KeyCorp (KEY) Earnings Call Transcript & Summary

If we could just put up the first ARS question that we've been asking all the companies. But next up, very pleased to have KeyCorp. From the company, we have Clark Khayat, Chief Financial Officer; and Randy Paine, who's President of Key Institutional Bank. So welcome, guys. Maybe the first place to start, Randy, because maybe people not being that familiar with in terms of what Key Institutional Bank means. I don't think you've been out in the public for the last couple of years. Maybe just kind of a quick overview of kind of what you do the businesses you oversee and just kind of how Key differentiates itself in the marketplace.

Sure. First of all, thanks for having us, Jason. I know a little bit about putting on conferences like this, and it's not easy. So congratulations. Well done. So the Institutional Bank is -- comprises a number of businesses for us, houses, our equipment finance business, which serves all of Key's commercial clients. Our Corporate & Investment Bank, KeyBanc Capital Markets, where we've got 7 of our 8 industry groups and then our entire real estate platform. So that would be our on-balance sheet lending to projects as well as to institutional owners of real estate portfolios, but also has our commercial servicing business as well as our affordable housing business. We really do have, I think, a very differentiated platform as you think about the institutional bank focused on deep industry expertise. We started down this path 2 decades ago when we brought together the investment banking business from the old McDonald's investments, put it together with the commercial lending business at Key. And we've been going to market this way, like I said, for 2 decades, and I think it's very, very differentiated. As you think about how we compete, we certainly compete against boutiques, very, very good boutiques that also have strong industry capabilities in depth, but they don't have the breadth of capabilities that we have to serve clients. And then when you think about how we compete with our larger competitors, we're very focused on emerging growth in middle market companies. We certainly work with larger companies. But generally, when we acquire those relationships, they're going to be -- they won't have scaled to the extent that some of our clients have, but we will have worked with them over many, many years, in some cases, decades and really in a leadership position. And I think that's what enables us to use that deep industry knowledge, get into the boardroom, be a strategic adviser and certainly deliver a broad suite of services to competitors or to customers and compete against both our larger competitors and the boutiques.

Got it. And I guess how are those clients feeling about the macro at the moment? Obviously, a lot going on in the environment. Maybe talk to the willingness to transact, borrow, engage, strategic transactions and the like.

Yes. It's been interesting times. Obviously, companies are navigating a lot right now. Certainly, the tariffs and that weekly hourly change that is coming with that. Hopefully, we're going to see rates coming down here as soon as pretty imminently, and so companies have been waiting for that, the restart of that. But I would characterize client sentiment as cautiously optimistic. And we certainly have seen very strong earnings. You all have seen that through the first 2 quarters of the year. And we certainly have seen that as well. So we've been very pleased with how customers are navigating an environment which is, in many ways, uncertain. I think it certainly speaks to a slowing but still growing economy. And we've got some stimulus that's coming with this most recent bill with accelerated depreciation. We started to see a pickup in equipment finance activity late last year, and certainly that's going to help. We've been really pleased with what it's meant for us. Our commercial lending activity is up 5% through the first half of the year. We had very strong fee results. And I think we've we feel good about the back half of the year as well.

And I guess maybe just talk a bit more about pipelines maybe more context in terms of how third quarter is progressing and just kind of fourth quarter as well?

Yes. We certainly had a very strong first half of the year. Our investment banking fees were up 19% versus '24, which I think compares very favorably to the market. We said in our second quarter call that we saw some third quarter activity pull into the second quarter. And so that certainly did happen. Pleased to say that we've rebuilt that and feel good about how we're progressing here in the third quarter. We said publicly that we thought that we could hold flat maybe of the upside with our second quarter investment banking fees. And at this point, it looks like we have a good chance of hitting that. So as we think about the rest of the year, we've guided to mid- to high single-digit growth from an investment banking standpoint, and market-dependent always. But assuming the markets continue to be constructive, and I would certainly describe them that way right now. We've got a shot at hitting the upper end of that target. The one thing we haven't seen, Jason, is a robust pickup in middle market M&A activity. So certainly, you've seen kind of large-cap M&A activity be pretty good here in 2025, and that continues. If you look at the $100 million to $1 billion enterprise value space, it's still pretty muted. But I am optimistic about how we're positioned certainly for that, and that's going to break. I thought it would have broken before now. We are seeing a pickup in activity post Labor Day, certainly, no trend there anecdotal at best. But I think with lower rates, certainly, you've got unprecedented amounts of private equity that's yet to be invested and you've got GPs at those private equity funds, not only a wash and about $1 trillion of committed capital, but also having returned very low levels, historically low levels of their AUM to investors over the last few years. So I think that all those things combined, hopefully, will provide some tailwinds.

Got it. And I guess earlier this year, I heard Chris mention that the Investment Bank talked about $1 billion in revenues organically at some point in the future. Just talk a bit more context in terms of how you think you can get there, when do you think you can get there, can you get there?

If we tell Chris, you could say that. No, I appreciate it. We certainly are headed down that path, and I'm very optimistic that we will get there. First and foremost, we have a value proposition that resonates and works very well for our targeted client base. And I think as you look at how we monetize, the lending we do, as you look at the fees as a percentage of our revenues, I think that, that speaks to our ability to do that. We also are really excited about some tailwinds that I think are unique to us. And first, we have, I think, one of the leading real estate platforms in the country. One of the big parts of that real estate platform is commercial mortgage banking platform. We generally put $10 billion into the capital markets. That space has been fairly muted the last couple of years. Lower rates is going to certainly help. We have a leading renewable energy and power franchise that has certainly been built well over a decade now. And the U.S. is underpowered, and that's only being exacerbated by AI. So that business is really seeing significant tailwinds. And we provide capital, we provide access to the capital markets. We leverage our payments platform, and we're the leading M&A adviser to that space as well here in the U.S. So we have a number of tailwinds like that, that we think are unique to us. Certainly, we're going to see underlying growth. We've said publicly that we think we can grow our investment banking fees to plus or minus time real GDP. So that's going to come, certainly with growth, not a straight line, but certainly, I think over time, and then we're investing in the platform. We've got -- we said publicly that we're going to grow our bankers by about 10%. And so as we do that, we really started down that road last year. That's going to come with productivity from those teammates.

So 10% growth in investment bankers. Maybe talk about how far are you along in that process to maybe describe the overall recruiting process? And just what areas of verticals are you focused on?

Sure. So I feel good that we'll get there, if not maybe a little bit 9%, but close enough this year. We've got very strong pipelines as we think about our recruiting activity. It's been pretty broad-based, but we've seen very good results in our health care franchise, technology and in real estate. But we're recruiting across really all aspects of our franchise. And I really -- I think that speaks to the headroom that we see broadly. We don't have 10% market share in any industry area that we focus on. So we've got a lot of headroom. And as you all know, the middle market space is a big space. And so it's really about finding the right talent. It's not about hitting the 10% number, although that's important but it's about finding bankers that want to serve this emerging growth middle market client base that want to leverage a broader platform that we feel like can fit into our culture and thrive in that culture. And we've shown that we can attract really the bankers that we're focused on. We don't often not hit on talent that we're going after. But also, they see that they can be very productive and serve their clients here at Key in ways that are quite unique.

Can you maybe just as an add, talk about internal promoters as well as just kind of productivity curves and ramp-up?

Thank you for the prompt, Clark. But it's not just about external recruiting. It's also about developing talent. And we have a very robust focus on that. We actually calibrate our breakers across the entire KeyBanc Capital Markets franchise twice a year. And we do it with all of the -- all of my leaders in the room, and we're talking about, not only about MDs, but about VPs and directors that next generation and really focused on that. So it's about pulling both levers. And I will say we have benefited significantly here the last couple of years from very, very low levels of turnover which has not seen the kind of levels of turnover that we would see what I would characterize as a normal environment. So that's been helpful as well in terms of how we think about that. As you look at our largest verticals, certainly, power, renewables, real estate, most of those bankers are homegrown. When I say most, I'd say, 80%. And so that's really helpful as you think about maintaining the culture and focus on the client and really collaborating to deliver all of our capabilities, uniquely in ways that many of our competitors don't. And I really think that that's one of our secret sauces. We talk a lot about scale, Jason, we certainly have a lot of scale, but versus our most -- our largest competitors, we're a fraction of that size. But I think our size as we think about what we're delivering to customers is a unique advantage. We're big enough to have the breadth of capabilities and real expertise from an industry and execution standpoint, but we're also small enough to bring it together seamlessly for the benefit of our clients. And we hear all the time from our clients that we show up differently than our competitors because of that collaborative culture and real focus on it. And I think a big part of that is how we develop talent internally, but also how we bring on the right talent.

Maybe just kind of comment on what Clark asked about. Just how do we think about the earn back of these hires and what metrics are you looking at to kind of measure success?

So look at -- as you might imagine, every banker has a scorecard, Jason. It's in Salesforce. I can look at it when I open up my computer, it's going to show you their pipeline. It's going to show you their new client acquisition results. It's going to show you their pitch activity, their client calling activity. And certainly, what have they produced to that point in the year. And we do it for all of our bankers. But for the people that we recruit, we've got a business plan for every one of them. And we know what their client set looks like, we know how it fits into our franchise. And so then we also track productivity and results of those new hires certainly over the first 24 months. And again, we're of the size that we can do that down to every individual banker and I'm looking at that regularly with my leaders. And what I would say is that, we said this publicly, generally, we target 12 to 18 months for people to kind of hit their stride and get to what I call a normalized rate of production. But I would say, in the last 12 months, most bankers have been on the front end of that kind of time line.

And then in addition to overseeing the investment bank, you also run the commercial real estate business. Anything you want to highlight there? Or any trends you're noticing as your role as a national CRE servicer?

Yes. I love this business for us because it involves not only what we do on balance sheet, but we also service over $700 billion of commercial real estate loans. We're permanently 1 or 2 primary special servicer nationally. This business comes with $8 billion of high-quality, low-cost deposits through the first half of this year, our mortgage servicing fees were about $150 million, up 25% over 2024. And that's in a really tough real estate economy which is another reason why I love this aspect of the business, it's countercyclical. And it gives us great insights into our on-balance sheet exposure. And we certainly have seen a slowdown in credits moving into active special servicing still happening in the areas that you would expect but we know we get a lot of benefit. For our own balance sheet activities, while we don't look at specifically individual property level information that we have in this third-party business. We can look at larger trends, and it certainly helps us think about markets that are getting extended and overinvested in, and we can use that for our benefit. We also have, like I said, an affordable housing business, #2 in the country. We love this business because it leverages every aspect of our franchise. Certainly, we provide project-level debt but we also syndicate tax equity, which is very valuable for the developers in this space. And then we provide the permanent execution for when projects are delivered. And as you think about the affordable space, the U.S. is incredibly under housed in this space. It is absolutely something that both Republicans and Democrats support. We certainly saw that in the most recent legislative activity. And so we've got a leading position in it. We can execute on our value proposition. We also provide, obviously, payments capabilities, and there are great tailwinds. And then as you think about the rest of the franchise, whether it's what we do as providing capabilities to REITs. We were active book runner for one of the largest IPOs this year for a self-storage REIT or for other developers within our footprint. We love the risk-adjusted returns of the business and the ability to execute for clients.

Got it. And then just technology, can you talk about increasing its investments by $100 million this year. Maybe just quickly, what are some of the areas you're focused on?

Yes. I would say -- and I've been running certainly KeyBanc Capital Markets now for 15 years, time flies and certainly broader aspects of the Institutional Bank and now the entire Institutional Bank. I don't know if there's a time where we've had more happening from a technology standpoint in that period. And it's not because we have a bunch of tech debt but we're just seeing accelerating opportunity to deploy technology, one for the benefit of our customers but, two, also for the benefit of our people to make it easier for them to serve customers in a way that obviously makes us also more productive. The one area specifically that we've delivered is we upgraded our FX and derivatives platform in the last year. We have put a new portfolio management system in place for our specialty finance lending business. And over the course of the next 24 months, we'll be upgrading our portfolio management and underwriting platforms for both our real estate, on-balance sheet real estate business as well as our institutional KeyBanc Capital Markets, industry groups. The one area where we have a very unique, I think, technology delivery platform is for key commercial investor services that $700 billion real estate loans that we service. And part of that business is, there's a lot of ratings that come with it, external ratings, and they assess our technology platform and we're very highly rated from that standpoint. So I know we can deliver on these other projects as we think about what we've done in that business.

And just kind of talk about overall expense flex. It sounds like things were a bit slow early in the year. Maybe they're ramping back up. Just how should we think about the expense line?

Yes. I mean, I'll speak to how I think about it for the Institutional Bank. But we have a lot of expense flex. And it's really, I think, quite not certainly unique to our business, but given the size of our business, we're about $3.5 billion of revenues like I said, $50 billion of earning assets for Key, I think certainly very relevant for Key. But about our biggest expense is comp, right? Not surprisingly, but 60% of our comp is incentive comp. So we obviously pay that based on people's production and performance. And as we think about growing our banker ranks, and we definitely did this coming out of '21 period when we saw things really get overheated and crazy things happening in the market. And we pulled back and to the extent that we don't hit some of these targets maybe in the year that we're focused on them, we'll do it because maybe we've got a flex. So we have a lot of levers to pull from that standpoint, especially given how big an item incentive comp is for the institutional bank and then as a result for Key.

And then maybe just lastly, Key has been an acquirer in the investment banking space. I think back to McDonald's 100 years ago, Pacific Crest , Cain Brothers, but nothing kind of...

I was there 100 years ago.

So I was covering it. Maybe talk to your appetite to more investment bank deals on any specific areas or regions you're interested in adding inorganically.

Yes, we absolutely would like to do more. And we really think of these as acquihires, very small bites of capital and something that we've done, I think, very successfully. There's really not a deal out there that happens. It's very, very rare that we don't see it. So the bar is high for us. We've got to make sure that the platform we're looking at, we can bring it on to our platform and 1 plus 1 is going to equal more than 2. We want to make sure culturally, there's a fit and that there's a real alignment in terms of our ability to deliver that broader solution set to that client base. But when we see that opportunity, we're going to certainly pursue it and hopefully, successfully, but it's got to be the right opportunity. The one thing I think we're very good at, and I think it's one of the reasons why we see the flow that we do is that we're good at it. We know how to onboard these entrepreneurial businesses. I think we've got a very entrepreneurial mindset. And we are very sensitive about not killing what made those businesses successful and really making sure that 1 plus 1 equals more than 2. And so I'll be disappointed if we don't see ourselves finding ourselves in a similar spot to bring other franchises onto our platform, but it's got to be the right one, obviously, and value for both sides.

I guess, Clark, on the topic of M&A. We have seen a few bank deals announced one even today. Some pressure on other banks to do deals in your peer group. I guess you and Chris have both talked about bank acquisition is not high on our priority list. But given the recent events and a smoother regulatory backdrop and maybe a more conducive environment for deals, have you reconsidered that thought?

Look, I think if -- the right deal were available when we can talk about what that means. We would do homework, but we're still right now, we're more focused on M&A kind of in 2 places. One would be broad market M&A because it's just good for Randy's business when there are more transactions. And as you noted, as much capital markets strength as we've had this year, it hasn't been off the back of M&A which is a little unusual. So I think there's potentially some side there. And then in the kind of nonbank space, so whether it's Randy's business or payments or other areas of Laurel Road type thing where we think we can add real capability. We haven't spent a lot of time to date on depositories. We'd like to keep kind of delivering our numbers as we're telling people, get our multiple, I think, to our more kind of peer level range so that when the right deal shows up, we can be appropriately competitive. But the only counter to that would be something that is uniquely valuable and that might be something like a single market platform that we really like or some differentiated capability that we think we could buy kind of subscale and then scale it up across the franchise, but we haven't seen those yet to date in a way that we would kind of out of that stance.

Got it. And I guess, before we kind of delve into some of the specifics, just any, I guess, expectations in terms of high level thoughts on how 3Q is going so far? Any changes to your kind of 2025 outlook slide?

Yes. So I think third quarter is kind of progressing as we had hoped. Maybe starting with the balance sheet. Loan growth up a little bit on average. It will be, as we noted, kind of flat end of period to 6/30, ballpark, again, that's maybe 1-ish percent growth in C&I, offset by the expected rundown in residential real estate and some paydowns in CRE. So that's kind of the mix that we've been seeing slowing a little bit on D&I growth on the balance sheet. We expected that, some of that is maybe what real strength in the first half, some of it is more market placement, and you're seeing a lot of strength in that issuance in particular. So we're okay with that trade-off. Deposit, as expected, bounces you'll see up a little bit, again, seasonal, but we also let some balances run off, particularly on the commercial side in the second quarter, as we saw competition there that we thought was a little too aggressive. That's come back in line. I think we feel very good about not just our rates, but our balances. So that is progressing very well. NII probably a little bit stronger than we thought kind of up 3% to 4% in the quarter. And again, off the back of for pulling through all of the good loan performance and then continued good deposit performance in the quarter and year-to-date. I think we'll see a NIM that actually gets comfortably into the 2.70s if you recall at the beginning of the year, we had targeted 2.70% plus for the fourth quarter. We revised that when we took NII to -- from 20% -- to up 20% to 22%, we revised the exit NIM to 2.75% plus. We're going to be in that ZIP code in the third quarter, assuming there's not multiple cuts next week and now seems like there will be at least one. And so we have some chance to really get above that depending on rates, deposit competition loan growth, et cetera, by the end of the year. So trajectory on NIM and NII continues to be really good, and we think that will continue to '26. Fees, Randy talked about refilling the bucket in Q3. I think we'll be sort of flat to up on the quarter, nearing $700 million in fees for the quarter. And again, strength across our priority areas continues year-over-year. And then expenses will be up as we plan, maybe 3-ish percent in the quarter, and that is continued investment in tech and bankers. You'll see a little bit of IC pickup just from the strong performance and then stock price sort of hits that long-term equity count. And then lastly, credit continues to be stable. Reserves, I think, are kind of flat to maybe a slight release in the quarter. So net-net, on par with where we thought to maybe slightly to the better end.

A lot in there. That's good.

Always a lot in there.

Let me ask some follow-ups. So you talked about the outlook for loan growth. I guess you talked about some slowing on the commercial side. Maybe just kind of delve into is it just more kind of a pull forward, and that's the slowing or particular areas that you're seeing that?

Yes. So maybe I'll speak broadly and then Randy, feel free to fill in. I think maybe the slowing might indicate sort of lessening, I'd say it's really the first half was so strong, and some of that was coming out of April with a lot of demand pent up, and I think some pull forward opportunities that likely would have occurred during the year, but probably not when they did. So it's really sort of, this is where we thought the year would be. The first half was a little bit stronger. I would just add that in our second quarter call, we noted that none of the potential impacts of something like accelerated bonus depreciation was included in that because we just -- it's probably a little bit too early to know how that's going to shake out. But if that manifests and we see good loan growth, particularly in those areas of strength like industrial for us, we would expect to see that make its way to the balance sheet or in the capital markets space. So either way, we'd expect some strength on top of what we've already seen. I don't know if you have to add...

I would just characterize it as client activity is quite constructive. I think whether it's lower rates, certainly, this 100% bonus depreciation. We're certainly seeing clients take advantage of that. And it's broad-based. So it's not just one industry, we're seeing it broadly.

Maybe we'll put up the next ARS question. But as this is the audience is answering this quarter, I know last year at this conference, you talked about 20% NII growth for this year, people didn't believe you. You guided up to 20% to 22% in July. And now you're talking about it sounds like a better NII look than we thought, better exit NIM than we thought. Do you care to update that 20% to 22% number?

I do not care to update that. I care to reiterate that we are very confident in it. And look, the thing that's really been unclear, most of the year has just been what's the path of rates. I think we now feel like we're going to see a cut next week. Our internal models, frankly, would have said probably not. You see one, but to the extent we see 2%, 3%, 4% by the end of the year, that's why we provide a range. And again, we feel comfortable we can land within the range. If we have fewer cuts or we feel very comfortable that with maybe fewer cuts will get to the higher end of that just because of the timing of beta deployment. But we're also we've become much more dynamic in the last 2 years in terms of getting beta into the market, which is reflective of a mid-50s beta already on the down. And that, frankly, in my experience, I don't know how you feel, Jason, haven't been around for 100 years, as you noted.

Feels like 100.

Yes. But that beta is going into the market on a 100 basis point cut a lot faster than I think historically, we would have all expected. So a lot of it is going to be competition as well. But no update other than to say we feel very confident about where we are and we think '26 has got additional upside as we move forward.

I guess in the past, you've talked about ending '26 at 3% or so NIM. So even if the Fed cuts aggressively how do you feel about bogey?

Yes. I mean I think the challenge with cuts is always how much and how quickly and then how quickly you can respond from a deposit standpoint. So if you told me, hey, they're going to get 4 times next week. What does that do in the fourth quarter? I mean that's challenging just because of the kind of artificial nature of time in the 3 months. If you get until the end of fourth quarter next year, I think we have more than enough time to kind of dynamically manage the deposit base. So I think we can do very well in that scenario. And I think maybe the most important question there is why are we cutting as much as we're cutting. And if it's safety cuts and the economy remains constructive, we feel great about it because there's probably some loan opportunity in there. If it's because we're seeing real deterioration, then we'll probably start having different conversations.

Got it. And I guess on the second quarter earnings call, you mentioned $4 billion or so in excess cash in the near term, and you're already at the high end of your capital targets. So what do you need to see in this environment to get comfortable kind of bringing those back down to more normalized levels?

Yes. I think, one, stability and clarity maybe on rates and monetary policy, probably the biggest ones. We want to just -- and Randy and his peers do a great job staying close to clients and just making sure we have a real feel for how clients are feeling and how their expectations are evolving and it continues to be constructive that it gives us a lot more confidence. And then just getting some sense of our best view of the kind of wide range of scenarios going forward as long as we feel like the really rough patches are low probability, and we're well positioned to manage those, then I think you'd see us start to move on those. Cash, a little bit easier. You might start to see us really do that in this quarter and into the fourth. And then as we talked about on buybacks, you'll see those pick up as we get through the end of the year and then I think, get to a more normalized view in '26.

I guess on buyback. I think the phrase that Chris used on the July call was crawl, walk, run in terms of think of buyback for second half of this year into next. Maybe just help clarify, quantify, give us more context of what that exactly means?

So I think the easiest way to think about that is third quarter, pretty de minimis in the crawl as we start to walk, I'd say, think about managing down the market capital ratio. So we've said marked capital kind of 9.5% to 10%. We're near the top of that to the extent we're earning and going above that, then see us like getting the market to start to pull that down back within range. And then I think as we get into '26, you'll see something that feels, again, depending on where the macro is, seeing us manage closer to the middle of the range potentially than the top end of the range.

And we look about the next ARS question. Maybe just talk about profitability targets. It's been a while since Key provided kind of a refresh or updated views. I guess, any plans to update them? I think kind of 11% ROTCE currently, used to talk mid- to high teens. Is that still the right bogey? When do you think we can get there? What are the drivers?

Yes. Look, I think if you think about the 2 components of ROTCE and you say, where is your sort of ROA in terms of your operating performance and then actually what's the capital piece? We have clearly been low on the ROA piece that's coming back. We'll see something around 1% in this quarter. We'll start to build from there. There's no reason over time why we can't be in the 1.15% to 1.25% range, which I think is a very solid ROA. So then the question is, what's the denominator? We obviously are sitting on a fair bit of excess capital at the moment. Assuming we deploy that productively and intelligently, which is our plan. I think 15-plus ROTCEs and the kind of midterm are very realistic and reasonable.

Got it. And then in the closing minutes. You haven't mentioned Bank of Nova Scotia at all and there -- how does that influence anything that you're doing, whether it's acquisition appetite or growth drivers or what not last year. That was obviously a big focus of the shot.

Yes, maybe just a quick comment, and Randy is sort of leading some of the collaboration efforts with this. One, I'd say we're still trying to feel out what are the areas that are worthy of real investment versus sort of interesting to talk about. I would say we have 2 board members. One is an executive there, one designated by them. They've been incredibly valuable -- additions to the Board. So we're happy to have them. And we've got a very productive relationship with the management team. We have shared best practices in both directions, frankly, but we're still sort of siphoning through what are the opportunities and what are the ones that we could come here and talk to you about because they were -- because they're more meaningful.

The only thing I would add is that early was a financial transaction for both of us. With that said, are there going to be opportunities for us to collaborate I think so. But the transaction wasn't driven by that. And so I think our measured approach as we pursue some of those opportunities is reflective of that. But we have dialogue, and I'm confident that we'll find some opportunities to work other to the benefit of both franchises.

Great. With that, please join me in thanking Randy and Chris for their time today.