The operator welcomes everyone to the 2024 First Quarter Earnings Call and reminds participants that the call is being recorded. Brian Mauney, KeyCorp's Director of Investor Relations, introduces Chris Gorman, the Chairman and CEO, and Clark Khayat, the CFO. The company reported earnings of $183 million or $0.20 per share, with solid underlying results. Revenue was flat, but investment banking had its best first quarter result in the company's history. Fees, retail relationship households, and commercial clients all saw increases. Customer deposits were also up year-over-year.

In the second quarter, the company reduced reliance on higher cost brokered CDs and wholesale borrowings, while controlling expenses and maintaining low nonperforming assets and credit losses. They also saw improvement in capital ratios and a strong performance in their capital markets business, particularly in targeted industry verticals. The company raised over $22 billion in the first quarter and announced a partnership with Blackstone to accelerate growth and manage credit concentration risk.

The recent deal validates the company's underwrite-to-distribute model and they will continue to explore similar arrangements. The company has also launched a new program, Key Private Clients, which has been successful in enrolling new households and increasing assets under management. Credit quality remains strong, but there has been an uptick in criticized loans due to the belief that inflation will remain high. A deep dive was performed on clients most impacted by this scenario and it confirmed that there will be low loss content in these loans. The majority of criticized commercial loans are current.

In the first quarter, the company reported earnings per share of $0.20, including a $0.02 impact from the FDIC special assessment. The company is on track to meet its net charge-off guidance and is focused on generating profitable growth. The company received an outstanding rating from the OCC for meeting or exceeding the terms of the Community Reinvestment Act. Net interest income declined as expected, while noninterest income increased due to strong investment banking performance. Expenses were down and essentially flat compared to the previous year.

The provision for credit losses remained flat at $101 million, with $81 million in net loan charge-offs and $20 million in credit reserve build. The common equity Tier 1 ratio increased to 10.3%, while tangible book value declined 1% due to higher rates. Average loans and deposits both declined, reflecting intentional actions taken to reduce low-return relationships and the runoff of certain loan types. This was also influenced by lower client demand and the return of capital markets activity. The bank remains disciplined in its balance sheet management and expects new loan origination to pick up throughout 2024. Deposits decreased slightly, with a reduction in brokered deposits and a slight increase in interest-bearing costs.

The company's cumulative interest-bearing deposit beta has increased by 3 percentage points since the Federal Reserve began raising interest rates. They provide a breakdown of their deposit mix and commercial book by product type and interest-bearing business. Net interest income and margin decreased due to lower loan volumes, higher deposit costs, and changes in funding mix. Non-interest income increased by 6% and investment banking fees reached a record high. Commercial mortgage servicing fees also saw a 22% increase.

In the final paragraph, the growth of Trust and Investment Services is highlighted, with a 6% increase in income and a 7% increase in assets under management. However, there was a decline in corporate services income by 9% due to LIBOR to SOFR related transactions and a 5% decline in cards and payment fees due to lower spend volumes and interchange rates. Non-interest expenses were flat compared to the previous year, but increased slightly from the previous quarter. Credit quality remained solid, with net charge-offs below the target and minimal increases in delinquencies and non-performing loans. However, there was an increase in criticized loans, mainly in the C&I portfolio.

During the quarter, the company conducted a thorough review of their loans and reaffirmed their collateral coverage. They also engaged with borrowers to understand any operating pressures and analyzed secondary payment sources. As a result, the company remains confident in their prior loss guidance for 2024. The company also provided a breakdown of the $20 million increase in their credit allowance, which was partially offset by an improved macro outlook. Their net upgrades to downgrades ratio improved, resulting in a continued build of their allowance for credit losses. The company also has a strong capital position, with CET1 at 10.3% and a tangible common equity to tangible assets ratio of 5.04%. This is despite the increase in five-year rates, which the company has been working to reduce their exposure to.

The company has been taking steps to reduce its securities portfolio and duration, as well as entering into fixed swaps and terminating cash flow swaps. This has resulted in a 27% decrease in DVO1 over the past year. The company expects to see a decline in their AOCI mark over the next few years, which would provide approximately $1.7 billion of capital build. Their outlook for 2024 is unchanged from what was shared in January, with the only potential challenge being ending loan balances. However, this will not impact their ability to deliver on net interest income commitments. The company also updated their net interest income opportunity from swaps and short-dated treasuries maturing, which has increased to $975 million.

The company has realized 30% of their $886 million net interest income opportunity, leaving $650 million to be captured in the next 12 months. They expect to reach a net interest income of over $1 billion by the end of the year, with $120 million coming from swaps and U.S. Treasuries. They also anticipate a modest benefit from lower funding costs and an improved net interest margin. If rates remain flat, the company will see more earning asset repricing benefits offset by higher deposit betas. They plan to support loan growth throughout the year.

The speaker discusses the potential impact of loan demand on the company's net interest income in the fourth quarter. They state that they still expect to meet their guidance, regardless of whether loan demand remains soft or improves. They also mention that the impact of loan growth on net interest income will be minimal in the current year. The range of outcomes for loan growth is not a significant factor in the overall net interest income.

The paragraph discusses the factors that impact loan growth, including asset repricing, funding, and demand. The speaker also mentions the new agreement with Blackstone and how it plays into the bank's loan origination and distribution strategy. The bank has demonstrated an ability to grow loans, but there is currently a lack of demand. The bank has also raised funds but only put a small percentage on its balance sheet, as it can better serve clients through other arrangements.

The speaker discusses three factors that must be considered when choosing loans to put on their balance sheet: risk profile, return requirements, and current market conditions. They believe that the best time to make bank loans is during a downturn, which they predict will happen. However, they also mention that they are focused on serving clients through capital-light businesses, such as payments, investment banking, wealth management, and business banking. They believe that all banks will need to carry more capital in the future and are repositioning their business model to reflect this.

Chris Gorman, CEO of Bank of America, discusses the areas where he sees potential for growth in the coming years. He mentions strategic transactions, such as M&A, as well as capital-intensive industries like renewables and affordable housing. He also predicts that as inflation rises, businesses will start investing in property and equipment, leading to opportunities for loan growth. Gorman also acknowledges that the current weakness in bond market disintermediation is affecting revenues in the investment banking and capital markets divisions, and expects a pullback in fees in the second quarter.

The speaker discusses the company's record backlogs in their M&A business and the potential impact of market volatility on future transactions. They also mention building reserves as a proactive measure in anticipation of a higher-for-longer environment. The company is stressing their portfolio and focusing on leveraged assets and real estate. This is driven by the assumption that interest rates will remain low for an extended period of time.

The speaker discusses their assumptions about the possibility of a recession and how it factors into their overall view. They also address expenses and how they have made provisions for a potential recovery in investment banking. They mention the additional FDIC charge but feel confident in their ability to cover it. They then move on to discussing partnerships with private credit and how they underwrite loans and make decisions.

The partnership with Blackstone is mainly to support more clients and manage credit concentrations in the specialty finance area. Blackstone has an option to participate in credits that fit their criteria, but the underwriting and business operations are still managed by the company. The partnership is a one-year deal and will be tested throughout the year. It is expected to help grow the portfolio and balance sheet while also providing a modest asset management fee. The company hopes to explore similar opportunities with Blackstone or other partners in the future to better serve clients. The partnership may also help with deposits by allowing the company to establish relationships with larger corporations.

During an interview, Clark Khayat and Manan Gosalia discuss Blackstone's business and loan review. Chris Gorman sheds light on what the company has learned from its servicing business, specifically in the office, multifamily, real estate, health care, and consumer services industries. He also mentions that there will likely be consolidation in the health care industry due to cost pressures. Ebrahim Poonawala follows up with a question.

The interviewer asks about the bank's outlook for a recession and how they are stress testing their loan book for higher interest rates. The CEO responds that higher rates would benefit their net interest income, but he hopes for a couple of rate cuts later in the year for the overall economy. He also expresses caution about assuming a soft landing without damaging the strong labor market. The interviewer then asks about the bank's strategic focus, and the CEO mentions optimizing the balance sheet and controlling expenses as key areas.

The speaker discusses how 2023 was a reset year for KeyBanc and how they have now shifted towards playing offense. They are investing in areas such as payments, investment banking, wealth, and business banking. The loan-to-deposit ratio is important and they have taken it down to 77. The speaker also mentions that KeyBanc Capital Markets is more focused on advisory and middle market companies rather than equity deals.

The speaker is discussing the impact of M&A on their business and how it relates to other areas such as financing and hedging. They mention that they are positioned well and have a strong M&A backlog, but their focus is on middle market businesses rather than larger deals. The speaker also notes that the multiplier effect of mergers varies and their M&A backlog is currently at record highs. They believe that the volatility of interest rates is a factor in transactions and hope for a more stable market.

During an earnings call, Chris Gorman, CEO of KeyBanc Capital Markets, was asked about the company's revenue over a 10-year horizon. Gorman stated that their normalized investment banking is typically around $600-650 million and has seen double-digit growth in the past. He believes they can continue this growth in the future. Another question was asked about the company's loan portfolio and Gorman explained that they have purposely exited single credit relationships in order to focus on more profitable sectors. He also mentioned their strategy of building their business bank deposit base, which differs from their commercial bank business line.

The speaker discusses the importance of cross-selling in order to generate value for the company. They mention the need to exit clients who cannot be penetrated in order to free up capital for more profitable opportunities. The speaker also explains how their focus on payments and other products can deepen relationships with customers and make them more profitable.

Chris Gorman, CEO of a company structured around industries, discusses the company's ability to implement new ideas but notes that the company must be receptive to them. In response to a question about loan increases, Gorman explains that debt service coverage is the main factor for a loan moving into the criticized category. He also mentions the company's readiness to play offense again, but acknowledges a cautious approach to loan growth due to low loan demand and flat utilization.

Clark Khayat, speaking on behalf of the company, summarizes their strategy for growth, which includes disciplined loan growth, quality deposit growth, and monetization through fee platforms. He also mentions that they expect a strong margin for the current year and that they hope to reach a more normalized margin of 3% by the end of next year. However, this is dependent on the shape of the yield curve and absolute rates. He confirms their guidance for the current year but cannot predict the yield curve for 2025. They believe their goals are achievable with their current business model and a more normalized rate environment. The operator then announces that there are more questions in the queue, and Steve Alexopoulos from JPMorgan is next.

Janet Lee, speaking on behalf of Steve Alexopoulos, asks about the company's stance on investment banking and capital markets. The company maintains its outlook of $600 million to $650 million for IBs this year, but there may be some decline in the second quarter due to rate volatility. The company is not prepared to say if they will reach a full normalized view. When asked about the office CRE portfolio, the company does not have specific numbers on hand but is monitoring it closely.

Gerard Cassidy from RBC Capital Markets asks a follow-up question about the Blackstone relationship. Clark Khayat and Chris Gorman explain that it is a more formalized arrangement for distributing assets, and allows them to manage concentrations at origination. Gerard asks if they have worked with Blackstone before and they confirm they have on a transactional basis. John Pancari from Evercore then asks a question.

During a conference call, John Pancari asked Chris Gorman about the bank's approach to evaluating criticized assets. Gorman explained that they only consider the primary source of repayment, which is the cash flow of the borrower, and do not take into account any recourse agreements or secondary sources of repayment. This is a conservative perspective and may result in some assets being classified as criticized even if the borrower has a high market value. Clark Khayat clarified that while the primary repayment is used for risk rating and classification, the secondary sources are considered when determining ultimate loss. Mike Mayo asked about weak loan growth, and Gorman attributed it to both a lack of investment by businesses and a wait for interest rates to drop.

The speaker believes that both interest rates and uncertainty about the economy have an impact on decision makers. They do not necessarily think a recession is imminent, but there is a lot of uncertainty about the future of the economy and whether the Fed will be able to engineer a soft landing. The moderator thanks the participants and reminds them to direct any follow-up questions to the Investor Relations team. The call concludes.

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