KeyCorp is reaping some early benefits from its partnership with Canada's Bank of Nova Scotia, a top executive said Monday after the company announced a sooner-than-expected strategy shift.
The Cleveland-based bank, fresh off an initial $800 million investment by Scotiabank, said that it used some of the wiggle room from that added capital to rework its bond portfolio.
The restructuring will lead to a $700 million hit in the third quarter, but Chief Financial Officer Clark Khayat said the bank got rid of some low-yielding bonds and was able to invest in more attractive opportunities.
KeyCorp, the $187 billion-asset parent company of KeyBank, made the trade sooner than its executives had expected, which means the bank's profitability should move closer to the level of its peers "sooner rather than later," Khayat said.
He also highlighted other less tangible ways the Scotiabank deal is helping KeyCorp, saying that the partnership has been "hugely rejuvenating for our bankers" as they fight for more business.
"As much as you tell them to go play offense, this makes it a little bit easier psychologically," Khayat said at a Barclays conference.
Key, whose stock has struggled since last year due to hampered profitability, saw its stock price rise 3% Monday after it announced the bond-restructuring trade. The bank bought a large chunk of bonds when interest rates were low, saddling itself with securities that pay relatively little in today's higher-rate environment.
It sold some $7 billion in bonds that it described in a securities filing as "low-yielding," since they had an average yield of 2.3%. The sales are expected to lead to an after-tax hit of $700 million this quarter.
The move wasn't a complete surprise, since the Scotiabank deal gave Key the "flexibility for such a repositioning," Piper Sandler analyst Scott Siefers wrote in a note to clients.
The Canadian bank, which completed the first leg of its investment late last month, now owns 4.9% of KeyCorp. A follow-on investment of $2 billion, which still needs regulatory approval, would lead to Scotiabank controlling 14.9% of Key.
Key had planned to hold off on the bond trade until the entire $2.8 billion investment closed, but it opted to complete about half of the restructuring last week. Part of the reasoning was that it would be tough to "move that many bonds that quickly" if they were all sold at once, Khayat said. The portfolio that the bank sold consisted of commercial mortgage obligations and commercial mortgage-backed securities.
Analysts have described Scotiabank's investment in Key as a cautious expansion in the United States, where it has a sizable corporate presence but, unlike some Canadian rivals, doesn't directly touch consumers. Toronto-Dominion Bank, the Bank of Montreal and the Royal Bank of Canada all have U.S. branch footprints.
Khayat was asked Monday whether the Scotiabank deal will preclude another bank from buying Key, but he said that the U.S. company has kept "strategic flexibility." If the Federal Reserve signs off on the Scotiabank deal, the Canadian bank will get two seats on Key's 15-member board.
That structure gives Key's leadership the ability to make the right decision for all Key shareholders, rather than "just 14.9% of them," Khayat said.
The implication was that if the right acquisition offer came along from a company other than Scotiabank, the two Key directors appointed by Scotiabank would be outnumbered by the 13 other board members.
"If you walk down that path and the right transaction were to come along for Key, then our board would do the right thing and make the decision that makes the most sense to all of our shareholders," Khayat said.
In the meantime, Khayat said there are several "synergies" between Key and Scotiabank that could bolster their respective businesses. Scotiabank's footprint includes not only its Canadian home base, but also Mexico and other parts of Latin America.
Key has "a lot of U.S.-based clients who do business in Canada and Mexico," and partnering with Scotiabank makes for an "easy handoff" to a trusted company, Khayat said.
In addition, Key may be able to help Canadian real estate clients of Scotiabank who want to expand in the United States.
"Early stage on that, but we're excited about the potential," Khayat said.
