KeyCorp (KEY)

Executive Summary / Key Takeaways

• Scotiabank Investment as Transformational Catalyst: The $2.4 billion strategic minority investment closed in late 2024 is enabling KeyCorp to restructure its securities portfolio and accelerate capital deployment, creating a structural tailwind that management projects will add $270 million to 2025 net interest income and support a 50-basis-point NIM improvement toward a 3.25% target by 2027.

• Commercial Banking Momentum Drives Re-rating: The Commercial Bank segment delivered 27.6% NII growth in Q3 2025, with C&I loans up 7.3% year-to-date to $56.8 billion and investment banking pipelines nearly double year-ago levels, positioning KeyCorp to capture disproportionate share of middle-market activity as M&A markets recover.

• Capital Strength Provides Unusual Optionality: With CET1 at 11.8% (marked at 10.3%, near peer-leading levels), KeyCorp has the firepower to support 10% growth in frontline bankers, complete cloud migration, and return capital through a newly authorized $1 billion buyback program while maintaining defensive flexibility in uncertain macro conditions.

• Clear Path to 15%+ ROTCE by 2027: Management has laid out specific building blocks—NIM expansion, fee compounding, expense discipline, and share repurchases—that they characterize as "low execution risk," targeting returns that would place KeyCorp in the top quartile of regional banks and justify meaningful multiple expansion from current 1.16x price-to-book.

• Risk/Reward Asymmetry Favors Long-term Investors: Trading at 6.4x price-to-free-cash-flow with a 4.5% dividend yield, KeyCorp offers defensive characteristics while undergoing a fundamental transformation that could drive earnings power 30-40% higher over two years, with credit quality remaining resilient (NPA ratio at 63 basis points) despite macro uncertainty.

Setting the Scene: A Bicentennial Bank's Strategic Pivot

KeyCorp, founded in 1849 and headquartered in Cleveland, Ohio, is approaching its 176th anniversary in 2025 by executing the most significant strategic repositioning in its modern history. The bank operates across a 15-state footprint through two primary segments: a Consumer Bank serving individuals and small businesses, and a Commercial Bank targeting middle-market and institutional clients nationally. This geographic concentration in the Midwest and Northeast has historically made KeyCorp sensitive to regional economic cycles and interest rate fluctuations, but the current transformation is fundamentally altering its risk profile and earnings power.

The regional banking industry has faced existential challenges since the SVB crisis, with regulators layering on additional capital and liquidity requirements while deposit costs surged and asset values declined. KeyCorp's response has been counterintuitive: rather than retreating, it has used the Scotiabank (BNS) investment to go on offense. The bank discontinued its government-guaranteed education lending business in 2009, a decision that, while painful then, has allowed management to focus on relationship-based banking with superior risk-adjusted returns. This pattern of disciplined capital allocation defines the current strategy.

What makes this moment distinct is the confluence of three factors: the Scotiabank capital injection providing strategic agility, the completion of core technology modernization enabling efficiency gains, and a deliberate portfolio remix from low-yielding consumer mortgages into higher-returning commercial and industrial loans. The bank is simultaneously shedding its past—running off $600-700 million in mortgages per quarter—while building its future, with commercial loan backlogs nearly double year-ago levels. This matters because it demonstrates that KeyCorp isn't simply riding a rate cycle; it's engineering a structural improvement in its earnings power that will persist through different macro environments.

Technology, Products, and Strategic Differentiation

KeyCorp's competitive moat rests on two pillars that competitors struggle to replicate: deep middle-market relationships and integrated technology platforms that drive client primacy. The bank completed two major core modernization projects in 2024—its commercial loan and derivatives platforms—and is finalizing cloud migration in 2025. This $900 million technology spend (up 10% year-over-year) isn't merely defensive compliance spending; it's enabling the bank to onboard clients faster, price risk more accurately, and deliver a seamless experience across lending, treasury services, and capital markets.

The EasyUp® tool, launched in 2019, exemplifies how technology drives deposit stickiness. By helping clients automatically convert spending into savings, the tool has helped users save over $182 million, with the average household saving $490 annually. This matters because it shows KeyCorp can grow deposits without engaging in destructive rate wars, preserving net interest margin.

The mass affluent wealth segment, launched in 2023, has added 50,000 households, $3 billion in AUM, and over $6 billion in total client assets by Q3 2025. This is significant because wealth management generates fee income that is uncorrelated with interest rates and deepens client relationships beyond simple deposit and loan transactions. With AUM reaching a record $67.9 billion (up 11% year-over-year), KeyCorp is building a durable fee stream that will support returns even if the yield curve inverts again.

In commercial banking, the KeyBanc Capital Markets platform provides a crucial differentiator. The bank raised $50 billion in capital for clients in Q3 2025, retaining only 15% on its balance sheet. This "underwrite and distribute" model allows KeyCorp to monetize client relationships through fees without taking on balance sheet risk, particularly when capital markets offer more advantageous funding than bank loans. When spreads widen and structures change, as CEO Chris Gorman noted, "clients and prospects really go to their banks," giving KeyCorp an advantage over non-bank competitors who lack the flexibility to serve clients across market cycles.

Financial Performance & Segment Dynamics: Evidence of Structural Change

KeyCorp's Q3 2025 results provide compelling evidence that the transformation is working. Adjusted revenues grew 17% year-over-year, while pre-provision net revenue increased for the sixth consecutive quarter. Return on assets surpassed 1%, and the efficiency ratio improved to 61.8%. These aren't marginal improvements; they represent a bank hitting its stride after a period of repositioning.

The segment performance reveals the strategic remix in action. The Consumer Bank generated $152 million in net income, up from $75 million a year ago, with its net interest income increasing by 21.4%. However, average loans declined 7.7% as the bank intentionally ran off low-yielding mortgages. This is the critical trade-off: sacrificing loan growth for margin expansion. Management expects to lean into HELOCs as a growth opportunity, potentially adding $2-3 billion, but the primary focus remains on relationship-based lending rather than commoditized mortgage products.

The Commercial Bank is where the story accelerates. Net income jumped to $367 million from $299 million, powered by a 27.6% increase in NII and 4.3% loan growth. C&I loans now represent 54% of the portfolio, up from 51% at year-end, and have grown $3.9 billion year-to-date. C&I loans carry higher risk-adjusted returns and generate ancillary fee income through treasury management, foreign exchange, and capital markets activity, which is significant for the bank's profitability. The segment's total revenue reached $1.014 billion, demonstrating that KeyCorp can compete effectively against larger super-regionals like PNC and Fifth Third in the middle market.

Fee income growth provides the most durable evidence of competitive positioning. Investment banking and debt placement fees rose 8% year-over-year and 15% year-to-date, with management expecting the second-best year in the bank's history. Trust and investment services fees grew 7%, driven by record mass affluent sales production. Commercial payments fee-equivalent revenue continues growing at a high single-digit rate. This fee momentum demonstrates that KeyCorp isn't simply benefiting from asset repricing; it's deepening client relationships and capturing more wallet share, creating operating leverage that will persist when the rate environment changes.

Credit quality remains resilient despite macro uncertainty. Net charge-offs were 42 basis points, within the 40-45 basis point target range, while nonperforming assets declined 6% sequentially to 63 basis points. The provision for credit losses increased to $107 million, reflecting management's qualitative adjustment for economic uncertainty rather than deterioration in the portfolio. KeyCorp is building reserves prudently while maintaining strong underwriting standards, positioning the bank to weather potential economic weakness without the dramatic credit losses that have plagued some regional peers.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2025 reflects confidence in the structural tailwinds. Net interest income growth is expected at the high end of the 20-22% range, with fourth quarter NIM reaching 2.75-2.80%. Fee income should grow 5-6%, expenses will rise approximately 4%, and the tax rate will be 21-22%. These targets imply positive operating leverage of over 100 basis points and demonstrate that the bank can grow revenues faster than costs even while investing in technology and talent.

The path to 15%+ ROTCE by 2027, as outlined by CEO Chris Gorman, rests on four building blocks. First, improving NIM by another 50 basis points to 3.25% or better, with half coming from mechanical asset repricing and half from execution. Second, compounding fee advantages by leveraging client relationships. Third, maintaining expense discipline through continuous improvement initiatives. Fourth, executing share repurchases to maintain high capital levels while boosting returns. Gorman characterizes this path as "low execution risk," signaling management's conviction that the improvement is driven by identifiable, controllable factors rather than hoping for a favorable rate environment.

Commercial loan backlogs nearly double year-ago levels, with particular strength in energy and healthcare sectors. Management plans to accelerate C&I growth by approximately $1 billion in Q4 2025 and continue that pace into 2026. The M&A pipeline is up materially from the prior quarter, as M&A activity drives ancillary fee income and often leads to larger banking relationships. If middle market M&A volumes recover as expected, KeyCorp is positioned to capture disproportionate share given its expanded senior banker team and national capabilities.

The macroeconomic assumptions underlying guidance are realistic but not pessimistic. Management uses Moody's (MCO) consensus forecast of 1.7% GDP growth in 2025-2026, unemployment peaking at 4.5% in mid-2026, and inflation remaining near 3%. They have made qualitative reserve adjustments for geopolitical uncertainty and potential economic weakness, demonstrating prudence without excessive conservatism that would artificially depress earnings. The bank's balance sheet is positioned to be "fairly neutral to rates" in the short term, with a 50% deposit beta assumption that appears reasonable given the franchise's relationship-based deposit base.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to KeyCorp's transformation is execution failure on the technology and talent investments. The bank is increasing technology spending 10% to $900 million while hiring 60 additional wealth professionals and 10% more senior bankers. These investments are expected to reach full production stride in 12-18 months. If revenue growth doesn't materialize as projected, the expense growth could compress margins and derail the ROTCE trajectory, which is significant given the market is pricing in successful execution; any stumble would likely result in multiple compression.

Commercial real estate exposure, while well-managed, remains a key vulnerability. Office loans represent only 4% of CRE exposure, and 75% of the construction portfolio is multi-family. However, active special servicing balances are elevated at over $11 billion, up 48% year-over-year, with office, multifamily (principally Sunbelt), and lodging in active special servicing. Management expects commercial mortgage servicing fees to decline to $60-65 million in Q4 from $73 million due to lower rates and successful resolutions. If CRE stress broadens beyond the well-identified problem areas, credit costs could exceed expectations and consume capital that would otherwise support growth or returns.

Competition in C&I lending is intensifying. CEO Gorman acknowledged that "pricing on quality loans will continue to be a challenge just based on what I see is excess capacity out there." While KeyCorp has maintained flat pricing year-over-year and isn't stretching on structure, the influx of market participants taking larger hold positions could pressure loan growth or margins. The NIM expansion thesis assumes the bank can continue remixing into higher-yielding C&I loans at attractive spreads; if competition forces yield compression, the 50-basis-point NIM improvement target becomes more challenging.

Deposit beta assumptions carry execution risk. Management assumes a "50s-ish beta" for deposits and benefits from a forward curve showing some steepening. However, if competition for deposits intensifies or if the Fed cuts rates more aggressively than expected, the actual beta could be higher, compressing NIM. CFO Clark Khayat noted that KeyCorp has "purposely not been aggressive on CD rates relative to competition," but this strategy only works if relationship deposits remain sticky. Any shift in consumer behavior toward rate shopping could force the bank to pay up for funding.

Regulatory risk remains ever-present. KeyCorp has faced "layering of regulation on regulation" post-global financial crisis and has adapted by focusing on safety and soundness. However, the bank's stress capital buffer is 3.20% through September 2026, and any adverse stress test results or regulatory changes could increase capital requirements, limiting the ability to repurchase shares or grow loans. The ROTCE trajectory depends on both earnings growth and active capital return; regulatory constraints would force a slower path to the 15% target.

Valuation Context: Pricing the Transformation

At $18.39 per share, KeyCorp trades at 1.16 times book value of $15.82, a discount to direct super-regional peers: PNC (PNC) at 1.41x, Fifth Third (FITB) at 1.49x, Huntington (HBAN) at 1.22x, and Regions (RF) at 1.27x. This discount exists despite KeyCorp's marked CET1 ratio of 10.3% being at or near the top of the peer group and its NIM expansion trajectory being more compelling. The valuation gap suggests the market hasn't fully recognized the durability of the transformation, creating potential for multiple expansion as KeyCorp delivers on its ROTCE targets.

The price-to-free-cash-flow ratio of 6.43x is notably attractive compared to peers (PNC at 13.81x, Fifth Third at 10.18x), reflecting KeyCorp's improved cash generation and capital efficiency.

The dividend yield of 4.46% provides downside protection, though the 101% payout ratio indicates the dividend is temporarily covered by earnings that are still recovering from the securities repositioning losses in 2024. As earnings grow 22% in 2025 and continue expanding toward the 15% ROTCE target, the payout ratio should fall back into the 30-50% target range, making the dividend more sustainable and potentially allowing for increases.

Forward P/E of 11.78x compares favorably to peers (PNC 12.71x, Fifth Third 11.91x) despite KeyCorp's superior growth outlook. This suggests the market is pricing in some execution risk or skepticism about the sustainability of NIM expansion. However, if KeyCorp delivers on its guidance and achieves the 2027 ROTCE target, earnings could be 30-40% higher than current levels, making the forward multiple appear conservative. The key question is whether investors believe management's characterization of the path to 15% ROTCE as "low execution risk."

The valuation asymmetry is clear: if the transformation stalls, KeyCorp trades sideways as a low-return regional bank with a decent dividend. If successful, the combination of earnings growth and multiple expansion could drive 50-70% total returns over two years. The downside is cushioned by the strong capital position and dividend yield, while the upside is levered to commercial banking momentum and successful capital deployment.

Conclusion: A Transformation Story with Defensive Characteristics

KeyCorp's bicentennial celebration coincides with a fundamental repositioning that is transforming it from a rate-sensitive, consumer-heavy regional bank into a commercial banking powerhouse with durable fee income and superior capital efficiency. The Scotiabank investment provided the catalyst, but the execution—remixing the loan portfolio, modernizing core systems, and deepening client relationships—is what will determine success. The bank's ability to grow commercial loans while maintaining pricing discipline, expand wealth management assets by 11% annually, and generate high single-digit fee growth in payments demonstrates a franchise that is gaining share through service quality rather than price competition.

The path to 15%+ ROTCE by 2027 is specific and measurable: 50 basis points of NIM expansion, continued fee compounding, expense discipline, and strategic capital return. Management's confidence in "low execution risk" is supported by six consecutive quarters of improving pre-provision net revenue and credit metrics that remain resilient despite macro uncertainty. The competitive positioning is strengthening, with commercial pipelines nearly double year-ago levels and investment banking backlogs building in energy and healthcare.

For investors, the critical variables to monitor are the pace of C&I loan growth, the trajectory of NIM expansion beyond the mechanical repricing benefits, and the realization of fee income from elevated pipelines. The stock's valuation at 1.16x book value and 6.4x free cash flow provides a favorable entry point for a transformation story that offers both downside protection through capital strength and dividend yield, and meaningful upside through earnings leverage and multiple expansion as KeyCorp proves its ROTCE targets are achievable.