KeyCorp’s momentum in capital markets activity has executives hopeful about commercial lending over the second half of this year.
The $176 billion-asset company generated $162 million in investment banking and debt placement fees in the first quarter, and executives said they expect this year to be the best ever in that business.
Many of those deals would have ended up on the balance sheet as loans if the climate was different, Chris Gorman, the Cleveland company’s chairman and CEO, said during a conference call to discuss quarterly results.
“Our business model is such that we look out and we figure out the best place and the best markets to serve our clients,” Gorman said. “In many cases, those are [deals] that, all things being equal, we would put on our balance sheet, but the terms potentially are better with other investors."
More midsize companies are looking to fund strategic initiatives, including acquisitions, providing more evidence that things are slowly returning to normal as vaccines become widely available.
Key isn’t the only bank seeing momentum in that area.
“We expect growth in several lines of business, led by middle market as a result of increasing M&A, as well as working capital and [capital expenditure] needs,” James Herzog, chief financial officer at Comerica, said during the Dallas company’s earnings call.
Key’s first-quarter profit rose by 8% from a quarter earlier to $591 million. Comparisons with a year earlier were skewed by the $359 million loan-loss provision Key recorded in the earliest days of the pandemic. The company released $93 million of reserves in the quarter that just wrapped up.
Key reported strong results in several fee-generating businesses, including trust and investment services and consumer mortgages, where the company had $3 billion of originations.
Commercial lending, Key’s biggest business line, is struggling to regain its footing. Commercial loans decreased by 1.8% from the end of last year.
Total loans fell slightly from the fourth quarter, with an increase in consumer portfolios offsetting softer commercial lending.
Gorman, however, said he believes commercial lending will pick up in coming months.
“We think the drivers will be some combination of inventory build, some combination of investment in property, plant and equipment as we go forward,” Gorman said.
Key also reported some early traction with Laurel Road for Doctors, a digital platform it launched on March 31. Since then, the company has had 50,000 online interactions and added 300 relationships with doctors and dentists.
“It’s the early days, but we’re very pleased with the trajectory,” Gorman said.
Key also disclosed plans to close 70 branches, or roughly 7% of its network, with most of the closures expected to take place in the second quarter.
Gorman also touted the company’s recent purchase of AQN Strategies, a client-focused analytics firm.
“We continue to lean into digital,” he said, adding that AQN “aligns with Key’s relationship strategy and underscores our commitment to a data-driven approach to grow our business,” he said.
Key’s asset quality showed improvement. Net charge-offs fell by 16% from a quarter earlier to $114 million. The company also lowered its full-year 2021 charge-off guidance to 0.35% to 0.4% of total loans from the previous projection of 0.5% to 0.6%.
Paul Davis contributed to this report.
