Business Overview and History

KeyCorp (KEY-PJ) is a diversified financial services company that has established itself as a resilient player in the banking industry. With a history dating back to 1849, KeyCorp has successfully weathered numerous economic cycles, adapting its strategies to meet the ever-changing needs of its clients and the financial landscape.

KeyCorp's origins can be traced back to 1849 when it was founded as The Society for Savings in Cleveland, Ohio. In 1958, the bank changed its name to The Cleveland Trust Company and began expanding beyond its local roots, opening branches throughout Ohio. A significant milestone occurred in 1963 when the bank formed a holding company called KeyCorp, enabling it to broaden its product offerings and enter new markets.

The 1980s and 1990s marked a period of rapid growth for KeyCorp through a series of mergers and acquisitions. The 1994 merger with Society Corporation was particularly notable, nearly doubling the company's assets and branch network, and positioning KeyCorp as one of the largest banking institutions in the Midwest.

In the early 2000s, KeyCorp faced challenges with rising credit costs and underwent a series of restructuring efforts. In 2004, Henry Meyer was named CEO and led a turnaround strategy focused on de-risking the balance sheet and improving operational efficiency. Under Meyer's leadership, KeyCorp divested non-core businesses and refocused on its commercial and retail banking operations.

A significant milestone in KeyCorp's history came in 2010 when Beth Mooney was appointed CEO, making her one of the first women to lead a top-20 U.S. bank. Mooney continued the company's strategic transformation, emphasizing growth in fee-based businesses like investment banking and wealth management. During her tenure, KeyCorp made several acquisitions, including the 2016 purchase of First Niagara Financial Group, which significantly expanded the company's footprint in the Northeast.

Today, KeyCorp operates as a bank holding company with its primary subsidiary, KeyBank National Association, serving individuals and businesses across a 15-state branch network. The company's operations are organized into two main business segments: Consumer Bank and Commercial Bank. The Consumer Bank caters to individuals and small businesses, offering a range of deposit, lending, and wealth management services, while the Commercial Bank serves middle-market and large corporate clients with lending, cash management, and capital markets products.

Financial Strength and Resilience

KeyCorp's financial performance has demonstrated its resilience in the face of economic challenges. Over the past three years, the company has reported solid financial results, with net income of $967 million in 2023, $1.92 billion in 2022, and $2.62 billion in 2021. The company's revenue has remained relatively stable, totaling $6.21 billion in 2023, $7.03 billion in 2022, and $7.04 billion in 2021.

In the most recent fiscal year (2023), KeyCorp reported revenue of $7.93 billion, net income of $964 million, operating cash flow of $2.9 billion, and free cash flow of $2.76 billion. However, the most recent quarter (Q3 2024) saw a net loss of $410 million, primarily driven by a $918 million loss on the sale of securities as part of a strategic repositioning of the available-for-sale investment portfolio. This resulted in negative operating cash flow of $1.205 billion and negative free cash flow of $1.222 billion for the quarter.

The company's balance sheet remains well-capitalized, with a Common Equity Tier 1 (CET1) ratio of 10.8% as of September 30, 2024, exceeding regulatory requirements. KeyCorp's liquidity position is also strong, with a loan-to-deposit ratio of 71% as of the same date, providing the company with the flexibility to navigate changing market conditions.

As of September 30, 2024, KeyCorp reported $24.07 billion in cash and $95.5 billion in available contingent liquidity, including $37.8 billion in unused secured borrowing capacity at the Federal Reserve Bank of Cleveland and $16.6 billion in unused secured borrowing capacity at the FHLB. The company's debt-to-equity ratio stood at 1.07x, with both current and quick ratios at 1.24x, indicating a solid liquidity position.

Business Segments and Performance

KeyCorp operates through two main business segments: Consumer Bank and Commercial Bank.

The Consumer Bank serves individuals and small businesses throughout KeyCorp's 15-state branch footprint, as well as healthcare professionals nationally through the Laurel Road digital brand. It offers a wide range of services, including 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 segment also provides wealth management and investment services to institutional, non-profit, and high-net-worth clients.

In the third quarter of 2024, the Consumer Bank segment reported net interest income of $584 million and noninterest income of $230 million, totaling $814 million in revenue. The segment's provision for credit losses was $52 million, and it generated $86 million in income from continuing operations. Average loans and leases for the segment were $38.33 billion, while average deposits stood at $86.43 billion.

The Commercial Bank segment is an aggregation of KeyCorp's Institutional and Commercial operating segments. It serves middle market clients within KeyCorp's 15-state branch footprint and operates nationally to provide lending, equipment financing, and banking products to large corporate and institutional clients across various industry sectors. The segment also includes KeyBanc Capital Markets (KBCM), which offers a broad suite of capital markets products and services.

For the third quarter of 2024, the Commercial Bank segment reported net interest income of $460 million and noninterest income of $408 million, totaling $868 million in revenue. The segment's provision for credit losses was $41 million, and it generated $300 million in income from continuing operations. Average loans and leases for the segment were $67.45 billion, with average deposits at $58.70 billion.

Diversified Business Model and Growth Initiatives

KeyCorp's diversified business model, spanning both consumer and commercial banking, has been a key driver of its stability and growth. The company's strategic focus on building customer relationships, expanding its wealth management offerings, and leveraging its capital markets capabilities has enabled it to generate a balanced stream of revenue from both interest and non-interest income sources.

In recent years, KeyCorp has undertaken several initiatives to enhance its competitive position and drive long-term growth. The company's investment in digital banking technologies has improved the customer experience and increased operational efficiency. Additionally, KeyCorp's acquisition of Laurel Road, a leading provider of student loan refinancing and digital banking services, has strengthened its presence in the consumer lending market.

Furthermore, KeyCorp's capital markets division, KeyBanc Capital Markets, has been a consistent contributor to the company's non-interest income, leveraging its expertise in areas such as syndicated finance, debt and equity underwriting, and mergers and acquisitions advisory services. The company has raised its full-year 2024 target for investment banking fees to $600 million to $650 million, with the potential to exceed the high end of that range if pipelines pull through prior to year-end.

Risk Management and Regulatory Oversight

As a large, regional bank, KeyCorp operates under the scrutiny of various regulatory bodies, including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. The company has established robust risk management practices to ensure compliance with evolving regulations and maintain the stability of its operations.

KeyCorp's risk management framework encompasses credit risk, market risk, operational risk, and compliance risk, with dedicated committees and processes in place to identify, measure, and mitigate these risks. The company's conservative approach to risk-taking has helped it navigate periods of economic uncertainty, as evidenced by its relatively low levels of non-performing assets and net charge-offs.

For the full-year 2024, KeyCorp expects the net charge-off ratio to be closer to the high end of the 30 basis point to 40 basis point range. The company anticipates the full-year 2024 provision for credit losses to come in around $400 million, which remains unchanged from previous guidance.

Outlook and Challenges

Looking ahead, KeyCorp faces a range of challenges and opportunities that will shape its future performance. The ongoing low-interest-rate environment and increasing competition from fintech companies and non-bank lenders pose challenges to the company's net interest margins and loan growth. However, KeyCorp's diversified business model, strong capital position, and focus on digital transformation position it well to adapt to these changing market dynamics.

For the fourth quarter of 2024, KeyCorp expects net interest income to be at least 10% higher year-over-year, equating to $1.20 million or better. For the full-year 2024, the company anticipates net interest income to fall in the middle of the guidance range of down 2% to 5%, with about 150 basis points of positive impact from the Scotiabank investment and securities portfolio restructuring.

KeyCorp has positively revised its full-year 2024 average deposit growth guidance to up 1.2% to 2%, including expectations for client deposits to grow 3% to 4%. The company now expects fees, excluding the securities portfolio restructuring impact, to grow 6% or better in 2024. Expenses are expected to increase by approximately 2% in 2024, which includes funding for the company's charitable foundation.

The banking industry has seen relatively flat revenue growth (CAGR of ~2-3%) over the past 5 years, with profitability pressures due to low interest rates. However, the expected rise in interest rates should provide tailwinds for net interest income growth going forward, which aligns with KeyCorp's positive outlook for net interest income in the coming quarters.

Conclusion

KeyCorp's long history, financial strength, and diversified business model have made it a resilient player in the banking industry. The company's strategic initiatives, risk management practices, and adaptability to changing market conditions position it well to continue serving its clients and generating value for its shareholders. As KeyCorp navigates the evolving financial landscape, investors will be watching closely to see how the company leverages its core strengths to capitalize on new opportunities and maintain its competitive edge.

With its recent investments in wealth management and commercial banking, as well as its strategic partnership with Scotiabank, KeyCorp is poised for long-term growth and profitability. The company's management team has demonstrated its ability to navigate through economic cycles and capitalize on emerging opportunities, instilling confidence in KeyCorp's ability to deliver value for its shareholders in the years to come.