Business Overview and History
KeyCorp (KEY) is a diversified financial services company that has been serving clients for over 150 years. With a focus on commercial and consumer banking, the company has established itself as a trusted partner for businesses and individuals across its 15-state footprint. Despite the challenges posed by the evolving economic landscape, KeyCorp has demonstrated its resilience and adaptability, positioning itself for continued success.
KeyCorp traces its roots back to 1849 when it was founded as The Society for Savings in Cleveland, Ohio. Over the decades, the company has undergone various mergers and acquisitions, including the landmark 2016 merger with First Niagara Financial Group, which significantly expanded its presence in the northeastern United States. Today, KeyCorp operates through two primary business segments: Consumer Bank and Commercial Bank.
The Consumer Bank serves individuals and small businesses, offering a wide range of deposit products, lending solutions, and wealth management services. It also caters to healthcare professionals nationally through its Laurel Road digital brand. The segment provides personal finance and financial wellness services, mortgage and home equity products, student loan refinancing, credit cards, treasury services, and business advisory services. Additionally, it offers wealth management and investment services to assist institutional, non-profit, and high-net-worth clients with their banking, trust, portfolio management, charitable giving, and related needs.
The Commercial Bank is an aggregation of KeyCorp's Institutional and Commercial operating segments. It is a full-service corporate bank focused principally on serving the borrowing, cash management, and capital markets needs of middle market clients within KeyCorp's 15-state branch footprint. The Institutional operating segment operates nationally, providing lending, equipment financing, and banking products and services to large corporate and institutional clients. The Commercial Bank has established expertise in various sectors, including Consumer, Energy, Healthcare, Industrial, Public Sector, Real Estate, and Technology.
The Commercial Bank also includes KeyBanc Capital Markets (KBCM), 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.
One of the key strengths of KeyCorp is its diversified revenue streams. As of September 30, 2024, the company's net interest income and noninterest income each accounted for approximately 50% of its total revenue, providing a well-balanced and stable income source. The company's focus on fee-based businesses, such as wealth management and investment banking, has also been a driving force behind its consistent financial performance.
KeyCorp's history of growth and expansion is notable, particularly during the 1980s and 1990s when it acquired several regional banks and expanded its presence across the Northeast, Midwest, and West Coast. Significant milestones during this period included the acquisition of Society Corporation in 1994 and the merger with Old KeyCorp in 1995, which helped transform the company into a diversified financial services provider with a national footprint.
The early 2000s presented challenges for KeyCorp as it navigated the fallout from the dot-com bubble and economic slowdown. However, the company's focus on prudent risk management and continued investment in its commercial, consumer, and wealth management businesses allowed it to weather these difficulties. This strategic approach also positioned KeyCorp to emerge from the Great Recession of 2008-2009 in a relatively strong position compared to many of its peers.
In the 2010s, KeyCorp undertook additional strategic moves to optimize its business model, including the divestiture of its education lending business in 2009. Throughout this period, the company maintained a commitment to controlling costs and maintaining a strong balance sheet, which has contributed to its long-term stability and success.
Financial Performance and Ratios
KeyCorp has demonstrated solid financial performance over the years, despite the challenges posed by the COVID-19 pandemic and the evolving economic landscape. As of the most recent quarter ended September 30, 2024, the company reported net income of $410 million and revenue of $1.22 billion.
For the full fiscal year 2023, KeyCorp reported revenue of $7.03 billion and net income of $1.92 billion. The company's operating cash flow (OCF) for 2023 was $4.47 billion, while free cash flow (FCF) stood at $4.36 billion.
In the third quarter of 2024, KeyCorp's revenue was $642 million, down 5.9% year-over-year. Net income for the quarter was -$410 million, compared to $303 million in Q3 2023. OCF for Q3 2024 was -$1.21 billion, compared to $492 million in Q3 2023, while FCF was -$1.22 billion, compared to $370 million in Q3 2023. The decline in revenue, net income, OCF, and FCF was primarily driven by a $918 million loss on the sale of securities as part of the company's strategic portfolio repositioning. Excluding this one-time item, revenue grew 3% year-over-year, reflecting continued momentum in fee income.
The company's capital position remains strong, with a Common Equity Tier 1 (CET1) ratio of 10.8% as of September 30, 2024, well above the regulatory minimum. This strong capital base has allowed KeyCorp to maintain a steady dividend, which currently stands at $0.205 per common share.
In terms of financial ratios, KeyCorp's return on assets (ROA) stood at 0.78% and its return on equity (ROE) was 9.70% as of the most recent quarter. The company's efficiency ratio, a measure of operational efficiency, was 70.2% for the same period, indicating a well-managed cost structure.
Liquidity and Solvency
KeyCorp's liquidity position remains robust, with a loan-to-deposit ratio of 71% as of September 30, 2024. The company's available contingent liquidity, which includes unpledged securities, net balances of federal funds sold, and unused secured borrowing capacity, totaled $95.5 billion as of the same date.
In terms of solvency, KeyCorp's debt-to-equity ratio was 1.55 as of September 30, 2024, indicating a prudent capital structure. The company's interest coverage ratio, a measure of its ability to service its debt, stood at 3.30 for the same period, further highlighting its financial stability.
KeyCorp's cash and short-term investments totaled $24.07 billion as of September 30, 2024. The company has 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 (FHLB). KeyCorp's current ratio and quick ratio both stood at 1.55x as of the latest reporting period.
Segment Performance
In the third quarter of 2024, the Consumer Bank's net interest income on a taxable-equivalent basis was $584 million, up from $534 million in the same period in 2023. Noninterest income was $230 million, down from $241 million in the prior year quarter. The provision for credit losses for the Consumer Bank was $52 million, up from $14 million in the third quarter of 2023. For the nine months ended September 30, 2024, the Consumer Bank's net interest income on a taxable-equivalent basis was $1.65 billion, and noninterest income was $689 million.
The Commercial Bank's net interest income on a taxable-equivalent basis was $460 million in Q3 2024, up from $446 million in the same period in 2023. Noninterest income was $408 million, up from $363 million in the prior year quarter. The provision for credit losses for the Commercial Bank was $41 million, down from $68 million in the third quarter of 2023. For the nine months ended September 30, 2024, the Commercial Bank's net interest income on a taxable-equivalent basis was $1.27 billion, and noninterest income was $1.17 billion.
Guidance and Outlook
KeyCorp has provided guidance for the full-year 2024, indicating that it expects net interest income to decline by 2% to 5% compared to the previous year, with the decline likely to fall in the middle of this range. This includes about 150 basis points of positive impact from the Scotiabank investment and securities portfolio restructuring. The company anticipates that its net interest margin will be around 2.4% for Q4 2024.
In terms of balance sheet expectations, KeyCorp projects loans to be down 5% to 6% for the full year 2024, while deposits are expected to grow 1.2% to 2%, with client deposits growing 3% to 4%.
The company expects its noninterest income, excluding the impact of the recent securities portfolio repositioning, to grow by 6% or better, depending on the capital markets environment. KeyCorp is confident it will hit the high end of its full-year target for investment banking fees of $600 million to $650 million, with an opportunity to exceed the high end if pipelines pull through prior to year-end.
In terms of expenses, KeyCorp expects a 2% increase in 2024, which includes the funding of its charitable foundation. The company's provision for credit losses is expected to be around $400 million for the full year, in line with its previous guidance. Net charge-offs are anticipated to be closer to the high end of the 30 basis point to 40 basis point range.
Looking ahead to 2025, KeyCorp expects net interest income to grow around 20%, with about half of that coming from the full impact of the securities portfolio restructuring.
Industry Trends and Competitive Position
Key industry trends affecting KeyCorp include the rising interest rate environment, which is putting pressure on net interest margins across the banking sector. However, KeyCorp has been proactive in managing its deposit costs and asset yields to mitigate the impact. The company is also seeing strong momentum in its fee-based businesses, such as investment banking, wealth management, and commercial mortgage servicing.
KeyCorp operates primarily within the United States and does not break out performance by geographic market. There are no major scandals, short seller reports, or CEO departures to report for the company.
Conclusion
KeyCorp's long history, diversified business model, and strong financial position have enabled the company to navigate the challenging economic environment with resilience. The company's focus on commercial and consumer banking, coupled with its growing fee-based businesses, has contributed to its consistent financial performance. As KeyCorp continues to execute its strategic initiatives and adapt to the evolving market conditions, it remains well-positioned to deliver value to its shareholders. The company's proactive approach to managing its balance sheet, as evidenced by the recent securities portfolio restructuring, and its strong guidance for future performance demonstrate its commitment to long-term growth and stability in the face of ongoing economic challenges.