Introduction

KeyCorp, one of the largest bank-based financial services companies in the United States, has recently received a strategic minority investment from Scotiabank, a move that is poised to reshape the bank's trajectory. With a history dating back nearly 200 years to Albany, New York, KeyCorp has established itself as a leading provider of deposit, lending, cash management, and investment services to individuals and businesses across 15 states.

Historical Background

KeyCorp's journey to its current position as a major player in the U.S. financial services industry has been marked by significant milestones and strategic decisions. The company's roots can be traced back to the founding of the Albany Savings Bank in 1825, which laid the foundation for its future growth. Throughout the 19th and 20th centuries, KeyCorp expanded its footprint through a series of mergers and acquisitions, gradually extending its presence across the northeastern United States.

A pivotal moment in KeyCorp's history came in 1994 when the company merged with Society Corporation. This transformative merger created one of the nation's largest bank-based financial services companies, combining KeyCorp's extensive branch network and commercial banking expertise with Society's strengths in consumer banking and wealth management. The merged entity retained the KeyCorp name and established its headquarters in Cleveland, Ohio, where it remains to this day.

Navigating Challenges

Like many in the banking industry, KeyCorp faced challenges in the early 2000s, including the aftermath of the dot-com bubble burst and a slowdown in its commercial real estate lending business. The company successfully navigated these headwinds through strategic cost-cutting measures and a renewed focus on its core commercial and consumer banking franchises.

The global financial crisis of 2008-2009 presented another significant test for KeyCorp. However, the company's prudent risk management practices, conservative lending approach, and commitment to maintaining a well-capitalized balance sheet enabled it to weather the storm. Emerging from the crisis, KeyCorp undertook a strategic transformation, divesting non-core business lines and refocusing on its traditional banking operations, which has positioned it as a stronger and more streamlined organization.

Scotiabank's Strategic Investment

In August 2024, KeyCorp announced that it had entered into an Investment Agreement with Scotiabank, under which Scotiabank agreed to make a strategic minority investment in KeyCorp of approximately $2.8 billion. This investment, representing approximately 14.9% of KeyCorp's common stock on a pro forma basis, marks a significant milestone for the company. The first tranche of the investment, amounting to $821 million, was completed in late August 2024, with the remaining $2 billion expected to be received in the first quarter of 2025, subject to regulatory approval.

Financials

The infusion of capital from Scotiabank has already begun to benefit KeyCorp. In the third quarter of 2024, the company reported a net loss of $447 million, or $0.47 per diluted common share, which included a $918 million loss related to the strategic repositioning of its securities portfolio. Excluding this one-time charge, KeyCorp's adjusted net income for the quarter was $290 million, or $0.30 per diluted common share.

One of the key drivers behind KeyCorp's third-quarter performance was the strength of its net interest income, which increased by 7% quarter-over-quarter. This was largely due to the maturation of low-yielding swaps and Treasuries, as well as the proactive management of the company's funding costs. Additionally, KeyCorp continued to see robust growth in its client deposits, which were up 4% year-over-year and 2% sequentially.

The company's fee-based businesses also demonstrated impressive momentum during the quarter. Investment banking and debt placement fees increased by over 20% year-over-year and 36% quarter-over-quarter, reflecting strong performance in syndication, debt, and equity underwriting. The commercial mortgage servicing business also had a record quarter, with active special servicing balances reaching $7.5 billion, providing KeyCorp with unique insights into the commercial real estate market.

Another area of strength for KeyCorp was its wealth management division, where assets under management reached a record $61 billion, up 16% from the prior year. The company's focus on serving the mass affluent segment has paid dividends, with over 5,000 new enrollments and approximately $620 million in assets added to the platform during the quarter.

For the full fiscal year 2023, KeyCorp reported revenue of $6.21 billion, net income of $967 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 significant decline in financial performance, with revenue falling to $642 million, a 58.6% year-over-year decrease. The net loss of $410 million in Q3 2024 contrasted sharply with the $303 million profit in Q3 2023. Both operating cash flow and free cash flow turned negative in Q3 2024, primarily due to the $918 million loss on the sale of securities as part of the strategic portfolio repositioning.

Liquidity and Capital Position

Despite the one-time impact of the securities portfolio repositioning, KeyCorp's capital position continued to strengthen. The company's Common Equity Tier 1 ratio increased to 10.8% as of September 30, 2024, up 35 basis points from the prior quarter. The company's tangible book value also grew significantly, increasing by nearly 16% sequentially.

As of September 30, 2024, KeyCorp reported a debt-to-equity ratio of 1.07 and held $22.8 billion in cash and cash equivalents. The bank maintains strong liquidity, with access to secured borrowing capacity of $54.4 billion, including $37.8 billion from the Federal Reserve Bank of Cleveland and $16.6 billion from the Federal Home Loan Bank. KeyCorp's current ratio and quick ratio both stand at 1.40, indicating a healthy short-term liquidity position.

Business Segments

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

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

For the third quarter of 2024, the Consumer Bank 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 income from continuing operations before taxes was $113 million.

The Commercial Bank 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, providing lending, equipment financing, and banking products and services to large corporate and institutional clients. The Commercial Bank has established expertise in several key sectors, including Consumer, Energy, Healthcare, Industrial, Public Sector, Real Estate, and Technology. It is also a significant national commercial real estate lender and third-party servicer of commercial mortgage loans, as well as a special servicer of commercial mortgage-backed securities (CMBS).

In Q3 2024, the Commercial Bank 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 income from continuing operations before taxes was $382 million.

The Commercial Bank segment also includes KeyCorp's KeyBanc Capital Markets (KBCM) platform, which provides a broad suite of capital markets products and services including syndicated finance, debt and equity underwriting, fixed income and equity sales and trading, derivatives, foreign exchange, mergers and acquisitions advisory, and public finance.

Future Outlook

Looking ahead, KeyCorp's management remains cautiously optimistic about the bank's prospects. The company expects net interest income to be in the middle of its full-year guidance range of down 2% to 5%, with the potential for a 10% or better year-over-year improvement in the fourth quarter. Fees, excluding the impact of the securities portfolio repositioning, are expected to grow by 6% or better for the full year, depending on the capital markets environment.

For the fourth quarter of 2024, KeyCorp anticipates net interest income to be at least 10% higher year-over-year, equating to $1.20 million or better. This guidance includes a $40 million incremental benefit from the September portfolio restructuring and initial Scotiabank investment, as well as a $50 million benefit from fixed rate asset repricing, including the accelerated sale of short-term Treasuries.

Looking further ahead, KeyCorp expects full-year 2025 net interest income to increase by around 20% compared to 2024, with about half of that coming from the full impact of the securities portfolio restructuring. The bank is targeting low to mid-single digit expense growth for 2025, maintaining expense discipline despite the additional capital.

In terms of credit quality, KeyCorp expects the full-year net charge-off ratio to be closer to the high end of the 30 to 40 basis points range, with provision for credit losses projected to be around $400 million for the full year.

While the economic outlook remains uncertain, KeyCorp's diversified business model, prudent risk management, and strategic partnership with Scotiabank position the bank well to navigate the challenges ahead. With the additional capital and resources provided by Scotiabank's investment, KeyCorp is poised to accelerate its growth initiatives, expand its footprint, and capitalize on emerging opportunities in the financial services industry.