Executive Summary / Key Takeaways

• Strategic Transformation Underway: KeyCorp is executing a deliberate strategy of balance sheet repositioning and aggressive investment in high-priority fee businesses and technology, fueled by a significant $2.8 billion Scotiabank minority investment. This initiative is designed to accelerate capital and earnings trajectory, enhancing profitability and market share in targeted segments.
• Robust Financial Performance and Outlook: The company reported strong Q2 2025 results with diluted EPS of $0.35, revenues up 21% year-over-year, and pre-provision net revenue growing over 60% since Q1 2024. Management projects full-year 2025 net interest income (TE) growth of 20-22% and adjusted noninterest income growth of 5% or better, underpinned by structural tailwinds and strong business momentum.
• Differentiated Technology and Business Model: KeyCorp leverages a relationship-based business model, industry-specific verticals, and a decade-long commitment to fintech and embedded banking. Ongoing investments in cloud migration, AI/machine learning, and core system modernization aim to drive efficiency, enhance client experience, and create a competitive moat against larger, more generalized rivals.
• Strong Capital and Liquidity Position: With an estimated CET1 ratio of 11.7% and a marked CET1 ratio of 10% at Q2 2025, KeyCorp boasts a leading capital position and ample liquidity. This financial strength provides resilience in uncertain macroeconomic conditions and strategic optionality for organic growth, tuck-in acquisitions, and future capital returns.
• Improving Credit Quality and Growth Momentum: Credit metrics are stable to improving, with net charge-offs, criticized loans, and delinquencies declining sequentially in Q2 2025. Commercial loan growth is accelerating, with the full-year 2025 target already achieved by mid-year, driven by project-based lending in renewables and affordable housing, and new client acquisition.

KeyCorp's Enduring Legacy and Strategic Pivot

KeyCorp, celebrating its bicentennial in 2025, stands as a testament to enduring financial service, evolving from its 1825 founding into a significant regional banking force. Operating across a 15-state footprint for its Consumer Bank and nationally for its Commercial Bank, KeyCorp serves a diverse client base ranging from individuals and small businesses to large corporate and institutional clients. The company's history is marked by strategic adaptations, including a significant reduction in construction loan exposure after the 2008 financial crisis and the discontinuation of its education lending business in 2009, demonstrating a proactive approach to risk management and portfolio optimization.

The current investment narrative for KeyCorp is defined by a strategic pivot initiated in late 2024. A transformative $2.8 billion minority investment from Scotiabank (BNS) provided the catalyst for a significant balance sheet repositioning. This involved selling approximately $10 billion in market value of low-yielding securities and reinvesting the proceeds into more liquid, shorter-duration assets at higher yields. This strategic maneuver was "well timed," enabling KeyCorp to accelerate its capital and earnings trajectory and enhance its strategic agility in a dynamic macroeconomic environment. This repositioning is expected to add a substantial $270 million to 2025 net interest income, creating a "clearly defined structural net interest income tailwind."

The broader industry landscape presents both opportunities and challenges. Regional banks like KeyCorp face intense competition from larger national banks such as JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as other regional players like PNC Financial (PNC). These larger institutions often benefit from superior scale, extensive branch networks, and greater technological sophistication. Indirect competition from fintech companies and online banks also pressures traditional banking models, particularly in digital-first services. However, KeyCorp's relationship-based model and focus on specific industry verticals allow it to carve out competitive niches. For instance, while precise, directly comparable market share figures for all niche competitors are not publicly detailed, KeyCorp's strong performance in commercial lending and wealth management suggests effective penetration in its chosen segments.

Technological Edge: Fueling Efficiency and Client Engagement

KeyCorp's strategic responses to competitive pressures and evolving client needs are deeply rooted in its commitment to technological differentiation and innovation. The company has pursued a decade-long strategy of investing in fintech, becoming an early adopter of embedded banking capabilities. This core technology allows KeyCorp to seamlessly integrate banking services directly into clients' business processes, offering tangible benefits such as streamlined cash management, improved payment processing, and enhanced financial workflow automation. This capability is particularly valuable for commercial clients, fostering deeper relationships and sticky deposits.

The company's R&D initiatives are focused on continuous improvement and modernization. In 2024, KeyCorp completed two major core system modernization projects, upgrading its commercial loan platform and derivatives platform. Concurrently, it made significant progress on its cloud migration journey, with plans to complete this in 2025. Currently, all but two major systems and half of its applications have been migrated to a hybrid cloud environment. This migration is not merely an IT upgrade; it aims to enhance operational efficiency, improve data analytics capabilities, and provide a more agile and resilient infrastructure. The company plans to increase its overall technology spend by approximately 10% to $900 million in 2025, with a focus on "transform or change the bank spend." This investment is designed to make it "easier for our clients to bank with Key and easier for our teammates to better serve the needs of our clients."

KeyCorp also leverages advanced analytics, robotic process automation, and machine learning, as demonstrated by its performance during the PPP program. These technologies contribute to a competitive moat by enabling more efficient back-office operations, better risk assessment, and personalized client solutions. For investors, this technological roadmap is critical. It underpins KeyCorp's ability to drive operating leverage, enhance profitability through lower costs and improved service delivery, and maintain relevance in an increasingly digital financial landscape. While larger competitors like JPMorgan Chase and Bank of America may have greater absolute tech budgets, KeyCorp's targeted investments and strategic partnerships (such as its equity investment in payment cycle management pioneer Qolo) allow it to punch above its weight in specific areas, fostering a more agile and client-centric approach.

Financial Transformation: Capitalizing on a Repositioned Balance Sheet

KeyCorp's financial performance in Q2 2025 reflects the early success of its strategic repositioning. The company reported diluted earnings per share of $0.35, with net income from continuing operations attributable to common shareholders reaching $387 million. Revenues surged 21% year-over-year, while expenses, adjusted for a charitable contribution, increased a more modest 6%. This disparity drove pre-provision net revenue (PPNR) up by $44 million sequentially, marking the fifth consecutive quarter of PPNR growth and an aggregate increase of over 60% since Q1 2024.

A key driver of this performance was net interest income (NII). Tax-equivalent NII in Q2 2025 was $1.15 billion, representing a 4% sequential increase and a robust 28% year-over-year jump. The net interest margin (NIM) expanded by 8 basis points sequentially to 2.66%. This NII and NIM expansion was primarily attributed to proactive deposit beta management, the repricing of fixed-rate assets, maturing swaps, and solid commercial loan growth. Interest-bearing deposit costs decreased by 9 basis points during the quarter, with total deposit costs managed below 2%. The cumulative down beta reached the mid-50% range, matching the terminal beta from the rising rate cycle, demonstrating effective funding cost management.

The loan portfolio also showed positive trends, with average loans increasing by $1.4 billion sequentially and $1.6 billion on a period-end basis in Q2 2025. Commercial and Industrial (C&I) loans grew $1.7 billion on a spot basis, and Commercial Real Estate (CRE) loans increased by $0.5 billion. This growth was partially offset by the intentional runoff of lower-yielding consumer loans, particularly residential mortgages, which management expects to continue at $600-$700 million per quarter. This strategic remixing of the loan portfolio towards higher-yielding commercial assets is a critical component of KeyCorp's NII growth strategy. The company's strong capital position, with an estimated CET1 ratio of 11.7% and a marked CET1 ratio of 10% at June 30, 2025, provides ample capacity to support this loan growth. Furthermore, KeyCorp's historically low loan-to-deposit ratio of 70% at the start of the year, coupled with $4-5 billion in excess liquidity, offers significant financial flexibility.

Differentiated Growth Engines: Fee Businesses and Targeted Expansion

KeyCorp's strategic focus extends beyond NII, with a strong emphasis on growing its high-priority fee-based businesses. Noninterest income increased 10% year-over-year in Q2 2025, driven by these differentiated segments. Investment banking and debt placement fees were particularly strong, up 41.3% year-over-year to $178 million in Q2 2025, reflecting increased syndications, equity new issue underwriting, and commercial real estate activities. The first half of 2025 marked the second-best in the company's history for investment banking, with pipelines remaining "historically elevated." This performance underscores KeyCorp's expertise in capital markets, where it raised over $30 billion of capital for clients in Q2 2025, retaining 22% on its balance sheet.

The wealth management business continues its impressive trajectory, with assets under management (AUM) reaching a record $64.2 billion in Q2 2025, driven by positive cash inflows and market impacts. Sales production in the mass affluent segment was record-setting in the first half of 2025, demonstrating strong traction in a segment where KeyCorp sees a "huge opportunity" given that only about 10% of its 1 million retail households with investable assets of $0.5 million to $2 million currently have an investment relationship. The company's commitment to this area is further evidenced by plans to increase frontline bankers and client advisers by roughly 10% this year, including wealth managers.

Commercial Payments fee equivalent revenue grew high single digits year-over-year in Q2 2025, reflecting the company's decade-long investment in this area and its early adoption of embedded banking capabilities. The third-party commercial mortgage servicing business also continued its strong performance, with named special servicing balances reaching record levels and active special servicing balances near record levels at approximately $11 billion, up 59% year-over-year. This countercyclical business provides unique insights into the commercial real estate market, identifying areas of stress such as office, multifamily (primarily in the Sunbelt), and a recent surge in lodging.

KeyCorp's middle market expansion, with new teams in Chicago and Southern California, has already driven new client growth, loan volumes, payments, and investment banking business. This targeted geographic and industry vertical approach allows KeyCorp to leverage its specialized expertise and integrated platform, attracting talent and clients.

Disciplined Risk Management: A Foundation of Stability

KeyCorp's commitment to disciplined risk management provides a crucial foundation for its growth strategy, particularly in a "dynamic and complex macro environment." The company's continuous focus on maintaining risk discipline has positioned it to perform well across business cycles. Credit metrics are stable to improving, with net charge-offs, criticized loans, and delinquencies all declining from Q1 2025 levels. Nonperforming assets (NPAs) were essentially stable, and overall credit migration improved for the sixth consecutive quarter, with commercial upgrades exceeding downgrades. Net charge-offs are tracking at the low end of the company's current annual outlook of 40-45 basis points.

The provision for credit losses in Q2 2025 was $138 million, including $102 million of net charge-offs and a $36 million reserve build. Approximately half of this build was attributed to loan growth and mix shift, with the remainder reflecting the net impact of macroeconomic scenario deterioration. Management acknowledged reversing some qualitative reserve adjustments made in Q1 2025, as the uncertainty is now reflected in the Moody's macroeconomic scenario. The current economic outlook, based on Moody's May 2025 Consensus forecast, anticipates U.S. GDP growth of 1.2% for 2025 and 1.5% for 2026, with the national unemployment rate peaking at 4.6% in mid-2026.

Specific areas of credit watch include leveraged companies (which constitute only 2-3% of KeyCorp's loan portfolio) and sectors dependent on Medicare funding, such as hospitals. The company's commercial real estate portfolio is closely monitored, with insights from its third-party special servicing business indicating active special servicing in office, Sunbelt multifamily, and a recent surge in lodging. KeyCorp's exposure to tariffs is also under review, with a top-down view suggesting that only 3% of its $56 billion C&I portfolio is significantly impacted directly. The Chief Risk Officer, Mohit Ramani, affirmed that loan growth is achieved "without stretching our risk appetite," through careful monitoring of weighted average risk ratings and policy exceptions.

Competitive Arena: Strengths, Vulnerabilities, and Strategic Responses

KeyCorp operates in a highly competitive financial services landscape, facing direct competition from larger national banks like JPMorgan Chase, Bank of America, and Wells Fargo, as well as regional peers such as PNC Financial. Indirect competition comes from fintechs and online banks.

KeyCorp's competitive advantages, or moats, are rooted in its strong community banking focus, extensive regional network, and emphasis on personalized financial wellness services. This approach fosters strong customer loyalty, particularly among small and middle-market businesses, leading to recurring revenue and potentially superior margins through efficient local operations. For instance, KeyCorp's regional network allows for greater pricing power in niche markets, and its community development financing initiatives differentiate it from larger, more generalized institutions. This localized strategy exploits the potential weakness of larger banks in providing personalized service to smaller businesses, leading to improved market share in regional segments.

However, KeyCorp faces vulnerabilities due to its smaller scale and potential technological gaps compared to its largest rivals. While KeyCorp is investing heavily in technology, major banks like JPMorgan Chase and Bank of America possess significantly larger budgets and broader digital platforms, enabling them to offer more seamless, integrated services and achieve greater operational efficiency. For example, KeyCorp's gross profit margin of 49.82% and net profit margin of 1.91% are notably lower than JPMorgan Chase's (59% gross, 22% net), Bank of America's (50% gross, 14% net), Wells Fargo's (62% gross, 16% net), and PNC's (59% gross, 17% net). Similarly, KeyCorp's P/E ratio of 118.63 suggests higher market expectations for future growth compared to its peers (JPM: 11.78, BAC: 12.54, WFC: 13.08, PNC: 13.07), but its lower profitability margins indicate a need for continued operational improvement to justify this valuation. Its lower Debt/Equity ratio of 0.76 compared to peers (JPM: 2.18, BAC: 2.23, WFC: 1.57, PNC: 1.13) indicates a more conservative financial structure.

The banking industry's high capital requirements and stringent regulations act as significant barriers to entry, which generally favor larger, more established players. While these barriers protect KeyCorp from new entrants, they also amplify the competitive threat from larger rivals whose strategies leverage scale. KeyCorp strategically responds to these forces by focusing on its industry verticals, where its specialized expertise and integrated platform create value that transcends simple lending. Management acknowledges that capital markets activity and private credit markets can "disintermediate the banks," but also asserts that banks offer greater flexibility in choppy markets when spreads widen, positioning KeyCorp to serve clients when other funding sources become less accessible.

Outlook and Strategic Trajectory: Charting a Course for Outsized Returns

KeyCorp's outlook for 2025, revised upwards in Q2 2025, reflects confidence in its strategic repositioning and underlying business momentum. The company now expects full-year average loans to be down 1-3% (an improvement from the prior guidance of down 2-5%), with ending loans projected to be up approximately 2% versus year-end 2024. Commercial loans, a key focus, are expected to grow about 5% on a period-end basis, with the full-year target already achieved by June 30, 2025. This growth is anticipated to be broad-based, driven by renewables, affordable housing, healthcare, and public sector projects, alongside new client acquisition. Management also foresees a "significant ramp up in CapEx" in the second half of 2025, fueled by 100% bonus depreciation for private companies, a factor not fully embedded in current guidance, suggesting potential upside.

The net interest income (TE) is projected to grow 20-22% for the full year 2025, with a Q4 2025 exit rate NII expected to be 11% or better year-over-year, and a NIM of approximately 2.75%. This NII growth is largely "hardwired" due to the 2024 securities repositioning and maturing swaps. Adjusted noninterest income is expected to grow 5% or better, contingent on capital markets conditions remaining constructive and healthy pipelines converting to revenue. Adjusted noninterest expense is guided to increase 3-5%, with management planning for the midpoint, reflecting continued investments in frontline bankers (targeting a 10% increase) and technology (a 10% increase to $900 million in tech spend).

Credit quality is expected to remain stable to improving, with net charge-offs in the 40-45 basis point range and NPAs and criticized loans projected to decline over the year, assuming a constructive macroeconomic environment. Management expresses confidence that the company can achieve a 3% NIM by the end of 2026, driven by continued commercial loan growth, the runoff of lower-yielding consumer mortgages, and favorable yield curve dynamics. KeyCorp's strong capital and liquidity position, coupled with its strategic investments in people and technology, are designed to provide resilience and optionality, allowing the company to capitalize on market dislocations and drive "outsized growth and operating leverage" in the coming years.

Conclusion

KeyCorp is in the midst of a compelling strategic transformation, leveraging a substantial capital infusion and a disciplined approach to balance sheet optimization to unlock significant earnings potential. The company's recent financial performance, particularly the robust growth in net interest income and noninterest income, underscores the effectiveness of its repositioning efforts and targeted investments. By leaning into its relationship-based business model, enhancing its technological capabilities, and expanding its high-priority fee businesses, KeyCorp is building a more resilient and profitable franchise.

The revised 2025 guidance, signaling strong NII growth and improving loan trends, reflects management's confidence in the structural tailwinds and operational momentum. While macroeconomic uncertainties and competitive pressures persist, KeyCorp's strong capital base, ample liquidity, and improving credit profile provide a solid foundation. The company's strategic focus on technology-driven efficiency, specialized industry verticals, and personalized client engagement positions it to differentiate itself and capture market share in a dynamic financial landscape, ultimately charting a course for enhanced shareholder returns.