KeyCorp Q2 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ebrahim Poonawala - Bank of America - Analyst : Hey, good morning.

Question: Ebrahim Poonawala - Bank of America - Analyst : So I guess maybe just starting out with NII, I mean, it's a huge focus for the stock. I'm looking at slide 14, it seems like the $120 million is locked in no matter what so fourth quarter NII one or two. And then the upside from there is driven by how some of the second part of that or walk works out. So give us a sense of on the downside risk on NII, if loan growth ends up being weaker or negative in the back half and implications, I guess more so for '25 versus '24, just talk to us in terms of the you've given good color on the Fed rates. I'm just wondering what weaker loan growth would imply in the scenario where we get to the [2.5 name versus the 2.4]?

Question: Ebrahim Poonawala - Bank of America - Analyst : That's good color. Thanks, Clark for walking through. The other question, just on slide 10. You look at NPLs and criticized picking up sequentially, we are seeing a lot of banks talk more about losses coming from C&I. Remind us in terms of your outlook on sort of what you are seeing from your customers and C&I, any specific areas where you're seeing credit degradation that could lead to just higher NPLs going forward and charge-offs? Thank you.

Question: Ebrahim Poonawala - Bank of America - Analyst : Thank you for taking my questions.

Question: Scott Siefers - Piper Sandler Companies - Analyst : Morning, guys. Thanks for taking the question. So Clark, appreciate that sort of walk through on the NII, still have sort of NII related question. Maybe when you look at sort of the deposits that -- so the deposits base looks like it's going to come in better than you had anticipated previously. Can you maybe walk through what kinds of deposits are growing and what sort of what the spread looks like on those. So I think there's probably some question if we dialed back the loan growth expectation, but we're still getting funds in that will go into something? Just sort of what that spread looks like in your view?

Question: Scott Siefers - Piper Sandler Companies - Analyst : Perfect. Okay. Thank you, Clark. And then a little bit of a ticky-tack question on the swaps commentary on slide 13. So you said the $950 million annualized opportunity, which was that down a little from $975 million last quarter. So I've gotten a couple of questions. Is that represent a reduction in expectations? Or is it that we've just already absorbed that difference in the 1950s? What's still remaining in the future?

Question: Scott Siefers - Piper Sandler Companies - Analyst : Okay. Perfect. All right, good. Thank you for taking the questions.

Question: Ken Usdin - Jefferies - Analyst : Hey, guys, good morning. Just to follow up on just of loans in the context of the whole balance sheet. So I'm just wondering if you could give us a little bit more color on just how much of the loan growth versus what we see in [H8]. We see appears just you guys just being more conservative. And can you talk a little bit about like how much did you keep of your originated, did that change? And where specifically, when you mentioned earlier, Clark, the pipelines, like what areas do you see those pipelines coming in? Is it more just a straight-up commercial? Thanks. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2024 / 1:00PM, KEY.N - Q2 2024 KeyCorp Earnings Call

Question: Ken Usdin - Jefferies - Analyst : Great. Thank you for that color. And second question is just when we think about just the entirety of the balance sheet, your RWAs have come down a lot over the last year or so. CET1 is growing CET1, even with AOCI we can see in slide 24 up to [7.3], the stress test went a little bit tougher. So just how important is that is managing to that with AOCI number, if at all, relative to your 10, 3 regular way and just how you're thinking about just managing your capital position vis a vis the loan book and RWA growth? Thanks.

Question: Ken Usdin - Jefferies - Analyst : Okay, got it. Thank you, Chris.

Question: Erika Najarian - UBS - Analyst : Hi, good morning. (multiple speakers) hey, I'm just on slide 14. So it's pretty clear that $899 million-plus let's call it $125 million you've got [$1.24 billion] in theory, quote in the bag for 4Q '24. And I'm wondering of those green bars question Chris and Clark in terms of improved funding mix and loan growth, and we just heard Chris talk about how perhaps the macro environment is not that great for loan growth. Could you walk us through sort of the probability of those green bars being green and obviously, the last two will have everything to do with the rate curve rate. So and you gave us pretty good guardrails in terms of how to think about deposit costs. But tell us a little bit more about how you plan to achieve the improved funding mix in the loan growth to be net positive to that number?

Question: Erika Najarian - UBS - Analyst : Got it. And my second question is a follow-up to Ken's question about capital. I think what struck me on slide 11 is I'm not sure how different the forward rate versus flat rate scenario are interpreted, as declined by that much how much time versus rates, although granted you only have 25 basis points difference in terms of the belly of the curve here is really what's going to heal the AOCI. And obviously the stress test is a was a bit of a sort of a negative surprise. As Clarke said, you guys have always been a premier grower in commercial and if macro comes back, you would think that Key is in a position to outperform peers. So it's about and I guess, how much is this adjusted AOCI impacting if at all your growth plan, it seems to be impacting your multiple and how investors think about you, but perhaps, sort of square that for your investor base for us in terms of how your RMs are going to market versus this the sort of the difference between adjusted and reported. And Clark, just quick confirmation, should we assume a flat balance sheet from the [$170.6 billion] to through the end of the year? Thank you.

Question: Erika Najarian - UBS - Analyst : So just to confirm, it feels like, obviously the go to market strategy you very firm, Chris, if that's not impacted in terms of managing the balance sheet for these wins, should we expect any RWA mitigation or credit risk transfers? Or do you feel like that's very much a 2023 story at this point?

Question: Erika Najarian - UBS - Analyst : Got it. Thank you so much.

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Hi Chris. Hi Clark.

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Chris, I know this is not really quantifiable, but obviously you've been at this for quite some time, but I took interest in your comments about your pipelines and how strong they are. Can you give us some confidence on those pipelines and those pipelines? How confident are you that these are real that they could pull through as you look at it over the next 12 months?

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Very good. And then as a follow-up on the credit on your slide 10, I think you guys mentioned that there seems to be some improvement in the health care area. And in the C&I, I think you said it may have been durable consumer. The question on the C&I portfolio. Obviously, you guys have been very strong in capital markets for a number of years. And part of that, I presume you work with your sponsors, the private equity guys and in earning the fees from those folks, they tend to also use your balance sheet. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2024 / 1:00PM, KEY.N - Q2 2024 KeyCorp Earnings Call Is there any evidence that on the private equity side or the loans to no depository financials that category and I know it includes insurance companies and less riskier borrowers. But is there any evidence that there's any credit concerns in that category of loans?

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Got it. And Clark, well, I have you just a quick technical question on that slide 20, where you gave us the '25 refinancing some dollar amounts and the coupon on the what you're receiving. What's the increase for example, the [1.80%] on a weighted average rate received, if that was to convert today, what would it convert to same thing with the fixed rate loans?

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Very, very good. Thank you, Clark.

Question: John Pancari - Evercore - Analyst : Morning.

Question: John Pancari - Evercore - Analyst : As you're actually looking at the on the impact of the swap and treasury maturities and the benefit that NII and heavy focus on, the 4Q exit rate of demand and what it means. And clearly, that has a pretty positive impact on 2025. And I believe from a revenue perspective, you could be looking at double digit revenue growth and mid-teens or so on NII next year in terms of growth, just given that dynamic. What type of how should we think about how much of that benefit really fall to the bottom line operating leverage for next year? Looks like, it could be anywhere in the ballpark of 800 basis points to 900 basis points positive operating leverage based on how consensus is thinking about it, if you're looking at a 2% expense growth rate. So is it that wide of positive operating leverage that you're allowed to materialize and allow this to fall the bottom line or you think that we could be looking at something less than that.

Question: John Pancari - Evercore - Analyst : Okay. All right. Thanks. And then separately on the deposit cost side, I know you indicated that you expect some incremental pressure on deposit costs may increase this quarter, but a little bit less than first quarter and you started to CDS actions on that front. Can you maybe just help us think about the incremental upside that you think is likely under maybe a forward curve assumption when you look at deposit costs from here.

Question: John Pancari - Evercore - Analyst : Increasing rates, yeah sorry.

Question: John Pancari - Evercore - Analyst : Got it. Okay, great. Thanks, Clark.

Question: Matt O'Connor - Deutsche Bank - Analyst : Good morning. Just to bring it all together on the investment banking fees, the strong kind of out of pipeline, how do you think about the back half of the year? I think you talked about $300 million to $350 million of revenues maybe last month. So how you're still you still feel comfortable about that range?

Question: Matt O'Connor - Deutsche Bank - Analyst : Okay. And then sticking with fees, the trust investment management or investment services, obviously nice growth there some boost from the market, but just remind us what else is going on there that might drive growth beyond what the market's giving us here? Thank you.

Question: Matt O'Connor - Deutsche Bank - Analyst : Okay. Thank you very much. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies. JULY 18, 2024 / 1:00PM, KEY.N - Q2 2024 KeyCorp Earnings Call

Question: Manan Gosalia - Morgan Stanley - Analyst : Hey, good morning, guys. I just wanted to ask on the ACL ratio it's a larger coming down. You ratcheting up reserves from a dollar perspective to the ACL ratio has been going up fairly steadily. How do you think about those reserve levels and what's the right level here if the macro environment remains stable?

Question: Manan Gosalia - Morgan Stanley - Analyst : So I guess what you're saying is until there's uncertainty, probably keep the reserves at these levels. And then when you get a little bit more certainty, you can start to bring that down and right size that relative to your loan growth, is that as fair?

Question: Manan Gosalia - Morgan Stanley - Analyst : Got it. Thank you.

Question: Steve Alexopoulos - JPMorgan - Analyst : Good morning, everyone.

Question: Steve Alexopoulos - JPMorgan - Analyst : I want to start that Clark. Thank you for all the detailed disclosures on NII, and we've obviously beat that horse on this call quite a bit. But just assuming that we get two cuts this year, just a September and December. What's your bias in terms of where you'll likely be in terms of the NII range for the year.

Question: Steve Alexopoulos - JPMorgan - Analyst : Got it. Okay. Thanks. And for my follow-up question, I wanted to go back and ask John's question a little bit different on expenses. I know you're not going to give 2025 outlook at this point, but if you do achieve the expense outlook this year. I think that's basically three years in a row where you're having and real expense growth. And I guess we're curious of your lots of ways to achieve that. One of them is just deferring expenses and projects until the environment is better. It is that the can you just help us understand that? Is there a catch-up and expensive coming because you've been deferring and you have an expense growth for multiple years, or could the next year as the revenue environment gets better? Just looked like a more normal expense year for the company?

Question: Steve Alexopoulos - JPMorgan - Analyst : Got it. Okay. That's great color. Thanks a lot.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Hi, I think I'm missing something very basic and that is that you have the same no change to the fixed asset repricing. You have a less favorable loan growth guidance yet you still have the same NII guidance. So what am I missing and my logic?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : You said middle market pipelines are up 50% quarter over quarter. Is that correct? And how much is middle market of your total commercial?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : So even though you have such strong backlogs and seems like you have a certain degree of conviction, you still thought you should guide loan growth lower, is that correct?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : And then just a separate topic, Chris, in terms of the merger environment, I feel like the topic side down here recently, but you said that you'd be willing and able to pursue another First Niagara sort of deal. Is that still the case? No matter what circumstances do you think it would become more likely would be more likely after the election. What do you think the tone is in DC and what's your appetite?

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : And then last question, investment banking I know your mix is different. You're more loan syndications, you have mergers, but relative to the big banks, I know it's not apples to apples completely, but it just doesn't really compares very favorably to them. On the other hand, you said you have record backlogs in investment banking. So what areas investment banking are you seeing the record backlogs.

Question: Mike Mayo - Wells Fargo Securities, LLC - Analyst : Got it. Thank you.

Question: Peter Winter - D.A. Davidson & Company - Analyst : Good morning.

Question: Peter Winter - D.A. Davidson & Company - Analyst : Morning, that consumer loan growth was under quite a bit of pressure in the second quarter. I'm just wondering if you could talk about the outlook on the consumer side of the lending business?

Question: Peter Winter - D.A. Davidson & Company - Analyst : Would you expect a just given the low yields, a similar type of decline going forward on the consumer side?

Question: Peter Winter - D.A. Davidson & Company - Analyst : Just relative to the second quarter?

Question: Peter Winter - D.A. Davidson & Company - Analyst : Okay. And then just on a different question. Just on buybacks, I know there are no plans to buy back stock this year. But Chris, I'm just wondering what are some of the parameters you're looking at to get back into the market to buy back stock?

Question: Peter Winter - D.A. Davidson & Company - Analyst : And then just one more last clarification question, Clark on Steve's question about the NII range. You mentioned with two rate cuts closer to the bottom end of the range, does that mean closer to 2% down?

Question: Peter Winter - D.A. Davidson & Company - Analyst : Upper end of the downlink?

Question: Peter Winter - D.A. Davidson & Company - Analyst : Got it. Thanks. Thanks for taking the questions.