KeyCorp (KEY) Earnings Call Transcript & Summary

There you go. Up next, we have KeyCorp. I'll get the disclosure out of the way, which is, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. And with that out of the way, we're delighted to have with us today from KeyCorp, Clark Khayat, CFO; and Dan Heberle, President of KeyBank's Real Estate Capital business. Thanks so much for joining us.

Thanks for having us.

So Clark, I wanted to start with you on a more bigger picture question. One of the advantages that Key has had over peers is a mix of fee-based businesses, right? You get 40% of revenues from fees. You're well established in capital markets, payments, wealth management. And a couple of weeks ago, Chris spoke about your strategic focus of driving more fee-based capital-light revenues. So what I wanted to start with is how are you working with clients to expand their relationship with Key to leverage all of the services that you can provide? And specifically, what does success look like for you? And what metrics do you track on this?

Sure. So -- and I'll ask Dan to jump in on some of this stuff. But I think, first of all, it's really a start with client selection, right? You want to pick clients who value the relationship and the products we have and that we can be relevant to in an important way. Secondly, we really focus on primacy. So we've been talking about that for a long time. It's not necessarily fees, but it's obviously critical to the customer relationship. And then you start to think about our balance sheet strategy of lending to high-quality borrowers and then monetizing that through some of the fees. So on the consumer side, wealth, obviously, $57 billion of assets under management, a real push into mass affluent where we've seen a lot of traction in the last year. On the commercial side, right off the deposit, you're talking about payments and a series of now almost a decade of pretty consistent investment there. We just launched something called Virtual Account Management, so we're continuing to fine-tune some of the capabilities. And then obviously, the capital markets stuff is sort of well known. But again, it is starting with clients who have needs that we can serve appropriately and then making sure we're just -- we're getting in front of them the right way and doing the right things. And I think some more recent examples would be things like our Blackstone relationship on the asset forward flow arrangement again, allows us to serve more clients, do it in a really easy way. And then a business we don't talk a lot about, I mean there's been a lot in the last year of like stay away from commercial real estate. That's obviously an incredibly important business to us, and we think we're really good at it. And a component of that is our commercial servicing business, right? That's a great source of fee income, a great source of escrow deposits and again, just another place where we have targeted scale, and we're really happy about it. But I'd ask Dan to kind of jump in on pieces of that because he actually gets a [indiscernible].

I'd echo what Clark said. It really does start with client selection. We look for clients where we can be relevant and frankly, folks that have a growth orientation. So we know they're going to be needing the types of products and services that we can help them with, whether that's capital, whether it's capital markets, whether it's deposits. As Clark mentioned on the loan service and asset management side, that's been a great growth area for us of late. We'll talk more about it later, but that's really our third-party loan servicing platform. So we service commercial real estate loans on a primary master basis and on a special servicing basis, which has become certainly much more important these days is real estate as an industry goes through a little bit of a transition and a rough patch.

Yes. And I'm looking forward to some of the insights you have there as well. And as we stay on the fee side, wealth capital markets. A lot of these businesses you're already at scale, but they also come with a high expense ratio and you are expecting to bring down the expense ratio to the mid-50s while also raising the share of some of these businesses. So can you talk about what gets you to that lower efficiency ratio over time?

Yes. So one -- I'd probably say the 2 places I'm more focused on. One is just going to be ROTCE. These are great return businesses at the expense, no pun intended of kind of the efficiency ratio to some degree. I think I'd make that trade more often than not and probably most would as well, but scaling them up more, so doing more in them, doing it more efficiently. If you think about asset management, it's a classic scale business, right? So the next marginal dollar of assets you manage relatively cheap. And so if we can continue to scale those, I think we can see the efficiency ratio come down. I think we're more focused again on our ROTCE and operating leverage. But when I think about metrics, and I think I was probably first introduced to this one when I first met Dan a decade ago, it was really revenue to assets or revenue to commitments, like are we getting paid to use the balance sheet appropriately. And then you follow through on things like the efficiency of servicing and are you making sure that the investments you're making are returning either in growth or efficiency or some combination of both?

So you're actively tracking those metrics, not just from a more holistic point of view but also on a customer-by-customer basis?

Yes. I mean I know in Dan's business, they sort of do it by portfolio, by office, by market, that there's a ton of rigor around that. I think you're also always looking at client penetration. So are we serving these clients, something like 6% of our commercial book is still loan, credit only, and we watch that very closely to make sure they're doing more. Some small percentage of new-to-bank clients, maybe 10 have starting with the credit relationship, and we'll have a lot of rigorous discipline around doing more or exiting that relationship. So again, it's a combination of getting paid for the balance sheet and then doing it across obviously not just 1 or 2 capabilities.

Got it. And then maybe on the efficiency of the consumer business, you get 60% of deposits from the consumer business. But at the same time, the branch footprint is spread across 15 states. So is that a positive because you have a wider reach? Or does it make it harder from an efficiency perspective? And especially given that about only 30% of your loans are from consumer and that number is coming down. So can you talk about the efficiency of that business?

Sure. So as you noted, 60% of deposits, diverse granular, stable book beta is kind of right now mid-ish 30s, so well priced attractive I think served us very well in the last year, up something like $5 billion to $6 billion kind of from the trough a year ago, been very happy with the deposit performance of that business. I think a decade ago, that was the right question. I think we've sort of grown into a model where if you look at peers, they're entering new growth markets. They're doing it physically right, with thin networks, and they're bringing in digital and other capabilities. We sort of looked into that maybe for a lack of a better phrase, but it's turning out to be a much more efficient model now with the proliferation of digital, more customer adoption, more skills around digital marketing and related items where the physical network and the contiguous nature of it don't have to be as narrowly focused as it was historically. So I think there's an opportunity there. Again, great deposit base. We've got the wealth business we already touched on. We've got a home lending business that's there, really is an accommodation for our targeted clients. And we've got a huge opportunity in small business, and we don't think we've really cracked yet. So we do think there's a lot of opportunity there to get some growth and really make that a more efficient, more valuable platform. But at the end of the day, the main focus there is get primacy and maintain that really high-quality deposits.

So that's a good segue on the deposit side. And I think as some of the comments made by your peers of this conference have been fairly mixed. You guys have been in the higher for longer camp for quite some time. You've also said you're in the seventh inning stretch on rising deposit betas. So can you talk a little bit more about what are you seeing on the deposit side quarter-to-date? And what you're seeing both your customers and competitors do here?

Yes. So we've seen -- I think maybe the best way to describe it, it's stable, right? So deposits have been performing well. I think as we've said consistently, the longer rates are at this level, we'll continue to see some drift. We've guided to kind of mid-50s for the full year, if there's no cuts. Nothing we're seeing at this point tells us that's out of bounds, still going in that direction. We still have not raised rates in the consumer bank in a year. So we're seeing still some mix shift in turnover, which will again drive that beta up from drift standpoint a little bit. But generally speaking, it's been constructive. We're still testing different products, different client types, different geographies. And again, one of the values of the deposit base or the footprint we do have is we really have 3 distinct markets, well established, more affluent, stable clients in the East to a younger, faster growing, more dynamic group in the West, right? So we do have a nice diversification in that book. And again, we're testing across those because the competitive set and the client sets are different. But again, I don't think we're seeing anything that is concerning or alarming. I would say we feel like there's less room around banks broadly saying, hey, we're taking rates down actively. So it's a little bit more of kind of rates where they are. I haven't seen a lot of rate up, but I think a lot of the game today might be played a little bit more in the premium game. So we are seeing a lot of premium offers. Obviously, that shows up in the marketing line, not in the beta line. But there's going to be an ongoing competition around deposits. Again, I don't think it's spiking, but I don't think it's abating maybe as much as people would have expected.

And are there any risks you see on the deposit side as you move into the back half of this year? I know loan growth has been fairly weak, and I'm sure we'll come to that. But across the industry, if loan growth doesn't pick up, should deposit costs be relatively flat through the end of the year? Or are there any risks you see that? How do you position for that?

Yes. So I think most of us would think about it as, look, deposits are there to fund the bank. A lot of that is funding loans. So if there's no loan growth, there's probably less pressure on deposits. So that might feel a little bit counterintuitive rates stay higher, but you might be able to back off a little bit. If we see a cut or 2 in loan activity and loan demand picks up, you might not see betas move as quickly because we want to maintain the deposit funding. And then I think the wildcard is new liquidity rules, when do they come, how aggressive are they and how much more of a premium do they put on deposits, and then we'll have to factor that in when we have more visibility in that.

I think you guys have been front and center talking about how banks will have to operate with lower deposit -- loan-to-deposit ratios for some time in the foreseeable future. So okay, that makes sense. And then as we get into loans, I think in April earnings, you noted some macro uncertainly was weighing on loan demand. But more recently, Chris spoke about loan demand and pipeline is picking up. So we're seeing from the [ HA ] that loan growth is still not coming. So can you talk a little bit about what you're seeing on the loan side?

Yes. And I'll make maybe a broad comment on this again where Dan can talk about actual client activity. I think we're seeing very constructive pipeline growth, a lot of conversations, lots of clients wanting to transact, but waiting to see when is the right time. And I think it's still a -- is this where rates are? Or is there an opportunity for them to dip? And we've seen a 5-year 10-year kind of in a 40 to 50 basis point range in the last month. So there's still a lot of uncertainty and volatility. We've talked to a historically great backlog in M&A, which we expect to pull through, how quickly it pulls through is a question. But again, I think clients are ready to transact, and I think they're just looking for that one piece of clarity to take the next step.

So clarity on rates, not necessarily lower rates that...

Yes. And I think -- I mean, Dan can talk to our client base on how they think about level of rates.

Yes. I think it's much of what Clark said. We've got a lot of clients in the real estate space, at least that have been for the last 2 years working through the Fed rate hike cycle and activity has been fairly muted. But as a result, here you are 2 years into it, and they've kind of managed the process a little bit outside of office, which I'm sure we'll spend some time talking about when we get to the real estate side. But in other asset classes, fundamentals are relatively strong. You've seen some NOI growth and margin expansion and the issues have abated somewhat. So clients are looking at it saying, "Hey, I'm ready to refinance, whether it's staying on Key's balance sheet or other banks' balance sheets or doing something in the capital markets. It's more a function of just stability in the 10-year. It's been bouncing around so much, and folks are just looking at it and saying, "Hey, if I knew it was going to be a 4, 3 or 4, 4, I'd go -- but it's at 4, 7. And then once it bounces up, I want to wait to see if it goes back down. So I think just if you take some of the volatility out, the absolute level isn't as important, but the volatility would be -- removing will be helpful for transaction activity.

Got it. So maybe just taking what you said on the loan side and the deposit side. Clark, are there any updates you want to share on the full year guide you gave at earnings?

Yes. I think at this point, we're very comfortable with guidance. I think the one place that we've raised this on the first quarter call that we might come in light as loan balances, right. We've talked about, I don't think given some of the structural mechanisms that we have between swaps and treasuries that that's a necessity to hitting guidance. I do think in the second quarter, we'll be just given where loans are and again, rates a little bit higher and that's sticky in the market. I think we'll see NII grow but probably a little bit lower than we thought, like low single digits. And then I do think capital markets, while we think there's activity building, I think the second quarter, we've talked about having pulled some deals into the first quarter. And I think net-net, we'll see a good first half, call it, in the $300 million-ish range. But well in line with the full year guidance we gave on that. Just -- I think this quarter will be a little bit lighter on a couple of those spots as we build through the year. And on NII, just because we've been talking about it now for a year, just big -- the big tailwind is really between swaps and treasuries, $9 billion plus of trade out on those through the back half of the year.

And that's coming through in the back half. So -- and on the capital markets side, I think you also alluded to this early on the 1Q call as well given the rate volatility that's putting some pressure there. Is there anything else on either the expense side or credit or anything else that...

No, I mean I think the expenses are coming in sort of as planned. And then on the credit side, we did a deep dive in the first quarter. We saw a big uptick in credit side. Again, we feel good about the loss content. Feel good about the guidance. We might be headed to the higher end of that, but that's really a function of the denominator not net charge-off dollars just lower loan books are going to drive that ratio up a little bit.

Yes. So the dollars essentially stay the same.

Yes.

Got it. Okay. Great. And then, Dan, I wanted to pivot over to you on the commercial real estate business. So just for those that don't know Dan here Daniel, President of Key's Real Estate Capital business, you obviously bought the CRE that keep us on its own balance sheet as well as the third-party servicing business where Key is the top 3 servicer, $660 billion in servicing assets, 1/3 of which Key is the special service support. Did I get that right?

You got it.

All right. Perfect. So then, Dan, given this unique position that you have, you're provider of capital, you're an adviser, you're servicer, can you talk about what you're seeing in the commercial real estate market at the moment? Where are you seeing the most pressure in terms of both as type and geography?

Sure. So stress wise, it continues to be -- and I'll maybe talk first about the servicing book. So these would be loans that are not on Key's balance sheet, but in our special -- in our servicing business, it continues to be primarily in the office space, mostly the CBDs, to a degree, some other areas as well. And then multifamily. So just to give you some stats in 1Q 2024, we had about $4.5 billion transfer into active special servicing from primary or master, that's about 2.5x the volume that we had in 4Q. So we continue to see movement into active special servicing. That breaks out 47% of that $4.5 billion was office, 40% multifamily and 13% retail. So that's all of it right there. That's effectively 100% in those 3 asset classes. When we say retail, that might be a surprise to some people, that's really -- frankly, that's just some regional malls that have been kind of -- it's a couple of deals that have been kicking around. But on the office -- on the multifamily side, again, office, it's the larger CBD-type properties. There's clearly some here in New York that are notable, and I'm sure everybody's read about over the last couple of weeks. On the multifamily side, it is a bit geographically concentrated in the Sunbelt areas. So think Austin, Texas, Atlanta, Charlotte, places where there was a lot of supply growth over the last 24 months. The market is just kind of choking with that a little bit. It's not a long-term issue. We don't think. It's just a function of just longer absorption times and taking some time to get some growth. The other thing I would say, when you think about multifamily and the stress we're seeing on the servicing side, it's not the kind of borrower that banks generally have on their balance sheet, not just Key but other of our peers would generally have kind of longer term, very high-quality owner operators of real estate, whereas when you think about special servicing, these are CLOs, they're SASB transactions, it's securitized kind of capital markets where the stress is, those are borrowers that would be going into, as an example, in Austin, Texas, and saying, "Hey, we're going to buy or we're going to build. They're going to borrow $0.80 on the dollar, nonrecourse 3.5% cap rate acquisitions with a plan to renovate the property, push rents by 30% over the course of a couple of years and then refinance make 2, 3x their equity and move on, those business plans didn't pan out. So those assets are moving through the cycle or through the system into special servicing, and that's where we're seeing the stress. So it really isn't kind of bank-centric. It's more kind of the unique higher octane, higher borrower capital markets where a lot of the stress is.

So 2 follow-ups on that. On the multifamily side and the Sunbelt is, it's a lot of these newer properties? Or are they older properties?

Yes. It's a little bit of both. It would be a lot of times, again, kind of in that same theme, you'd have a kind of a real estate fund come in and say, we're going to buy a Class B or B minus property, spend $20,000 per door. And if we do that because of the location and just the in-migration of the population growth and job growth in those Sunbelt markets, we think we'll be able to take the rents from $1 a foot to $1.50 a foot in one leasing cycle. And again, that's a very aggressive strategy. And for a while, frankly, in '21, '22, you were getting very strong rental rate growth in certain markets in the multifamily side. That's just kind of leveled off. So the business plans that were put in place didn't pan out.

And then the $4.5 billion that you mentioned moved into active special servicing, which was 2.5x what you saw in 4Q. What has the trend been on that? Has it been continuously increasing over the last couple of years?

Yes, years. Well, I would say the last -- the numbers are increasing, but the rate of increase is slowing, if that makes sense. So we've -- but it can be chunky.

Probably over quarters.

Yes, you can have a quarter where you have $1 billion or $2 billion because some of these deals are just big SASB transactions, which is a -- it's a securitization. It's a single asset, single borrower deal, so it might be a pool of assets owned by one investor or one loan, one piece of collateral, but they can be $1 billion or $2 billion just in and of themselves, one deal. So you can get kind of a lumpiness if one deal moves into special servicing, which frankly happens fairly often.

Fair enough. So then as you think about maybe the last 3 to 4 months, has there been any change in the margin? Do you see pressure increasing or decreasing?

I think -- so that's a really interesting question. I think the way I'd characterize it is when the rate hike cycle started, there are a lot of business plans that just weren't built on a treasury of 4.5% or 5% or so for at 5.25%. It proved out to be true that those business plans were going to fail. And so those types of loans are what we're talking about kind of moving into special servicing. At the margin, there's maybe some other transactions out there that are struggling a little bit. But by and large, I would say, the real estate industry, despite some of the news you here, everything gets lumped into CRE, gets lumped altogether. There are some -- obviously, some problems with office, which is more of a structural issue in some of this multifamily, which is more of a capital structure issue. But broadly speaking, because the real estate market has been at this for 2 years, a lot of the owner operators have had time to kind of adjust the business strategy kind of grow NOI over a year or 2 to support cash flows that can cover your debt service and kind of grow out of the problem. So again, when you think about the types of risk that are -- that's on a bank's balance sheet, it's a very different risk profile than you see in the capital markets.

And while we're on that subject on given the focus on large office stars recently in central business districts, you're actually seeing some transaction activity there. What about -- are you seeing any signs of stress in smaller suburban office buildings?

I wouldn't say stress. I mean, for sure, across the board, office values are down. It doesn't matter if it's a trophy asset, high-quality Class A CBD well leased to an anchor tenant that's got a 20-year lease, the value is going to be lower than it was 2 or 3 years ago just by virtue of the fact that the risk free rates up. So across the board, you're seeing that, I would say that there is less stress in the suburban kind of smaller office space only because they're more granular rent rolls. So in the suburban office property, you might have 20 tenants and they're taking less space. And so as a result -- and it's just -- it's a lower cost of ownership. So if you have a goal in the suburban property, it might cost you $20 a square foot or $10 a square foot in TI's CapEx leasing commissions to replace that tenant, whereas in downtown CBD here in New York or other major coastal cities, your cost of ownership is that much higher. So when you get to the point where you're the lender or the owner and you have some vacancy and you are deciding, okay, am I going to spend $50 million to replace that tenant in terms of TI's CapEx leasing commissions. When you look at where the value of that building is today relative to what it's going to cost to bring in a new tenant to maintain your cash flows. At some point, the owner just says, you know what, it's just not worth it. If the NPV is negative. I'll just give the keys to the servicer in this case, Key on the special servicing side and move on.

So what you're saying is it's easier to hold on to smaller office properties, suburban properties than it is in these large office stars there?

Yes, less supply, lower cost of ownership, Yes.

And so if you see transaction activity pick up, you would still expect that the suburban office holds up over central business history?

I think it will, although I don't know that we think for -- given how structurally the usage of office space has changed as a result of COVID and work from home. I don't know that we -- our view isn't that the office-based suburban or otherwise really turns around anytime in the near future. It's going to take years to kind of crawl through that.

Got it. One of the questions I had on the special servicing side was -- how do you make that decision between selling the underlying property and deciding, okay, we'll hold on to it. Let's offer an extension or modification? How do you make that decision?

So there's a lot of factors that go into it. The main one is ultimately -- so if there's a default, right? So there's a credit event, maybe it's a payment default, maybe the loans at maturity and you get a reappraisal, you start to -- the way we think about it as you do, it's a lot of NPV analysis, right? So you look at the market, you look at the leasing, you look at who's available, what the competition looks like, what the values are, you'll get another appraisal, you'll also look at the sponsor or the borrower and see are they part of the solution or are they part of the problem. Obviously, best case scenario you want to keep the sponsor in place, but sometimes you can't. Ultimately, it's -- we have to act in the best interest of the trust. I mean that's our job as the servicer as to be certain that we're doing the right thing for the bondholders. And so it's a delicate process. it's not always the same, but it's looking -- it really is truly just looking at the NPV and saying, are we better at transacting now in foreclosing and moving to receiver REO sale and how do we think that looks from a return of capital to the bondholders today versus maybe giving an extension and seeing if 6 months, it's better or a year out, it's better. So it's a lot of that analysis.

And in general, do you think you're doing more of the latter so offering an extension of modification? Or are you doing more of the former?

So that's a great question. I would say that the last 18 months, 12 -- the last 12 to 18 months, it was probably a little bit of a let's kick, let's kick, let's kick and we'll see what happens, our rate is going to come down. Is there going to be some environment where that might be better? I think the markets and the owners have looked at it and said, okay, this is higher for longer. And so there's a shift more towards what's the better strategy. And frankly, sometimes it's not our decision. Sometimes the borrower who looks at it, who's been supporting it. They might be under the 10 debt service coverage. They could have been paying out of pocket for a year. And at some point, they're like, look, we think it's value for longer. Also, we're not paying anymore, right? So they just stop making the P&I payments and then that forces us to take a little bit of a different approach. So -- but I do think again, when you think about the business structures or strategies or plans that didn't work at a higher interest rate, which are, in some cases, pretty clear if you're going to buy a property at a 3.5% or 4% cap rate, and you're trying to finance it at 7%, that doesn't work. So those types of properties, we've gotten to the point where they're moving through that foreclosure sale process. And so I think in terms of answering your question, you're just -- you're seeing kind of the natural progression of those types of deals through the process in that kind of weeding out, which is occurring.

Got it. And maybe in terms of -- the answer is always, you look at things on a case-by-case basis. But I guess, in general, do you think that the borrower base is healthy enough to continue contributing to some form of commitment to the property? Or do you see that cohort of borrowers dwindling?

I think there is a ton of capital out there. And so whether it's the borrower we have. So just as an example, some of the things we're seeing right now, there's a refinance gap, right? I mean, so with rates up the underwritten initial plan was a 150 debt service cover. And now you're at a 110 or 115 or 105, just given where rates are. So the loan comes due, you can't refinance at par necessarily, not in all cases. I mean a lot of -- when people think broadly about the maturity wall, which is talked about a lot, a lot of loans -- most of the loans that are maturing are performing loans, right? They're a 150 cover, they're a 65% loan to value. There's no issue. You can easily refinance those in any form or fashion on a bank's balance sheet or in the capital markets. But in the cases where there's maybe kind of a 105 cover 110, we're seeing clients bring in preferred equity, maybe some Mez debt, depending on the size of the asset or the nature of the underlying equity ownership at that point in time. They can bring in a joint venture partner for common. So if the owner today, the borrower today doesn't necessarily have the dry powder to kind of stay engaged, pay the loan down, recapitalize it and refinance it at a lower amount. They have partners that they can bring in either again, as common equity or preferred Mez or other types of pieces of the capital structure. That works so long as the underlying asset has some -- you can look at it and say, okay, we think in 2 or 3 years, the value is going to go up a little bit and then you could refinance it or recapitalize and pay that piece of Mez [indiscernible]. Multifamily, we're seeing a lot of that in the types of scenarios talked about earlier.

And again, I just -- sorry, this is an important distinction here of what we're servicing versus what's on our balance sheet and how banks will behave a little bit differently just given the relationship, length of time, the resources available to that client versus a case where I think what Dan would say is some of the riskier stuff with less of that support is what's moving through the pipeline that I just want to make sure we're not extrapolating that process to like what's on, I think, most of our bank balance sheets.

So I want to bring that together. So one is on the special servicing side, as some more of these properties come in, is that a big revenue opportunity for Key?

It is. Yes, that's a great point. We have seen over the course of, gosh, the last couple of weeks, we're trying to forecast out where we think that's going. But just yes, given the trend on the special servicing side, moving to active special. So we, as the active special servicer will make -- can not in every case, but we'll make protective advances if we need to. So we'll pay P&I to the trust. We might fund TIs or CapEx and leasing commissions or other property costs if we need to. When we do that, those are basically loans to the property, and they become super senior as we're making that loan. So we're paid off. We're paid back with interest before if the loan sales gets refinanced. That's a source of income for us. So there's -- it's a little bit countercyclical. It's not a little bit. It is countercyclical. So it's a great business for us. And as we've seen the market be softer over the course of the last 1.5 years, where the activity that we would normally want to see in terms of capital markets in real estate has gone down. This is certainly offset.

So it's really both a fee and an NII contributor to revenues.

Yes. It's a great source of really quality deposits.

Got it. Okay. Perfect. And then, Clark, to your point on what's on Key's balance sheet, maybe just a bigger picture question, not just on commercial real estate, but also C&I. You've guided to a 30 to 40 basis point NCO ratio that's slightly higher than what you've been trending over the last 4 quarters or so. So can you talk about any pressure you're seeing or anything you're focused on?

I mean, we've talked about sort of where you go when rates are at this level, it's leveraged deals, and it's just parts of the economy that are under a little bit more stress so those are going to be consumer, going to be consumer goods. I think there's elements of health care, although other pieces of it, I think, have rebounded well over the last year, year or 2 and it's not necessarily in the broad book kind of a geographic thing. So it will be some of those industry areas that we're looking at. But some of it is just the nature of lending to large commercial clients, and they come in. And I think if you look at our NPAs over the last couple of quarters, it's been kind of a small handful of names, not a broad-based set of issues.

So nothing you're specifically worried about at this stage?

Not at this point.

All right. Perfect. I'm going to dig into capital and then I'm going to see if there's any questions here in the room. On capital, you're at a 10.3% CET1 right now. Chris mentioned at a conference a couple of weeks ago that there is no change to the longer-term, target or guide of 99.5%, but you could reach 11% in the near term. So can you talk about what's the right level in the near term? How long do you think you need to stay at this level of 10.5% to 11% before you can bring those capital ratios backed out?

Yes. So I think some of it is a function of -- we're still in the mode of -- if there's good client activity to support on the balance sheet, we want to support. So obviously, if we're lending money and it's primarily commercial in nature, that's going to -- that's not going to allow CET1 to grow at the same rate, and we're okay with that because we want to support clients as we've talked about strategically. If loan demand stays light, we're going to let that go, and we're going to let it go until we have more clarity on what the capital rules are and as much as we're talking about CET1, and that's obviously important, the market capital piece is equally important. We just want to see that continue to grow, right? And that's a function of both raising CET1 and then just time allowing us to kind of manage down the ASCI portion.

Got it. All right. Are there any questions in the room? Okay. Then maybe just to wrap up. We touched on this earlier, but you mentioned that Key and others in the industry will need to maintain a lower loan-to-deposit ratio for some time as these new liquidity rules come in, as you think about LCR, and you think about the potential new requirements, how are you managing your balance sheet differently at this stage?

I mean, right now, we're in the mid- to high 70s in loan to deposits. So that feels like a reasonable long-term target. We're always going to sort of focus on great quality deposits. So that's kind of first and foremost, I think that's only going to get more important. So the fact that we've been kind of dialed in on primacy now for some period of time, I think, is really valuable. We'll continue, I think, to manage client demand. But I do think this is where the ability to distribute becomes really important because I think we can recycle capital differently than a lot of people in the peer group. And I think we can grow our business without necessarily growing the balance sheet. And I think that's an important distinction. We've talked about letting our consumer book rundown. That doesn't mean we're not necessarily going to originate consumer loans. We will find a different outlet necessarily for them, and that creates the ability to support clients, use the balance sheet efficiently and create another fee income stream. So I think you'll see us continue to lean into those places because I just think it's a more efficient use of capital.

And that drag us up nicely to where we started, which is the advantage that Key has in fee-based businesses. So that's great. Thanks so much for your time. We're out of time here, but I really appreciate you being here with us.

Thanks for having us.