KeyCorp's Head of Investor Relations, Brian Mauney, welcomes participants to the company's second quarter 2024 earnings conference call. He is joined by the CEO, Chris Gorman, and CFO, Clark Khayat. The company reported earnings of $237 million, which is down from the previous year but up sequentially. Revenue was flat and expenses were well-controlled. The company remains confident in its ability to deliver on its commitments for net interest income for the full year and fourth quarter of 2024.

Key experienced positive growth in deposits and non-interest income in the second quarter. They saw a 1% increase in deposits and a decrease in deposit costs. Non-interest bearing deposits stabilized at 20% of total deposits and client deposits were up 5% year-over-year. The company also saw growth in consumer relationship households and has been disciplined in pricing. In their wealth management business, they have added a significant number of households and assets since launching last year. They also have a large opportunity within their existing customer base. In commercial payments, they have seen strength in commercial deposits and cash management fees are growing. Their focus on verticals and embedded banking strategy have been successful in creating deposit opportunities.

The investment banking business had lower fees in the second quarter but remains optimistic about the future due to high pipelines and improved outlook for other revenue streams. The commercial loan servicing business is performing well and provides valuable insights into the real estate market. Loan demand and pricing remain competitive, but the company expects stabilization and growth in the second half of the year. The Common Equity Tier 1 ratio and stress test results show a strong capital position for the company.

In the second quarter, Key reported earnings per share of $0.25, an increase of $0.05 from the previous quarter. Revenue remained flat, with a slight increase in net interest income offset by a decline in non-interest income. Expenses decreased by 6% and credit costs were stable, with a $10 million addition to the allowance for credit losses. Year-over-year, EPS declined due to a tough net interest income comparison, but this is expected to improve in the next quarter and the second half of the year.

The fifth paragraph discusses the growth in non-interest income and flat expenses. It also mentions a decline in average loans due to low client demand and intentional runoff of low yielding consumer loans. However, the bank is optimistic about stabilizing or improving loan balances in the future. Average deposits increased, driven by growth in both consumer and commercial deposits. The bank has also taken a more conservative approach in adding term deposits in preparation for potential changes in liquidity rules. Non-interest bearing deposits stabilized and the interest-bearing deposit beta was 53%. Deposit rates have remained stable, but there has not been much opportunity to reduce them due to higher rates.

Despite not offering the highest rates or cash premiums, the company has still been able to attract client deposits. Net interest income and margin increased slightly, driven by fixed rate asset repricing and the impact of forward starting swaps. Non-interest income also increased, primarily due to growth in trust and investment services, commercial mortgage servicing fees, and investment banking cases. However, corporate services income declined due to a return to normal levels after elevated activity in the previous year. Commercial mortgage servicing fees also increased due to growth in servicing and active special servicing balances.

In the second quarter, Trust and Investment service fees grew 10% and assets under management increased 7%. Investment banking fees were consistent with prior guidance. Non-interest expenses were flat year-over-year and down 4% sequentially. Credit quality remains solid with low delinquencies and non-performing loans. The bank continues to build its capital position with CET1 up 20 basis points and tangible common equity ratio increasing to 5.2%.

In the past 12 months, we have reduced our DD01 and our balance sheet is effectively interest rate neutral. Our AOCI has improved by $170 million and we project further improvement through 2026. Our P&L guidance remains unchanged and we have updated our loan and deposit guidance. We believe we can hit our net interest income commitments even if loan volumes are slightly lower. We have realized about 50% of the opportunity from swaps and short-dated treasuries maturing.

The company expects to capture an additional $480 million in annualized NII over the next three quarters, with the most significant benefits occurring in the fourth quarter and first quarter of 2025. They have outlined their plan to reach a $1 billion plus NII by the end of the year, taking into account potential rate cuts by the Fed. They anticipate growth from various sources, including lower-yielding assets and maturing consumer loans. Even if there are two rate cuts this year, they believe they can still meet their NII target for the year.

The company expects to see improved balance sheet dynamics and benefits from the $7 billion of forward starting to receive fixed swaps that come off in the first half of 2025. They also anticipate higher client transaction activity and more demand for credit if there are rate cuts. The call will now move on to the Q&A portion. The first question is from Ebrahim Poonawala from Bank of America, who asks about the downside risk on NII if loan growth ends up being weaker or negative in the back half. The company has been consistent in stating that a lot of the pull-through will happen in the second half of 2024.

The paragraph discusses the structural roll-off in swaps and treasury, with $5.5 billion of treasury and $3.2 billion of swaps maturing in the second half. The company expects deposit costs to continue to rise and loan yields to come down, potentially impacting loan balances in the future. The company's pipelines are strengthening, but lower loan growth could have implications for the size of the balance sheet in 2025.

The speaker believes that rate cuts will lead to an increase in client activity and strong growth in loans in 2025. They mention that Key has been a leader in commercial loan growth in the past and they see no reason for this to change. They also highlight some potential opportunities for repricing in 2025, including swaps, fixed rate loans, and fixed rate securities. They are confident in their ability to grow loans and attract clients in the commercial sector.

The speaker addresses concerns about the increase in non-performing loans and criticized loans, and explains that the bank's C&I book is in a good position with a majority being investment grade and secured. They mention some industries that have been impacted by the current economic situation, but also note some areas that are showing signs of improvement. The bank has also built up reserves in anticipation of potential charge-offs in the future.

The speaker discusses the bank's comfortable range for their net interest income and mentions that they may tend towards the higher end due to loan charge-offs. They also mention their focus on growing operating and checking accounts, adding CDs, and optimizing funding. They have built a cash position of $15 billion and expect to see growth in deposits in the back half of the year.

The speaker discusses their positive outlook for the commercial book and their active dialogue with clients about their accounts. They mention their success in moving clients towards index-like products and shortening CD maturities. They also mention the potential for rate cuts and their conservative approach to managing down betas. The speaker also addresses a question about the swaps commentary and clarifies that the $950 million annualized opportunity may have decreased due to changes in the forward curve.

Ken Usdin from Jefferies asks about the loan growth and balance sheet of the company. Chris Gorman responds by saying that loan demand is low due to concerns about the economy, interest rates, and uncertainty around the election. He also mentions that clients are hesitant to borrow due to potential changes in tax policy.

The speaker discusses how the rate of inflation is impacting inventory and utilization rates. They also mention raising $23 billion for customers and keeping 16% of it on their balance sheet. They have seen some degradation in structure in the marketplace, but are not reaching for it. On the positive side, they are starting to see transactional finance in their pipeline. The speaker also mentions that their RWAs have decreased and their CET1 has grown, even with AOCI, which was tested more rigorously.

On Slide 14, it is clear that there is $1.24 billion secured for the fourth quarter of 2024. The green bars represent improved funding mix and loan growth, but the likelihood of these remaining green depends on the rate curve. The company has given guidance on deposit costs.

The speaker discusses the company's plan to improve their funding mix and achieve net positive loan growth. They plan to bring down FHLB advances and manage deposit costs. They expect loan growth in areas such as renewables, affordable housing, and healthcare. The speaker also addresses concerns about capital and mentions the impact of time and rate on AOCI. The stress test was a negative surprise.

The speaker asks about the impact of adjusted AOCI on Key's growth plans and multiple, and if the balance sheet will remain flat. The response is that the AOCI has no impact on the company's ability to outperform peers and the balance sheet is expected to remain relatively flat, with no significant changes in earning assets. There are no plans for RWA mitigation or credit risk transfers in the near future.

Christopher M. Gorman and Erika Najarian discuss the company's consistency and understanding of their portfolio, as well as their strong pipelines. They spend a lot of time reviewing and analyzing their pipelines, taking into account probability, time, and fees. While some deals may fall through, they are confident in their ability to close on some in a timely manner.

The company's loan pipelines have been weaker due to deals being done outside of the company, but their investment banking pipelines are strong. There has been improvement in the health care and C&I areas, and there are no credit concerns in loans to private equity firms. The company has been underwriting leverage loans every quarter and is not concerned about this portfolio. The company has only had one loss in their financial concentration portfolio in the past 20 years.

The speaker, Gerard Cassidy, is asking a technical question to Clark Khayat about a slide showing the 2025 refinancing dollar amounts. Khayat explains that they are putting forward starters on in 2025 at a 4% rate, which is favorable compared to the 180 and 278 rates in the future. The fixed rate consumer loans are at a 6.5% to 7% range, and the C&I rate is at 7%. The securities rate is at 5.5 to 5.75 range.

John, a question was asked about the impact of the swap and treasury maturities and the benefit to NII. The speaker, Clark, stated that there is a heavy focus on the 4Q exit rate of the NIM and it could have a positive impact on 2025 with potential double-digit revenue growth and mid-teens NII growth. However, they have not yet released their view on 2025. There was also a question about deposit costs and Clark stated that they expect some incremental pressure, but it will depend on any potential rate cuts. They have guided to mid-50s and one rate cut may have a minor impact.

The speaker discusses the potential impact of a cut in September on the beta cycle and the overall cost. They also mention a strong pipeline for investment banking fees and confirm their previous guidance for the back half of the year. They also mention growth in the Trust Investment Management and investment services, particularly in the mass affluent business.

The speaker discusses how their company brought in 30,000 new customers and $3 billion in assets, which drove a significant increase in a particular line. They then address a question about the ACL ratio and explain that it is determined by loan growth, the macro economy, and individual credit evaluations. They mention that they may adjust the reserves in the future based on these factors.

Clark and Steven discussed the potential impact of two interest rate cuts on the company's net interest income (NII) and the outlook for expenses. Clark stated that with two cuts, the company's NII would likely be closer to the lower end of their range, but he believes it would benefit the overall health of the business. Steven then asked about the company's expense outlook, wondering if the lack of expense growth in the past few years was due to deferring expenses until the environment improves. Christopher responded that the company is expecting a more normal expense year as they continue to recover.

The bank has been able to invest in people, technology, and business growth due to a reduction in expenses. However, expenses are expected to increase in 2025 as the business continues to grow. This increase is not due to deferred expenses, but rather a need for continued investment. The bank's NII guidance remains the same, despite a less favorable loan growth outlook, due to a range of factors such as structural fixed asset repricing and stronger deposit performance.

The speaker discusses loan growth and pipeline increases in the middle market, which accounts for about 40% of total commercial business. They mention that although they have strong backlogs and conviction, they have guided loan growth lower due to their exit rate being lower than their average loan rate. The speaker also mentions the current merger environment and states that they do not see any deals happening in the near future due to obstacles and uncertainties, such as potential approval and the impact of a soft landing.

The speaker discusses the success of their company's acquisition of First Niagara, which allowed them to keep clients and reduce costs. They predict future consolidation in the industry and plan to focus on acquiring niche businesses. In terms of investment banking, they have a strong backlog in M&A due to their focus on certain industries.

The commercial mortgage business is expected to pick up in the second half of the year as rates come down. The consumer loan growth was under pressure in the second quarter, but the company will continue to support clients through off-balance sheet methods. There may be a decline in the consumer lending due to low yields.

In the second quarter, consumer loan growth decreased more than expected, but there were no unique factors that caused this. The company does not plan to buy back stock this year due to uncertainty about capital requirements. If there are two rate cuts, the company's net interest income will be closer to the upper end of the 5% decrease range.

Christopher M. Gorman thanks everyone for participating in the call and directs any follow-up questions to Brian and the Investor Relations team. The conference is now concluded and the operator thanks everyone for using AT&T Teleconference Service.

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