8-K: KeyCorp Reports Solid Second Quarter 2024 Earnings, Driven by Deposit Growth and Expense Control

KeyCorp announced a net income of $237 million for the second quarter of 2024, supported by increased deposits and disciplined expense management.

Summary

• KeyCorp reported a net income of $237 million, or $0.25 per diluted common share, for the second quarter of 2024.
• This compares to $183 million, or $0.20 per diluted common share, in the first quarter of 2024, and $250 million, or $0.27 per diluted common share, in the second quarter of 2023.
• Average deposits increased by $1.3 billion compared to both the prior quarter and the second quarter of 2023, with client deposits up 5% year-over-year.
• Expenses declined approximately 6% from the prior quarter and were stable compared to the year-ago period.
• The Common Equity Tier 1 ratio rose 20 basis points to 10.5%.
• Net charge-offs to average loans were 34 basis points.

Sentiment

Score: 7

Explanation: The sentiment is positive, reflecting solid results, deposit growth, and expense management. However, there are some concerns about loan demand and net interest income, preventing a higher score.

Positives

• Net interest income increased sequentially due to fixed asset repricing and deposit growth.
• The company demonstrated momentum in Wealth Management and Commercial Payments.
• Investment Banking pipelines are meaningfully higher than prior periods.
• Expenses are well-managed, and net charge-offs remained low.
• The Common Equity Tier 1 ratio increased by 23 basis points in the quarter.
• The company has built approximately 120 basis points of organic capital over the past twelve months.
• The company's credit quality remains solid.
• Average deposits increased by $1.3 billion compared to the year-ago quarter.
• The increase in deposits was driven by growth in retail deposit balances and a focus on growing deposits across commercial businesses.

Negatives

• Loan demand remained tepid.
• Net interest income decreased by $87 million compared to the second quarter of 2023.
• The net interest margin decreased by eight basis points compared to the second quarter of 2023.
• Noninterest income decreased by $20 million compared to the first quarter of 2024, driven by a decline in investment banking and debt placement fees.
• Noninterest expense increased by $3 million compared to the second quarter of 2023, driven by a $14 million increase in personnel expense.
• Average loans decreased by $11.7 billion compared to the second quarter of 2023.
• Nonperforming loans totaled $710 million, representing 0.66% of period-end portfolio loans, compared to 0.36% at June 30, 2023.

Risks

• Lower loan balances and higher deposit costs negatively impacted net interest income and the net interest margin.
• The balance sheet experienced a shift in funding mix from noninterest-bearing deposits to higher-cost deposits and borrowings.
• The decrease in noninterest income was driven by a $44 million decline in investment banking and debt placement fees.
• The increase in noninterest expense was driven by a $14 million increase in personnel expense, reflective of a higher stock price compared to the year-ago period.
• Nonperforming loans increased to 0.66% of period-end portfolio loans, up from 0.36% at June 30, 2023.

Future Outlook

KeyCorp is optimistic about loan growth in the second half of the year and expects to benefit from the roll-off of swaps and treasuries. The company anticipates a total benefit of approximately $550 million in 2024 from these maturities, with an annualized benefit of around $470 million in the second quarter run rate. They also expect an incremental benefit of about $80 million in the fourth quarter compared to the second quarter.

Management Comments

• This was a solid quarter for Key as we continued to execute on our clearly defined path to enhanced profitability.
• Sequentially, net interest income grew as we benefited from fixed asset repricing and continued to grow client deposits while the pace of deposit repricing slowed.
• Loan demand remained tepid, however, we are optimistic that we will begin to see growth in the second half of the year.
• We continued to make progress against our most important strategic fee-based initiatives where we benefit from a differentiated value proposition.
• We demonstrated momentum in Wealth Management and Commercial Payments.
• Additionally, our Investment Banking pipelines are meaningfully higher from prior periods.
• Expenses continue to be well-managed, and net charge-offs remained low.
• I am excited for our path forward and energized by our momentum which positions us to deliver sound, profitable growth.

Industry Context

KeyCorp's results reflect a broader trend in the banking industry where institutions are navigating a higher interest rate environment, focusing on deposit growth, and managing expenses. The company's emphasis on fee-based initiatives and strategic growth areas aligns with industry efforts to diversify revenue streams and enhance profitability.

Comparison to Industry Standards

• KeyCorp's Common Equity Tier 1 ratio of 10.5% is above the regulatory minimums, indicating a strong capital position.
• The company's net charge-offs to average loans of 34 basis points is within the range of what is considered acceptable for a regional bank, but is higher than the 17 basis points reported in the same quarter last year.
• KeyCorp's focus on growing client deposits and managing expenses is consistent with strategies employed by other regional banks such as PNC and US Bancorp.
• The company's investment banking pipeline growth is a positive sign, as many regional banks are looking to expand their fee-based businesses to offset challenges in net interest income.
• Compared to peers like Fifth Third and Huntington, KeyCorp's deposit growth is a positive indicator of its ability to attract and retain customers in a competitive market.

Stakeholder Impact

• Shareholders will likely view the results positively due to the increase in net income and the strong capital position.
• Employees may benefit from the company's continued growth and strategic initiatives.
• Customers will benefit from the company's focus on growing deposits and providing a range of financial services.
• Creditors will likely view the company's strong capital position and solid credit quality as positive indicators.

Next Steps

• The company will continue to focus on growing client deposits and managing expenses.
• KeyCorp expects to see loan growth in the second half of the year.
• The company will continue to execute on its strategic fee-based initiatives.
• KeyCorp will benefit from the roll-off of swaps and treasuries.

Key Dates

Keywords

net income, deposits, expenses, Common Equity Tier 1 ratio, net charge-offs, net interest income, loan demand, wealth management, commercial payments, investment banking