KeyCorp expects rising deposit costs to keep eating into its profitability this year, company executives said Thursday after updating investors on what they acknowledged was a "challenging" first quarter.
The Cleveland-based regional bank reported that its net interest income fell to $1.1 billion during the quarter, down 10% from three months earlier, as it paid more to retain its depositors. The bank also reduced its guidance for 2023 net interest income — projecting a fall of 1% to 3% rather than a slight increase — as it expects more pressure on deposit costs.
The good news is that KeyBank's parent company saw slight growth in deposits at a time when investors are
"We feel well prepared to handle the deposit challenges in front of the market right now, and I think our numbers have shown that," CEO Chris Gorman said on the bank's first-quarter earnings call. "I think more than anything, we're probably likely to be more offensive on the deposit side than we've been to date, and we feel well armed to do that."
Rising deposit costs helped drag down Key's net income attributable to common shareholders, which fell to $275 million during the quarter. That was down from $356 million a quarter earlier and $420 million a year ago.
Profits were also hurt by a decline in noninterest income, as fees from investment banking and consumer overdrafts dropped. And because of a weaker economic outlook, which led to a projection that some loans won't be repaid, KeyCorp
"This is a tough quarter for you guys," Wells Fargo Securities analyst Mike Mayo said on the earnings call, asking KeyCorp executives whether it's "as bad as it looks" or whether there are "silver linings."
Gorman responded that there's "no question it was a challenging quarter for us," as the decline in net interest income dragged down earnings.
But, he said, Key has a "clear path" to reverse that decrease by investing in its future and cutting expenses. One example: The company implemented a hiring freeze in November.
Key expects to boost its net interest income in late 2023 and into next year through investments in shorter-dated Treasury securities and the use of swaps. Those investments may drive up net interest income by $1 billion by the first quarter of 2025, executives said.
The earnings report followed a month of turbulence for the banking industry. The failure of Silicon Valley Bank helped drive significant deposit outflows at a handful of other banks and has raised the likelihood that regulators will impose tougher rules on regional banks.
Gorman said that one reason Key's deposits remained stable is that most of its commercial customers use the firm as their primary bank, making outflows less likely.
"Frankly, there wasn't even a lot of angst," Gorman said. "I mean, we obviously did a good job of reaching out to all of our customers, as we always do. But I was very pleased with the stickiness of the deposits in the core deposit base."
Key said it has retained strong capital levels and liquidity, though it expects to carry higher cash balances until markets stabilize. Executives also said that they do not expect to buy back any shares in the near term, partly due to uncertainty about the regulatory fallout from Silicon Valley Bank's failure.
"We don't plan on executing any buybacks until there's clarity as to what the capital framework is going forward," Gorman said.
Regulators are
As new rules are phased in, the bank's ongoing earnings stream will allow Key to build up capital organically, executives said.
"Under all the scenarios that we've looked at, we feel confident that Key can be in a position to meet both the regulatory and the capital requirements going forward," Gorman said.
