8-K: KeyCorp Reports Third Quarter 2024 Net Loss Amid Strategic Portfolio Repositioning

KeyCorp announced a net loss of $(447) million for the third quarter of 2024, primarily due to a loss on the sale of securities, while also reporting a 7% increase in net interest income and the initial $821 million tranche of a strategic investment from Scotiabank.

Summary

• KeyCorp reported a net loss of $(447) million, or $(0.47) per diluted common share, for the third quarter of 2024.
• This loss includes $(737) million after-tax, or $(0.77) per diluted common share, in charges related to the sale of securities as part of a strategic portfolio repositioning.
• Adjusted net income for the quarter was $290 million, or $0.30 per diluted common share.
• Net interest income increased by 7% quarter-over-quarter, driven by the maturity of low-yielding securities and swaps.
• Average deposits increased by 2.5% quarter-over-quarter and 4% year-over-year.
• The company received the initial $821 million tranche of a strategic minority investment from Scotiabank.
• KeyCorp's Common Equity Tier 1 ratio improved to 10.8%, and the Tangible Common Equity ratio reached 6.2%.

Sentiment

Score: 4

Explanation: The document presents mixed results with a significant net loss due to strategic actions, but also positive trends in net interest income and capital ratios. The strategic repositioning and capital raise are positive for the long term, but the short-term impact is negative.

Positives

• Net interest income increased by 7% quarter-over-quarter, driven by the maturity of low-yielding assets.
• Average deposits increased by 2.5% quarter-over-quarter and 4% year-over-year.
• The company's Common Equity Tier 1 ratio improved to 10.8%.
• Tangible book value per common share increased by 15.7% quarter-over-quarter.
• Fee-based pipelines in investment banking, wealth management, and commercial payments continue to build.
• Nonperforming assets and provision for credit losses were stable to improved quarter-over-quarter.

Negatives

• KeyCorp reported a net loss of $(447) million for the third quarter of 2024.
• The net loss was primarily due to a $(918) million pre-tax loss on the sale of securities.
• Noninterest income decreased by $912 million compared to the third quarter of 2023.
• Average loans decreased by $2.7 billion compared to the second quarter of 2024.
• Net loan charge-offs increased to $154 million, or 0.58% of average total loans.

Risks

• The company experienced a significant loss on the sale of securities, impacting overall profitability.
• There is a continued decline in loan balances, which could affect future revenue.
• Higher deposit costs relative to a year ago are impacting net interest income.
• The company is subject to regulatory approvals for the remaining tranches of the Scotiabank investment.
• The economic outlook and credit portfolio migration could lead to further credit losses.

Future Outlook

KeyCorp expects further net interest income tailwinds and a stable-to-improved credit outlook, with the final tranche of the Scotiabank investment expected in the first quarter of 2025, subject to Fed approval. The company remains optimistic about its ability to drive value for stakeholders.

Management Comments

• Key performed well in the third quarter.
• EPS was impacted by a previously communicated securities portfolio repositioning that will enhance future earnings, capital, and liquidity starting in the fourth quarter.
• Underlying results were solid as relationship clients, deposits, and business-related fees all demonstrated continued momentum.
• We saw a meaningful increase in net interest income, up 7% quarter-over-quarter, as substantial portions of low-yielding securities and swaps matured.
• We continue to make progress regarding our $2.8 billion capital raise from Scotiabank, completing the initial $821 million investment tranche this quarter.
• Our fee-based pipelines continue to build.
• I remain optimistic with respect to the trajectory of our business and our ability to drive value for all of our stakeholders.

Industry Context

The strategic portfolio repositioning and capital raise reflect a broader trend in the banking industry to optimize balance sheets and strengthen capital positions in response to changing economic conditions and regulatory requirements. The increase in net interest income is a positive sign, as many banks are facing pressure on margins due to rising deposit costs.

Comparison to Industry Standards

• KeyCorp's net interest margin of 2.17% is within the range of regional banks, but the loss on securities sales is a significant deviation from peers.
• Companies like PNC and US Bancorp have also been managing their securities portfolios, but the magnitude of KeyCorp's loss suggests a more aggressive repositioning.
• The CET1 ratio of 10.8% is above the regulatory minimum, but some peers like JPMorgan Chase and Bank of America have higher ratios.
• KeyCorp's loan-to-deposit ratio of 71% is lower than some peers, indicating a more conservative approach to lending.
• The increase in nonperforming loans to 0.69% of period-end portfolio loans is a concern, as it is higher than some of its peers.

Stakeholder Impact

• Shareholders experienced a net loss for the quarter, impacting earnings per share.
• The strategic investment from Scotiabank is expected to strengthen the company's capital position.
• Employees may see changes in compensation due to the company's performance and strategic initiatives.
• Customers may benefit from the company's improved financial position and continued investment in its businesses.
• Creditors may view the company's improved capital ratios positively.

Next Steps

• KeyCorp expects to complete the final tranche of the equity financing from Scotiabank in the first quarter of 2025, subject to Fed approval.
• The company will continue to focus on growing relationship clients, deposits, and fee-based businesses.
• KeyCorp will continue to manage its balance sheet and credit risk profile.

Key Dates

Keywords

KeyCorp, Financial Results, Net Loss, Strategic Investment, Scotiabank, Net Interest Income, Portfolio Repositioning, Common Equity Tier 1, Tangible Common Equity, Nonperforming Assets, Credit Losses, Investment Banking, Wealth Management, Commercial Payments