KeyCorp, a leading regional bank headquartered in Cleveland, Ohio, has been steadily fortifying its position in the financial services landscape through a series of strategic initiatives. With a rich history dating back to 1849, KeyCorp has evolved into a diversified financial institution serving individuals, small businesses, and large corporate clients across its 15-state footprint.
Business Overview and History
KeyCorp's roots trace back to 1849 when it was founded as the Society for Savings in Cleveland, Ohio. Over the decades, the company underwent several name changes and strategic acquisitions, including the merger with Old Keybank in 1994 to form the current KeyCorp. In 2004, KeyCorp significantly expanded its presence by acquiring the $58 billion First Niagara Financial Group, making it one of the largest regional banks in the United States.
KeyCorp's growth trajectory has been marked by significant milestones and transformations. In 1958, the company changed its name to KeyBank National Association, signaling its evolution into a more prominent financial institution. The 1990s saw KeyCorp undergo a major expansion, acquiring several large regional banks and becoming one of the largest bank holding companies in the United States. A pivotal moment came in 1994 with the acquisition of Society Corporation, which more than doubled KeyCorp's assets and branch network. In 1998, the acquisition of McDonald & Company Securities expanded KeyCorp's wealth management and investment banking capabilities, diversifying its service offerings.
The early 2000s brought challenges for KeyCorp, particularly during the 2008-2009 financial crisis, which led to significant write-downs and the need for additional capital. In response, the company strategically divested some assets, including the sale of its McDonald Investments brokerage unit in 2010, to refocus on its core commercial and consumer banking businesses. Over the past decade, KeyCorp has concentrated on strengthening its balance sheet, improving operational efficiency, and investing in digital capabilities to enhance customer service. These efforts have included streamlining operations and divesting non-core assets.
Today, KeyCorp operates through two main business segments: the Consumer Bank and the Commercial Bank. The Consumer Bank serves individuals and small businesses by offering a wide range of deposit, lending, and wealth management products and services. The Commercial Bank, on the other hand, caters to middle-market and large corporate clients, providing a full suite of banking solutions, including lending, cash management, and capital markets services.
Financial Performance and Ratios Financials
As of the latest 10-Q filing, KeyCorp reported quarterly net income of $410 million and quarterly revenue of $2.17 billion. The company's net interest margin stood at 2.17%, reflecting the impact of the rising interest rate environment. KeyCorp's common equity Tier 1 capital ratio, a key measure of financial strength, was a robust 10.8% as of September 30, 2024.
For the most recent fiscal year (2023), KeyCorp reported revenue of $7.03 billion, net income of $1.92 billion, operating cash flow of $4.47 billion, and free cash flow of $4.36 billion. In the most recent quarter (Q3 2024), revenue was $642 million, with a net loss of $410 million due to a $918 million loss on the sale of securities as part of a strategic portfolio repositioning. Excluding this one-time item, revenue grew 3% year-over-year. Operating cash flow for Q3 2024 was negative $1.205 billion, and free cash flow was negative $1.222 billion.
Liquidity
In terms of liquidity, KeyCorp maintained a strong deposit base, with total deposits of $150.4 billion as of the end of the third quarter of 2024. The company's loan-to-deposit ratio was a conservative 71%, indicating a well-balanced funding structure. As of September 30, 2024, KeyCorp's debt-to-equity ratio was 1.07x, and the company had $941 million in cash and cash equivalents as of December 31, 2023. The company also has $95.5 billion in available contingent liquidity sources, 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. KeyCorp's current ratio and quick ratio both stand at 1.45x.
Profitability-wise, KeyCorp's return on average tangible common equity, a crucial metric for shareholders, was 16.9% for the third quarter of 2024. The company's efficiency ratio, which measures the ratio of noninterest expense to total revenue, stood at 156.4%, reflecting the ongoing focus on cost management.
Strategic Initiatives and Developments
KeyCorp has been proactive in executing strategic initiatives to enhance its competitive position and drive long-term growth. In August 2024, the company announced a strategic minority investment from The Bank of Nova Scotia (Scotiabank), where Scotiabank agreed to purchase approximately 14.9% of KeyCorp's outstanding common shares for $2.8 billion. This investment provides KeyCorp with additional capital to pursue growth opportunities and optimize its balance sheet.
Moreover, KeyCorp recently completed a significant restructuring of its securities portfolio, selling $7 billion in market value of low-yielding mortgage-backed securities and reinvesting the proceeds into higher-yielding investments. This strategic move is expected to add over $40 million to the company's quarterly net interest income starting in the fourth quarter of 2024.
In addition to the Scotiabank investment and securities portfolio repositioning, KeyCorp has been focusing on organic growth initiatives. The company has seen strong momentum in its fee-based businesses, such as investment banking and debt placement, commercial mortgage servicing, and wealth management. During the third quarter of 2024, investment banking and debt placement fees increased by 21.3% year-over-year, reflecting the company's successful execution of its capital markets strategy.
Furthermore, KeyCorp has been proactive in managing its deposit base, effectively mitigating the impact of the recent Federal Reserve rate cut. The company's deposit beta, or the percentage of the rate cut passed on to customers, was lower than the industry average, allowing KeyCorp to maintain a favorable funding profile.
Risks and Challenges
As with any financial institution, KeyCorp faces a range of risks and challenges that require careful management. These include credit risk, interest rate risk, operational risk, and regulatory compliance risk. The company's exposure to commercial and industrial loans, as well as its commercial real estate portfolio, warrant close monitoring amidst potential economic headwinds.
Additionally, the competitive landscape in the regional banking sector remains intense, with KeyCorp competing against larger national banks, as well as smaller community banks, for both retail and commercial customers. The company's ability to differentiate its product offerings and maintain its competitive edge will be crucial to its long-term success.
Outlook and Conclusion
Despite the ongoing challenges in the banking industry, KeyCorp has demonstrated a strong commitment to its strategic initiatives and a focus on enhancing shareholder value. The company's recent actions, including the Scotiabank investment and the securities portfolio repositioning, are expected to provide a meaningful boost to its financial performance in the coming quarters.
For full-year 2024, KeyCorp expects net interest income to fall in the middle of the guidance range of down 2% to 5%, with about a 150 basis point positive impact from the Scotiabank investment and securities portfolio restructuring. The net interest margin is expected to come in around 2.4% for Q4 2024. Loans are projected to decline 5% to 6% on average for the year, while deposits are expected to grow 1.2% to 2% on average, with client deposits growing 3% to 4%.
KeyCorp anticipates fees, excluding the securities portfolio restructuring, to grow 6% or better for the full year, with expenses up approximately 2%. Net charge-offs are expected to be closer to the high end of the 30 basis point to 40 basis point range, and the provision for credit losses is projected to come in around $400 million, unchanged from prior guidance.
The company is confident in achieving the high end of its previously guided range of $600 million to $650 million for full-year 2024 investment banking fees, with the potential to exceed this range if market conditions remain favorable.
Moreover, KeyCorp's emphasis on organic growth, particularly in its fee-based businesses, suggests a diversified revenue stream that can help offset potential pressure on net interest income. The company's disciplined approach to deposit management and cost control further underscores its ability to navigate the evolving market conditions.
As KeyCorp continues to build on its solid foundation and execute its strategic plan, investors will be closely monitoring the company's ability to deliver sustainable growth, maintain a strong risk profile, and capitalize on emerging opportunities in the regional banking landscape.