KeyCorp (NYSE:KEY), an Ohio-based financial institution with over $187 billion in assets, recently reported its financial results for the second quarter of 2024. The company's net income for the first half of 2024 stands at $493 million, a decrease from the $599 million reported in the same period of the previous year. KeyCorp's annual net income for 2023 was $967 million, with annual revenue of $10,397 million, annual operating cash flow of $2,903 million, and annual free cash flow of $2,761 million.
Capital Adequacy and Risk Management
KeyCorp's capital position remains a cornerstone of its financial stability. The company's Common Equity Tier 1 ratio of 10.5% as of June 30, 2024, is indicative of a robust balance sheet capable of withstanding economic fluctuations. This strength is further underscored by KeyCorp's moderate risk profile, with net charge-offs to average loans ratio well below the targeted range of .40% to .60%, reflecting the efficacy of its risk management practices.
Client Primacy and Digital Innovation
KeyCorp's strategic commitment to client primacy is evidenced by a 5% year-over-year increase in client deposits and a 3.3% annualized rise in consumer relationship households. The launch of Key Private Client has attracted over 31 thousand households and approximately $2.9 billion in new assets, showcasing the success of its digital initiatives. With Assets Under Management reaching $57.6 billion, KeyCorp's focus on digital innovation and personalized services is a significant strength that enhances client retention and attracts new business.
Interest Rate Environment and Net Interest Income
The current interest rate environment has posed challenges for KeyCorp, as evidenced by the decrease in net interest income from $2,077 million in the first half of 2023 to $1,762 million in the same period of 2024. The company's financials reflect the impact of lower loan balances and higher funding costs, which have led to a contraction in net interest income. KeyCorp expects net interest income to become a tailwind in the back half of 2024 and into 2025, as the company benefits from the repricing of its assets.
Risks and Challenges
Market Risks and Competitive Pressures
KeyCorp operates in a highly competitive industry where market risks and competitive pressures are omnipresent. The company's financial performance is susceptible to fluctuations in asset prices, geopolitical destabilization, and changes in credit quality trends. Additionally, the need to adapt to evolving industry standards and consumer preferences requires continuous innovation and investment, which can strain resources and impact profitability.
Expansion of Digital Banking Services
The growing trend towards digital banking presents KeyCorp with an opportunity to expand its digital offerings and attract a tech-savvy customer base. By leveraging its successful Key Private Client platform and other digital initiatives, KeyCorp can capitalize on the shift in consumer behavior towards online and mobile banking services. This expansion can lead to increased market share, improved customer engagement, and enhanced operational efficiency.
Strategic Acquisitions and Partnerships
KeyCorp has the opportunity to pursue strategic acquisitions and partnerships that align with its business model and growth objectives. By targeting companies or technologies that complement its existing services, KeyCorp can broaden its product offerings, enter new markets, and achieve economies of scale. Such strategic moves can also provide access to new customer segments and drive long-term value creation.
Economic Downturn and Credit Quality
An economic downturn poses a significant threat to KeyCorp's financial health, as it can lead to a deterioration in asset quality and an increase in credit losses. The company's exposure to commercial and industrial loans and commercial real estate market fundamentals could be adversely affected by a recessionary environment. KeyCorp must remain vigilant in monitoring economic indicators and adjusting its credit risk management strategies accordingly to mitigate potential impacts.
Regulatory Changes and Compliance Costs
The financial services industry is subject to extensive regulation, and any changes in laws, regulations, or standards can have a material impact on KeyCorp's operations. Compliance with new regulatory requirements can result in increased costs and operational complexities. Additionally, the company must navigate the evolving landscape of privacy and cybersecurity laws to protect customer data and maintain trust. Failure to comply with regulatory expectations can lead to penalties, reputational damage, and a loss of competitive advantage.
Business Overview
KeyCorp operates through two main business segments: Consumer Bank and Commercial Bank. The Consumer Bank serves individuals and small businesses, offering a variety of deposit and investment products, personal finance and financial wellness services, lending, mortgage and home equity, student loan refinancing, credit card, treasury services, and business advisory services. The Commercial Bank is a full-service corporate bank focused on serving the borrowing, cash management, and capital markets needs of middle market clients, as well as providing lending, equipment financing, and banking products and services to large corporate and institutional clients.
Financials
In the second quarter of 2024, KeyCorp reported earnings of $237 million or $0.25 per share, which is down $0.02 from the year-ago quarter, but up $0.05 sequentially. Revenue was essentially flat as the company offset the expected pullback in investment banking fees from a record-first quarter with growth across the balance of the franchise. Expenses remained well-controlled, and credit costs were stable.
Net interest income (TE) was $899 million for the second quarter of 2024, a decrease of $87 million compared to the second quarter of 2023. The decline was driven by lower loan balances and higher funding costs, which were partially offset by the reinvestment of proceeds from maturing investment securities into higher-yielding liquid investments and the maturity of lower-yielding interest rate swaps. For the full year 2024, KeyCorp expects net interest income (TE) to be down 2% to 5% compared to 2023.
Noninterest income was $627 million in the second quarter of 2024, up 3% year-over-year. The increase was primarily driven by trust and investment services, commercial mortgage servicing fees, and investment banking fees, which offset a decline in corporate services income. For the full year 2024, KeyCorp expects noninterest income to increase by more than 5% compared to 2023.
Noninterest expense was $1.1 billion for the second quarter of 2024, flat year-over-year. The company remains focused on maintaining expense discipline, with noninterest expense expected to be relatively stable in 2024 compared to 2023, excluding the impact of a $34 million FDIC special assessment in 2024.
Liquidity
KeyCorp's credit quality remains solid, with net charge-offs of $91 million or 34 basis points of average loans in the second quarter of 2024. Nonperforming loans increased 8% sequentially but remained low at 66 basis points of period-end loans. The company expects net charge-offs to be in the range of 30 to 40 basis points for the full year 2024.
KeyCorp's liquidity position is strong, with $88 billion in available contingent liquidity as of June 30, 2024. The company's loan-to-deposit ratio was 74% at the end of the second quarter, and it continues to maintain a diversified funding base, including deposits, short-term borrowings, and long-term debt.
Outlook
Looking ahead, KeyCorp remains focused on its strategic priorities, including enhancing client primacy, driving digital innovation, and maintaining a moderate risk profile. The company expects net interest income to become a tailwind in the back half of 2024 and into 2025, as it benefits from the repricing of its assets. Additionally, KeyCorp is optimistic about its investment banking and loan pipelines, which have improved meaningfully from prior periods.
The company's capital position remains strong, with a Common Equity Tier 1 ratio of 10.5% as of June 30, 2024. KeyCorp is well-positioned to navigate the current interest rate environment and continue supporting its clients, while maintaining its moderate risk profile and delivering value for its stakeholders.
Conclusion
KeyCorp (NYSE:KEY) demonstrates a robust balance sheet, a commitment to client primacy and digital innovation, and a focus on maintaining a moderate risk profile. However, the company faces challenges from the interest rate environment and market risks, which could impact its financial performance in the near term. KeyCorp's strategic initiatives and disciplined approach to risk management position it to navigate the evolving financial landscape and capitalize on growth opportunities.