10-Q: KeyCorp Reports Second Quarter 2024 Results, Net Interest Income Declines Amidst Balance Sheet Optimization

KeyCorp's second quarter 2024 results show a decrease in net interest income due to lower loan balances and higher funding costs, despite growth in client deposits and assets under management.

Summary

• KeyCorp's net interest income (TE) for the second quarter of 2024 was $899 million, with a net interest margin of 2.04%, representing a decrease of $87 million and 8 basis points, respectively, compared to the same period last year.
• The decrease in net interest income was primarily due to lower loan balances, driven by balance sheet optimization efforts in 2023, and higher deposit costs in the current interest rate environment.
• Average loans decreased by $11.7 billion year-over-year to $109.0 billion, while average deposits increased by $1.3 billion to $144.2 billion.
• Noninterest income increased to $627 million, representing 41% of total revenue, driven by trust and investment services income and commercial mortgage servicing fees.
• The provision for credit losses decreased to $100 million, compared to $167 million in the second quarter of 2023, due to a more stable economic outlook and balance sheet optimization efforts.
• Noninterest expense remained relatively stable at $1.1 billion for the second quarter of 2024.
• The company's Common Equity Tier 1 ratio improved to 10.50%, and the tangible common equity to tangible assets ratio increased slightly to 5.17%.

Sentiment

Score: 5

Explanation: The document presents mixed results with some positive aspects like deposit growth and improved capital ratios, but also negative aspects like declining net interest income and loan balances. The overall tone is neutral, reflecting a challenging but stable financial position.

Positives

• Client deposits increased by 5% year-over-year.
• Consumer relationship households are up 3.3% annualized year-to-date.
• Assets under management have reached $57.6 billion, reflecting new business and market impacts.
• Net charge-offs and delinquencies remain below the company's long-term target.
• The Common Equity Tier 1 ratio improved to 10.5%, up approximately 20 basis points from last quarter and over 120 basis points from a year ago.
• The tangible common equity to tangible assets ratio increased slightly to 5.17%.

Negatives

• Net interest income (TE) decreased by $87 million year-over-year.
• Net interest margin decreased by 8 basis points year-over-year.
• Average loans decreased by $11.7 billion year-over-year.
• The balance sheet experienced a shift in funding mix from noninterest-bearing deposits to higher-cost deposits and borrowings.

Risks

• The company faces risks related to concentrated credit exposure in commercial and industrial loans.
• Deterioration of commercial real estate market fundamentals could negatively impact the company.
• Defaults by loan clients or counterparties could lead to increased credit losses.
• Adverse changes in credit quality trends could affect the company's financial performance.
• The company is subject to extensive regulation in the U.S. financial services industry.
• Breaches of security or failures of technology systems due to cybersecurity threats could disrupt operations.
• The company is exposed to market risk, including interest rate risk and foreign exchange risk.
• A worsening of the U.S. economy could negatively impact the company's performance.

Future Outlook

KeyCorp expects average loans to be down 7% to 8%, average deposits to be relatively stable, net interest income (TE) to be down 2% to 5%, noninterest income to be up 5%+, noninterest expense to be relatively stable, and net charge-offs to average loans to be 30 to 40 basis points for full year 2024.

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.
• We remain focused on efforts to deliver sound profitable growth and value for our stakeholders.

Industry Context

The results reflect the broader trend of banks facing pressure on net interest income due to higher funding costs and lower loan demand in the current interest rate environment. The company's focus on growing deposits and managing risk aligns with industry best practices.

Comparison to Industry Standards

• KeyCorp's net interest margin of 2.04% is below the average for large regional banks, which have seen margins compress due to higher funding costs.
• The company's loan growth is below the industry average, reflecting its balance sheet optimization strategy.
• KeyCorp's Common Equity Tier 1 ratio of 10.50% is above the regulatory minimum, but below some of its peers.
• The company's focus on growing deposits and managing risk is consistent with industry trends.
• Compared to peers like PNC and Truist, KeyCorp's noninterest income growth is moderate, reflecting a more conservative approach to fee-based businesses.

Legal Proceedings

• A complaint was filed against KeyBank in New York state court, seeking damages related to a KeyBank customer's request for a wire transfer recall.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net interest income and loan balances.
• Employees may be affected by the company's efforts to manage expenses.
• Customers may benefit from the company's focus on growing deposits and improving services.
• Creditors may be reassured by the company's improved capital ratios.

Next Steps

• The company will continue to focus on growing deposits across its commercial business.
• The company will continue to maintain its risk discipline.
• The company will continue to improve balance sheet resiliency to changes in interest rates.

Key Dates

Keywords

net interest income, loan portfolio, deposits, asset quality, credit risk, capital adequacy, mortgage servicing, commercial banking, consumer banking, financial results