10-K: KeyCorp Reports Annual Results: Strategic Repositioning Drives Future Earnings Growth

KeyCorp's 2024 results reflect strategic repositioning trades aimed at enhancing future earnings, with net interest income down but fee growth exceeding expectations.

Summary

• KeyCorp's 2024 financial results were generally positive, influenced by large securities repositioning trades.
• Net interest income decreased due to lower loans and changes in interest rates, but remained within the target range compared to 2023.
• Fee growth was stronger than expected, driven by the second-highest year of investment banking revenues in KeyCorp's history.
• As of December 31, 2024, the Common Equity Tier 1 and Tier 1 risk-based capital ratios were 11.92% and 13.69%, respectively.
• KeyCorp achieved meaningful positive operating leverage in the second half of the year and aims to continue earnings growth and operating leverage in 2025.
• Scotiabank completed a strategic minority investment in KeyCorp of approximately $2.8 billion, representing approximately 14.9% pro forma common stock ownership.
• KeyCorp initiated a strategic repositioning of its available-for-sale investment securities portfolio, selling approximately $10.0 billion in market value of low-yielding securities and reinvesting in higher-yielding investments.

Sentiment

Score: 7

Explanation: The document presents a mixed picture. While there are positive aspects like the Scotiabank investment and strong fee growth, the decline in net interest income and the losses from securities repositioning temper the overall sentiment. The strategic repositioning is expected to improve future earnings, but the immediate impact was negative.

Positives

• KeyCorp achieved meaningful positive operating leverage in the second half of 2024.
• Fee growth was stronger than expected, driven by the second-highest year of investment banking revenues in KeyCorp's history.
• The company expects net interest income to increase by approximately 20% in 2025 compared to 2024.

Negatives

• Net interest income decreased due to lower loans and changes in interest rates.
• The company incurred approximately $1.8 billion in losses on the sales of securities available for sale as part of portfolio repositioning activity during the third and fourth quarters of 2024.

Risks

• A worsening of the U.S. economy and volatile or recessionary conditions in the U.S. or abroad could negatively affect KeyCorp's business or its access to capital markets.
• KeyCorp is subject to interest rate risk, which could adversely affect net interest income.
• The company is subject to liquidity risk, which could negatively affect its funding levels.
• KeyCorp and third parties on which it relies may experience a cyberattack, technology failure, information system or security breach or interruption.
• The company may not realize the expected benefits of its strategic initiatives.
• Damage to KeyCorp's reputation could significantly impact its business and major stakeholders.

Future Outlook

KeyCorp expects net interest income to increase by approximately 20% in 2025 compared to 2024, with a 10%+ increase in 4Q25 vs. 4Q24. Adjusted noninterest income is expected to increase by 5%+, and adjusted noninterest expense is expected to increase by 3% to 5%. Net charge-offs to average loans are projected to be 40 to 45 basis points.

Industry Context

The financial services industry is highly competitive and continuously evolving, with legislative, regulatory, economic, and technology changes, as well as consolidation, potentially increasing competition from new and existing market participants.

Comparison to Industry Standards

• KeyCorp competes with other providers of financial services, such as BHCs, commercial banks, savings associations, credit unions, mortgage banking companies, finance companies, mutual funds, insurance companies, investment management firms, private credit funds, investment banking firms, broker-dealers, financial technology companies, and other local, regional, national, and global institutions that offer financial services.
• Some of KeyCorp's competitors are larger and may have more financial resources, while some of its competitors enjoy fewer regulatory constraints and may have lower cost structures.
• The financial services industry has become more competitive as technology advances have lowered barriers to entry, enabling more companies, including nonbank companies, to provide financial services.
• Mergers and acquisitions have also led to increased concentration in the banking industry, placing added competitive pressure on KeyCorp's core banking products and services as competitors enter some of its markets or offer similar products.

Management Changes

Stakeholder Impact

• The strategic minority investment by Scotiabank may influence KeyCorp's policies and operations and impact matters requiring shareholder approval.
• The company's corporate responsibility and sustainability efforts could affect its reputation and its business and results of operations.
• The company's ability to attract and retain customers, clients, investors, and highly skilled management and employees is affected by its reputation.

Next Steps

• KeyCorp intends to continue to focus on generating positive operating leverage by growing revenue and creating a more efficient operating environment.
• The company plans to leverage its continuous improvement culture to maintain an efficient cost structure that is aligned, sustainable, and consistent with the current operating environment and that supports its relationship business model.
• KeyCorp intends to remain focused on sustaining strong reserves, liquidity, and capital.
• The company plans to work closely with its Board and regulators to manage capital to support its clients' needs and drive long-term shareholder value.

Key Dates

Keywords

KeyCorp, financial results, securities repositioning, net interest income, capital ratios, Scotiabank, strategic investment, risk factors, regulatory capital, liquidity