10-Q: KeyCorp Reports Mixed Q3 Results Amid Strategic Portfolio Repositioning

KeyCorp's Q3 results show a net loss due to a strategic securities repositioning, but also highlight growth in client deposits and a strong capital position.

Summary

• KeyCorp reported a net loss for the third quarter of 2024, primarily due to a $918 million loss from a strategic repositioning of its available-for-sale securities portfolio.
• Despite the loss, client deposits increased by 4% year-over-year, and the company saw a 3.5% annualized growth in net new relationship households year-to-date.
• Key Private Client added over 5,000 new enrollments and approximately $620 million in assets during the quarter, bringing total Assets Under Management to $61.1 billion.
• Net charge-offs remained at the low end of the company's long-term target range, and expenses were down approximately 1% compared to the prior year.
• The Common Equity Tier 1 ratio increased to 10.8%, up approximately 100 basis points from a year ago, including the impact of the balance sheet repositioning and a strategic minority investment by Scotiabank.
• The company sold approximately $7.0 billion in market value of low-yielding mortgage-backed securities and reinvested the proceeds into higher-yielding investments.
• KeyCorp expects average loans to be down 7% to 8%, average deposits to be up 1% to 2%, and net interest income to be down 2% to 5% for the full year 2024 compared to 2023.

Sentiment

Score: 5

Explanation: The document presents mixed results. While there are positives like deposit growth and a strong capital position, the net loss due to the securities repositioning and the decrease in net interest income temper the overall sentiment. The strategic investment from Scotiabank is a positive development, but the potential risks and uncertainties associated with it and the overall economic environment keep the sentiment neutral.

Positives

• Client deposits increased by 4% year-over-year.
• Net new relationship households grew by 3.5% annualized year-to-date.
• Key Private Client saw significant growth with over 5,000 new enrollments and $620 million in added assets.
• Expenses were down approximately 1% compared to the prior year.
• The Common Equity Tier 1 ratio increased to 10.8%.

Negatives

• KeyCorp reported a net loss for the third quarter of 2024.
• The net loss was primarily due to a $918 million loss from a strategic securities portfolio repositioning.
• Average loans were down $11.4 billion compared to the third quarter of 2023.
• Net interest income (TE) decreased $266 million for the nine months ended September 30, 2024, compared to the same period in the prior year.

Risks

• The company faces risks related to concentrated credit exposure in commercial and industrial loans.
• There is a risk of deterioration in the commercial real estate market.
• The company is exposed to defaults by loan clients or counterparties.
• Adverse changes in credit quality trends and declining asset prices pose risks.
• Geopolitical destabilization and a potential global economic downturn or recession could impact the company.
• The company faces operational and risk management failures by itself or critical third parties.
• Breaches of security or failures of technology systems and cybersecurity threats are a concern.
• The company is subject to extensive regulation of the U.S. financial services industry.
• There is a risk that the company may not be able to complete the second closing under the Investment Agreement with Scotiabank.
• The company is exposed to the risk of downgrades in its credit ratings or those of KeyBank.

Future Outlook

KeyCorp expects average loans to be down 7% to 8%, average deposits to be up 1% to 2%, and net interest income to be down 2% to 5% for the full year 2024 compared to 2023. Noninterest income is expected to be up 6%+, excluding the loss on sale of securities. Noninterest expense is expected to be up ~2%, excluding certain special items. Net charge-offs to average loans are expected to be 35 to 40 basis points for FY2024. The effective tax rate is expected to be ~13% for FY2024.

Management Comments

• Our relationship-based business model and our long-term strategic commitment to primacy continues to serve us well.
• Our continuous focus on maintaining our risk discipline has and will continue to position us to perform well through all business cycles.
• Expenses remained well-controlled, down approximately 1% compared to the prior year.

Industry Context

The strategic repositioning of KeyCorp's securities portfolio reflects a broader trend among financial institutions to optimize their balance sheets in response to changing interest rate environments. The investment from Scotiabank highlights the ongoing interest in strategic partnerships and minority investments within the financial sector.

Comparison to Industry Standards

• KeyCorp's Common Equity Tier 1 ratio of 10.8% is above the regulatory minimum of 7.0%, indicating a strong capital position compared to industry standards.
• The company's net charge-offs are at the low end of its target range, suggesting effective credit risk management compared to peers.
• The strategic repositioning of the securities portfolio is a common practice among banks to improve yields and manage interest rate risk, similar to actions taken by other regional and national banks.
• The growth in client deposits and new relationship households indicates a positive trend in customer acquisition and retention, which is a key performance indicator for banks.
• The investment from Scotiabank is a strategic move that is similar to other minority investments seen in the financial sector, such as the investment in First Republic Bank by a consortium of banks prior to its failure.

Legal Proceedings

• The parties reached a settlement in principle in the Oren-Pines v. KeyBank case, with the settlement amount not being material to KeyCorp's results of operations or financial condition.

Stakeholder Impact

• Shareholders may be concerned about the net loss in Q3 2024, but the increase in the Common Equity Tier 1 ratio and the strategic investment from Scotiabank are positive developments.
• Employees may be affected by the company's ongoing efforts to control expenses.
• Customers may benefit from the company's focus on relationship-based banking and the growth of Key Private Client.
• Creditors may view the company's strong capital position and liquidity as positive indicators.

Next Steps

• KeyCorp expects to complete the final purchase of approximately $2.0 billion of its common stock by Scotiabank in the first quarter of 2025, subject to Federal Reserve approval.
• The company contemplates executing a similar securities repositioning upon the second closing of the strategic minority investment from Scotiabank.
• KeyBank is required to file its next resolution plan by July 1, 2025.

Key Dates

Keywords

KeyCorp, financial results, securities repositioning, client deposits, net interest income, capital ratio, loan portfolio, credit risk, mortgage-backed securities, Scotiabank investment