KeyCorp sticks to double-digit NII guidance

Ty Wright/Bloomberg

UPDATE: This article includes additional information from analyst notes and KeyCorp's earnings call.

KeyCorp is maintaining its forecast for net interest income growth in 2025, even as it predicts that average loan balances will decline by low- to mid-single digits year-over-year.

On Tuesday, the parent company of KeyBank stuck to what it said at an investor conference in September — that net interest income will rise by approximately 20% compared to the prior year.

At the same time, average loans are expected to decline 2% to 5% for the full year, with year-end 2025 loan balances predicted to come in flat compared with where they ended in 2024, which was $104.7 billion, executives told analysts during the company's fourth-quarter earnings call.

While commercial loans stabilized in the fourth quarter, KeyCorp is currently running off about $3 billion of consumer loans, largely in first-lien mortgages but also including some student loans.

Commercial loan demand is a key factor in hitting the 20% net interest income growth target. But even if that sort of growth doesn't materialize, the company has other ways to meet that target, such as a pickup from a recent securities-book repositioning as well as fixed-asset repricing.

"If we can grow commercial loans as planned, we will be in good shape relative to that 20%," Chief Financial Officer Clark Khayat said on the call. If not, "we'll have other levers to pull."

A surge in net interest income would be a huge plus for Key, which saw its profits underperforming other regional banks in 2023 as it grappled with a relatively large pool of low-yielding securities.

For the fourth quarter, Key's net interest income was $1.1 billion, up 14.3% from $948 million reported in the same quarter of 2023. The $187 billion-asset company, which has been clawing back toward $1 billion of quarterly net interest income for a while, told analysts in October that it was likely to cross the $1 billion threshold during the fourth quarter, helped in large part by a $2.8 billion investment from the Bank of Nova Scotia, the third-largest bank in Canada by assets.

Toronto-based Scotiabank injected $821 million of new capital into Key in August and followed it up with a second and final investment of about $2 billion in December. Scotiabank, which now owns 14.9% of Key, is trying to expand its presence in the United States. Unlike its Canadian peers, Scotiabank has a sizable corporate presence here but doesn't directly touch consumers.

Key used some of the capital influx to remix its securities book two separate times, with the second repositioning taking place in the fourth quarter and impacting the company's profits. It reported a net loss of $279 million, or 28 cents per share, for the quarter ending Dec. 31.

The swing into negative territory — KeyCorp's second net loss in a row — stemmed from a one-time charge of $657 million from the sale of the bonds. In the third quarter, it recorded a one-time charge of $737 million charge from selling bonds and a $447 million net loss.

Revenue for the fourth quarter was $865 million, down nearly 44% from the year-ago period.

The outlook for net interest income was down slightly from the street's expectations, some analysts said in research notes. Some estimates called for growth of 22% year-over-year.

Key's stock declined by as much as 5.5% as of mid-morning Tuesday.

By early afternoon, the decrease had eased somewhat to 4.5%.

CEO Chris Gorman spent part of the call talking about the company's plans to keep investing in people and technology in 2025. Key expects to hire around 60 new wealth management advisors in the new year and increase its technology spending by 10% to $900 million, Gorman said.

In November, the company expanded its commercial banking business into Southern California and Chicago, part of an effort to get more middle-market business clients. To serve the Chicago market, it hired bankers away from rival Huntington Bancshares in Columbus, Ohio.

Total noninterest expenses for 2025 are projected to rise 3% to 5% year over year. In the fourth quarter, noninterest expenses were $1.2 billion, down 10.4% from the same quarter in 2023. The decrease reflected certain charges in the year-ago period that did not recur in the most recent period, including a special Federal Deposit Insurance Corp. fee and efficiency-related expenses.

The expense forecast "was slightly higher than expected," analyst Brian Foran of Truist Securities said in a research note.

Erika Najarian, an analyst at UBS Securities, was curious about whether there was "an appetite" at Key to be more aggressive in adding talent, including commercial bankers that would drive more loan growth, given the size of Scotiabank's total investment and the capital influx.

Key's common equity Tier 1 capital ratio was 12% in the fourth quarter, up from 10.8% in the third quarter of 2024 and up from 10% from the fourth quarter of 2023.

Compensation

KeyCorp CEO Gorman to receive $7.5M bonus after Scotiabank investment

Chris Gorman and four other high-ranking KeyCorp executives have been granted a combined $16.7 million in performance-based equity awards that will vest in two years, as long as the Cleveland-based company meets certain capital requirements and earnings goals.

By Allissa Kline

January 3

"Given you have all this capital and given that there's so much in your balance sheet that's a natural cure to your net interest income I'm wondering [if] there's an appetite … [for] using this capital for … really forward thinking on growth?"

Gorman largely reiterated comments he made earlier on the call, saying Key "will continue to invest in the business" by adding more people and looking to do more bolt-on acquisitions.

One question that popped up was about Gorman's recent retention bonus.

Following the completion of Scotiabank's investment, Gorman and four other high-ranking executives were granted a combined $16.71 million in performance-based equity awards. The bonuses are aimed at boosting top executives' stock ownership levels to "retain the talent the Company needs to continue to generate and deliver long-term shareholder value from the Scotiabank strategic minority investment," the company said in a Dec. 31 regulator filing.

Analyst Mike Mayo of Wells Fargo Securities wanted to know more about the competition for talent upon which the board's compensation committee based its decision to make the awards.

"First of all, just to state the obvious, obviously I have zero impact on any of my compensation," Gorman said. "But what was mentioned in the [filing], which I think is important, is this notion of retention. … I think the board recognizes that we have worked really hard to put ourselves in a position where we've got a great runway in front of us.

"I think the board wanted to make sure that the team was on the field, so to speak," he said.