Q4 and full-year 2023 outlook.
- Assess credit migration, charge-offs, criticized commercial loans, CRE and office exposure, and whether allowance growth keeps pace with risk.
- Monitor the final FDIC special-assessment rule and the resulting charge, as well as any additional deposit insurance assessments.
- Review the effect of ratings downgrades on funding costs, collateral requirements, and liquidity; compare reported contingent liquidity with usable liquidity under stress.
- Follow AOCI and securities unrealized losses, swap-related earnings reclassifications, and the effect of capital rules proposed for large banks.
- Check subsequent disclosures on the SEC record-keeping matter, securities litigation, and any other material legal or regulatory developments.