KeyCorp's fourth quarter 2023 earnings conference call featured the company's Chairman and CEO, Chris Gorman, along with Chief Financial Officer Clark Khayat and Chief Risk Officer Darrin Benhart. The company reported earnings of $30 million, which included $209 million in after-tax expenses. Gorman acknowledged the challenging year for the industry and for Key, but highlighted the company's efforts to enhance their balance sheet liquidity and capital position. Despite missing expectations, Gorman is confident that Key has made positive strides in preparation for the future.

The author expresses gratitude for their team's hard work and dedication in serving clients during a challenging year. They highlight their focus on relationships, which resulted in a decrease in loans but an increase in the number of relationship clients and deposits. The company also reduced its reliance on wholesale funding and raised significant capital through their unique distribution capabilities. They also mention their efforts to simplify and streamline their business by exiting non-relationship businesses.

In November, the company announced organizational changes, including consolidating and realigning business units to improve efficiency and the client experience. These changes affected 6% of employees and have allowed the company to hold core expenses flat and generate $400 million in savings. Risk-weighted assets decreased by $14 billion and the common equity Tier 1 ratio increased by 90 basis points to 10%. Capital metrics, including AOCI, also improved.

The bank is in a good position in terms of capital priorities and future capital requirements due to their underwrite-to-distribute model and asset and capital light businesses. Credit quality is also a strength, with low net charge offs and NPAs. The bank has limited exposure to high-risk categories and a majority of their loans are rated as investment grade or have high credit scores. Moving forward, the bank has a clear opportunity for net interest income growth as their short-term swaps and treasuries reprice, regardless of interest rate scenarios. This is due to the bank's efforts to improve balance sheet resiliency over the past year.

The company saw some success in the third quarter, with net interest income growing and the net interest margin bottoming out. They have invested in fee businesses and anticipate positive operating leverage for the full year. They also expect to outperform the industry in credit quality. The company has made difficult decisions and is now better positioned for the future. The retirement of a key member of the company was also announced.

Vernon has been an exceptional Head of IR, leading Key through numerous earnings releases and meetings with investors. He has formed strong relationships within the industry and the company. Brian Mauney has been welcomed as the new Director of Investor Relations, bringing extensive experience to the role. The fourth quarter results were impacted by three items, resulting in a decrease in net income from continuing operations. Non-interest income was stable and net interest margin increased. Fees declined and expenses grew due to the three items mentioned.

In the third quarter, expenses would have been stable without certain items. Net charge-offs were low and the allowance for credit losses was increased. The focus on building relationships and capital position contributed to strong risk discipline. Average loans decreased due to planned balance sheet optimization efforts. Risk-weighted assets also decreased and are expected to continue to do so. Key's commitment to primacy has resulted in stable core deposits, with commercial deposits growing 4% and consumer deposits growing 1%.

In the fourth quarter, the company saw an increase in commercial and consumer deposits, but this was offset by a decline in broker deposits as they focused on improving their funding mix. They were able to generate liquidity and reduce wholesale borrowings. The cost of deposits was 206 basis points and their deposit beta was 49%, in line with their previous guidance. Net interest income was $928 million, down 24% from the previous year, but up slightly from the previous quarter. The net interest margin was 2.07%, lower than the same period last year due to higher interest rates and a shift in funding mix. However, actions were taken to manage interest rate risk, liquidity, and funding mix, leading to an increase in net interest income and margin from the previous quarter.

In the fourth quarter, Key's net interest income was affected by higher interest-bearing deposit costs and a planned reduction in loan balances, but the net interest margin improved due to the termination of received fixed cash flow swaps. Non-interest income decreased from the previous year due to lower investment banking and debt placement fees, and from the previous quarter due to a decrease in other income. Non-interest expense increased due to various factors, including FDIC assessment, efficiency-related expenses, and a pension settlement charge.

In the fourth quarter, Key incurred efficiency related expenses, but excluding these, expenses were stable and down compared to the previous year. Credit quality remains solid, but nonperforming loans and criticized loans have increased. Key has significantly increased its capital position and does not expect to buy back stock in the near-term. The AOCI position improved and Key expects a reduction in its AOCR mark based on two scenarios.

The forward curve scenario predicts a decline in AOCI mark by 24% by the end of 2024 and 34% by the end of 2025, resulting in approximately $1.8 billion of capital build. In the flat rate scenario, the company still expects to accrete $1.6 billion of capital through 2025. The company's outlook for 2024 includes a potential range of scenarios for Fed interest rate cuts, with average loans expected to decline 5-7%, but period-end loans to remain stable. Average deposits are expected to be flat to down 2%, and net interest income is expected to be down 2-5% but still up low-single-digits compared to the fourth quarter exit rate.

The bank expects non-interest income to increase by 5% or more, with potential for even greater growth if market conditions remain favorable. Non-interest expenses are expected to remain stable, with a focus on cost management and simplification. The bank also plans to continue investing in its franchise and expects moderate positive operating leverage in 2024. Credit quality is expected to remain strong, with a slight increase in net charge-offs. The bank's GAAP tax rate is projected to be around 20%. The bank also provided more detail on the pacing of its net interest income opportunity, with a total benefit of approximately $900 million by the first quarter of 2025. This benefit will increase each quarter as more swaps roll off and treasuries mature. The bank is now halfway through this process, having completed three quarters.

In 2023, the company realized $85 million in additional income from their positions. The following four bars show the progression through 2024, with each bar representing the value for the quarter. The company estimates a total benefit of $500 million in 2024, which is a significant increase from the $85 million received in 2023. The final bar on the far right shows an estimated benefit of $220 million for the first quarter of 2025, representing an annualized value of $900 million. This is due to the roll-off of swap and short-term treasury portfolios. Other key factors driving the company's net interest income outlook include deposit betas, balances and mix, loan growth, and seasonal factors. The company expects a 3% to 5% decrease in first quarter NII from the fourth quarter, but anticipates growth and acceleration in the second half of the year as the pace of swaps and U.S. Treasury maturities increases.

In the fourth quarter of 2023 to the fourth quarter of 2024, the company expects a 10% plus growth in quarterly net interest income, with an exit of over $1 billion. The net interest margin is also expected to improve significantly by the end of 2024. This will put the company on a strong trajectory for 2025. The operator then opens the call for a Q&A session. In response to a question about the net interest income opportunity, the speaker provides a breakdown of the key factors that will impact the company's net interest income, including loan balances, asset yields, deposit balances and pricing, and the swaps and treasury portfolio. The company expects a 2% to 5% decrease in net interest income from 2023 to 2024, primarily due to a decrease in loan balances and flat to down deposit balances.

The paragraph discusses the impact of interest rate cuts on the bank's earnings, with a decrease in earning asset yields and an increase in deposit and funding costs. However, the bank expects to see growth through quarterly swaps and a better funding mix. The fourth quarter of 2024 is expected to see a significant increase in NII, and the first quarter of 2025 is expected to have a strong start due to maturing treasuries and swaps.

The speaker, Clark Khayat, explains the components that are affecting the company's forward curve and timing of rate cuts. They expect a range of 2% to 5% in response to the current forward trend and the Fed's dot plots, with a general view of four cuts starting in the middle of the year. They also discuss the 3% normalized margin as their target and the impact of swaps and treasuries on their margin in the coming quarters.

Analyst John Pancari congratulates Vern, the CEO, and asks about the company's projected fee and net interest margin (NIM) guidance. Chris Gorman, a company representative, responds by stating that the projected NIM of 280+ is achievable in the short term, but may require a more favorable yield curve for the longer term goal of 3%. He also mentions that the company's fee guidance may be conservative due to the current state of the capital markets, but they expect it to improve in the second half of the year. Additionally, he notes that the company's hedging income may also improve as they continue to grow their balance sheet.

The speaker wishes the person good luck and welcomes someone new. They then discuss the potential impact of interest rate cuts on the bank's net interest income, specifically in terms of deposit pricing and the composition of their deposit base. They mention that a large portion of their deposits are commercial and are indexed or index-like, which could lead to a mid-teens beta on a rate cut. They also mention the potential for drift up on the consumer side and a shift from interest-bearing to noninterest-bearing deposits.

The company is planning to make four interest rate cuts starting in the middle of the year, with the biggest impact expected in 2025. They are taking steps to prepare for these cuts and are closely monitoring the competitive environment. There was a 25% increase in nonperforming assets in the quarter, but the company is not concerned as they believe most of these assets are low-risk. The increase in criticized assets is due to higher interest rates, which have caused some stress on debt service coverage. The company does not see this as a major issue.

The speaker discusses the underwriting process for loans and the factors they consider, such as clients' willingness to build an interest reserve and the value of collateral. They mention that they tend to underwrite at lower CLTVs and have not seen many losses in this area. They also mention that there were three specific credits, one of which was real estate, that contributed to an increase in non-performing assets. The next question is about RWA reduction and the speaker explains that they have gone through their entire portfolio and made adjustments in three areas, including exiting certain businesses and being more conservative in capital treatment. They state that this process is now over, but they will continue to monitor their portfolio.

The speaker discusses the recent decrease in risk-weighted assets and expects loan growth to pick up in the future. They also mention managing the business for a potential recession in 2024 and the expected decline in consumer business. The other speaker adds that the loan decline in 2023 will likely rebound in 2024, with potential for further growth if the economy improves. The questioner asks about the optimal interest rate environment for Key in 2025.

During a conference call, Clark Khayat was asked about the optimal environment for the business in terms of interest rates and yield curve. He believes that an upward sloping yield curve is beneficial for the business, but he is not concerned about the number of rate cuts. He also discussed the impact of RWA reductions on net interest income and clarified that the decline in the first half of the year is due to actions taken last year to manage RWAs. He believes that there will not be any more wholesale actions that could impact the NII and NIM trajectory in the second half of the year.

The speaker discusses the impact of non-relationship and credit-only clients on the company's loan reduction and first quarter pressure. They also mention the potential for loan growth later in the year and predict NIM expansion and NII growth. The second question asks about the funding needs and sources, specifically if the commercial deposits are indexed on the way down. The speaker also asks for a breakdown of the maturity schedule on Slide 14 to understand the impact of the cuts in the curve on swaps.

The speaker discusses the second quarter earnings and addresses concerns about commercial deposits. They believe they have a good understanding of how the dynamics will work and expect a portion of the indexed deposits to come through. The fee guidance of 5% assumes a slightly higher level than the annualized fourth quarter, but not quite at normal levels.

Gerard Cassidy from RBC asks Chris Gorman about the increased competition from private credit lenders in the commercial space. Gorman explains that these lenders are actually customers of the bank, as the bank distributes a lot of its capital to these funds. He also sees this as an opportunity for the bank to partner with these lenders and provide them with other services, such as payments and capital markets, while also avoiding holding on to risky paper. Gorman also mentions that the bank has minimal exposure to office space, which is beneficial in the current environment.

Chris Gorman, CEO of KeyCorp, discusses the company's exposure to the multifamily housing market, particularly in low-cost housing. He explains that the company has limited exposure to this market due to their decision to exit certain cities in the past. However, their third-party commercial loan servicing business has given them insight into the growing segment of multifamily housing in some gateway cities. He also mentions that while there was a record year in 2023, the number of loans in active special servicing has actually decreased. Gerard Cassidy, an analyst, wishes Vern, KeyCorp's retiring CEO, good luck and shares a fond memory of an investor conference from 1995.

Chris Gorman, CEO of Key, discusses the importance of scale and how it has changed in the past year. He notes that Key is 40% fee income, which is at the high end for a Category 4 bank, and that they look at this metric to gauge their performance. Gorman also mentions that scale may be more important now due to factors such as carrying more capital and increased cybersecurity concerns, but he does not believe it is the sole solution for Key.

The speaker discusses the company's focus on targeted scale and not competing with larger banks. They also mention the importance of corporate deposits and their success with acquiring niche businesses. However, they are not currently looking at acquiring depositories due to regulatory concerns and potential losses.

The speaker discusses uncertainty in the marketplace and the value of deposits in the company's book. They mention that they are focused on building their business banking business and estimate that 30% of the value is in payments and deposits. The speaker also mentions that they will confirm this percentage and then moves on to a question from Steven Alexopoulos about NIM and expenses in the future.

The speaker discusses the structural differences in Key's loan book, particularly in their C&I, CRE, and consumer portfolios, which have higher quality borrowers and collateral. This may lead to lower base NII but also better credit losses. They also mention their efforts to monetize these clients and invest in business growth. They have been tight on expenses to maintain investment capacity, but it is difficult to predict their future actions.

The speaker discusses the importance of investing in good clients and technology, and mentions their success in infrastructure over the past decade. They plan to continue investing in their franchise to remain competitive. The other speaker mentions their focus on organic growth and investments in their integrated corporate and investment bank, payments, and business banking. The first speaker addresses concerns about commercial real estate loans and explains that they have been able to renew them due to low LTV and higher cap rates, refuting the perception of "extend and pretend" tactics.

Chris Gorman discusses the current state of loans coming up for renewal, reflecting on the company's past losses in real estate during the financial crisis. He explains that the company has since rebuilt its business model and only finances the best real estate projects. As a result, the company has been able to ask for interest reserves from borrowers due to the rise in interest rates. This success is a result of the work done 10 years ago. In response to a question about expenses and efficiency, Gorman emphasizes the importance of risk management within the company.

The speaker discusses the responsibility of managing expenses and revenue, mentioning a decrease in staff and the impact of exiting certain businesses. They also discuss the possibility of a soft-landing scenario and the importance of controlling inflation. They note that their clients are currently in good shape, but inflation may be stickier than expected.

The speaker believes that if there is a soft landing, there will be opportunities for loan growth. They are planning for a short recession in 2024 and congratulate the new leaders of the company. The call has now ended.

This summary was generated with AI and may contain some inaccuracies.