KeyCorp Earnings: Loan Growth Guidance Has Worsened

Key Morningstar Metrics for KeyCorp

• Fair Value Estimate: $19.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of KeyCorp’s Earnings

For the second quarter, KeyCorp KEY reported net income to common shareholders of $237 million, or $0.25 per diluted share, on $1.5 billion of net revenue. Another incremental $5 million FDIC special assessment charge related to March 2023 banking events did not significantly impact results, which were in line with our expectations, besides the surprise of loan growth being weaker than expected. We do not anticipate a material change to our fair value estimate, and we continue to view shares as undervalued.

Net interest income bottomed out sometime in the quarter and ended up 1.5% higher than the previous quarter. We are a bit more negative on NII for the year, because while deposit costs are stabilizing, they’re continuing to rise faster than at other regional banks under our coverage that have reported so far. Loan balances have also declined, which drags on interest income. We think these two factors will partially offset the NII benefit gained from repricing short-duration swaps and Treasuries. As a result, we believe 2024 NII will decline by around 4%, which is on the upper end of management’s guidance.

Key’s expenses were stable from the prior-year quarter, demonstrating that it’s maintaining prudent expense discipline. Fee income was down 3% from the prior quarter because this quarter had weak investment banking fees, as expected. Investment banking fees should climb up a little in the back half and will be on pace to reach management’s $600 million-$650 million target for the year. Even though fees will offset the NII decline for the year, we hope to see more promising signs of loan growth. Management now projects loan balances to decline by 4% or 5% for the year, more significant than the up-to-2% decline implied last quarter. Other regionals that reported have guided for stable 2% annual loan growth on average.