My Market Wizard

KEYCORP /NEW/ 10-K Analysis & Summary – 2/21/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

KeyCorp

Filing date:

02/21/2025

TLDR:

KeyCorp’s 2024 performance was mixed, with declining net interest income offset by fee income growth and strategic initiatives like the Scotiabank investment. Credit quality, interest rate sensitivity, and regulatory changes pose potential risks.

ELI5:

KeyCorp, a bank, had a tough year with some income going down, but they made money in other areas. They got an investment from another bank, which is good, but they need to watch out for risks like loans going bad and changes in the rules.

Accession #:

0000091576-25-000038

Published on

Analyst Summary

  • Net interest income decreased year-over-year.
  • Noninterest income increased due to strong investment banking fees.
  • Shareholders’ equity increased significantly due to the Scotiabank investment.
  • Common Equity Tier 1 Ratio: 11.92% (strong).
  • Return on Average Tangible Common Equity: (3.01)% (impacted by securities losses).
  • Operating Profit Margin: -6.69%
  • Net Profit Margin: -3.52%
  • Return on Assets (ROA): -0.085%
  • Return on Equity (ROE): -1.04%
  • Price-to-Earnings Ratio (P/E): -61.67
  • Revenue Growth: -2.8%
  • Net Income Growth: -116.6%
  • EPS Growth: -147%

Opportunities and Risks

  • Credit Risk: Concentration in commercial and industrial loans, commercial real estate loans, and commercial leases. Deterioration of the commercial real estate market is a concern.
  • Market Risk: Exposure to interest rate risk and potential economic downturns.
  • Liquidity Risk: Dependence on subsidiary dividends and potential for deposit outflows.
  • Operational Risk: Cyberattacks, reliance on third parties, and ineffective risk management frameworks.
  • Compliance Risk: Extensive government regulation and evolving privacy and cybersecurity laws.
  • Strategic Risk: Competitive pressures, ability to attract and retain talent, and integration risks from acquisitions.

Potential Implications

Company Performance

  • Monitor Credit Quality: Closely track credit quality trends in the commercial loan portfolio, particularly in the commercial real estate sector.
  • Manage Interest Rate Risk: Implement strategies to mitigate the impact of potential interest rate fluctuations on net interest income.
  • Navigate Regulatory Changes: Proactively adapt to evolving regulatory requirements, including the proposed revisions to the Regulatory Capital Rules.
  • Evaluate Strategic Partnerships: Assess the potential impact of Scotiabank’s influence on KeyCorp’s strategic decisions.

KeyCorp (KEY) – Form 10-K Analysis – FY2024

Executive Summary

This report analyzes KeyCorp’s 2024 10-K filing, focusing on financial performance, risk factors, and strategic initiatives. KeyCorp experienced a mixed year, with net interest income declining but offset by strong fee income growth. The strategic investment by Scotiabank and securities repositioning are key events. While capital ratios remain strong, the report identifies potential risks related to credit quality, interest rate sensitivity, and the evolving regulatory landscape. Overall, a cautious outlook is warranted, with a focus on monitoring credit performance and the impact of regulatory changes.

Company Overview

KeyCorp is a bank-based financial services company headquartered in Cleveland, Ohio. It operates through two main segments: Consumer Bank and Commercial Bank, offering a range of banking, investment, and financial services. The company’s footprint spans 15 states with a significant presence in the Midwest and Northeast.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

  • Key Strategic Priorities: KeyCorp focuses on profitable growth, client relationship expansion, risk management, financial strength, and workforce engagement.
  • Securities Repositioning: Significant losses were incurred due to the sale of lower-yielding securities to reinvest in higher-yielding ones. This is expected to improve future earnings.
  • Scotiabank Investment: The strategic minority investment by Scotiabank is a significant event, providing capital and potentially influencing KeyCorp’s strategic direction.
  • Forward Guidance: Management expects loan growth to be down 2-5% and net interest income to be up ~20% in 2025.

Financial Statement Analysis

Income Statement

  • Net interest income (TE) decreased by $133 million year-over-year, driven by higher deposit costs and lower loan balances.
  • Noninterest income increased due to strong investment banking fees, offsetting losses from securities sales.
  • Provision for credit losses decreased, reflecting reserve releases.

Balance Sheet

  • Total assets decreased slightly.
  • Average loans decreased, reflecting tepid client loan demand.
  • Average deposits increased, driven by growth in both consumer and commercial deposits.
  • Shareholders’ equity increased significantly due to the Scotiabank investment.

Key Ratios

  • Net Interest Margin: 2.16% (relatively stable year-over-year).
  • Return on Average Tangible Common Equity: (3.01)% (impacted by securities losses).
  • Common Equity Tier 1 Ratio: 11.92% (strong).
  • Tier 1 Risk-Based Capital Ratio: 13.69% (strong).
  • Loan-to-Deposit Ratio: 70.3%

Risk Factors

  • Credit Risk: Concentration in commercial and industrial loans, commercial real estate loans, and commercial leases. Deterioration of the commercial real estate market is a concern.
  • Market Risk: Exposure to interest rate risk and potential economic downturns.
  • Liquidity Risk: Dependence on subsidiary dividends and potential for deposit outflows.
  • Operational Risk: Cyberattacks, reliance on third parties, and ineffective risk management frameworks.
  • Compliance Risk: Extensive government regulation and evolving privacy and cybersecurity laws.
  • Strategic Risk: Competitive pressures, ability to attract and retain talent, and integration risks from acquisitions.

Red Flags & Uncommon Metrics

  • Securities Repositioning Losses: The significant losses from securities sales raise concerns about the timing and execution of this strategy.
  • Concentrated Credit Exposure: High concentration in commercial lending segments increases vulnerability to economic downturns in those sectors.
  • FDIC Special Assessment: The special assessment to cover the cost of the Silicon Valley Bank and Signature Bank failures negatively impacted earnings.

Conclusion & Actionable Insights

KeyCorp’s 2024 performance reflects a company in transition, balancing challenges in net interest income with strategic moves to improve future profitability. The Scotiabank investment provides a capital cushion and potential strategic advantages, but also introduces new governance considerations. The securities repositioning, while intended to boost future earnings, resulted in significant short-term losses. The strong capital ratios are a positive sign, but the identified risk factors, particularly credit risk and regulatory compliance, warrant close monitoring.

Recommendations:

  • Monitor Credit Quality: Closely track credit quality trends in the commercial loan portfolio, particularly in the commercial real estate sector.
  • Manage Interest Rate Risk: Implement strategies to mitigate the impact of potential interest rate fluctuations on net interest income.
  • Navigate Regulatory Changes: Proactively adapt to evolving regulatory requirements, including the proposed revisions to the Regulatory Capital Rules.
  • Evaluate Strategic Partnerships: Assess the potential impact of Scotiabank’s influence on KeyCorp’s strategic decisions.

Overall Assessment: Hold. While KeyCorp has taken steps to improve its long-term outlook, the near-term challenges and uncertainties warrant a cautious approach.

Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin: Not applicable for a bank.
  • Operating Profit Margin:

    • Ratio/Metric: Operating Income / Total Revenue = ($3,765 + $809 – $335 – $4,545) / ($3,765 + $809) = (3,765 + 809 – 335 – 4,545) / (3,765 + 809) = -306 / 4574 = -0.0669 or -6.69%
  • Net Profit Margin:

    • Ratio/Metric: Net Income / Total Revenue = -161 / (3,765 + 809) = -161 / 4574 = -0.0352 or -3.52%
  • Return on Assets (ROA):

    • Ratio/Metric: Net Income / Average Total Assets = -161 / 188,855 = -0.00085 or -0.085%
  • Return on Equity (ROE):

    • Ratio/Metric: Net Income / Average Total Equity = -161 / 15,408 = -0.0104 or -1.04%
  • Earnings Per Share (EPS) – Basic and Diluted:

    • Ratio/Metric: EPS = Net Income Attributable to Common Shareholders / Weighted Average Shares Outstanding = -304 / 949,561 = -0.00032 or -0.32

Liquidity

  • Current Ratio:

    • Ratio/Metric: Current Assets / Current Liabilities. Need to calculate current assets and current liabilities from balance sheet.
      Current Assets = Cash and due from banks + Short-term investments + Trading account assets + Loans held for sale + Accrued income and other assets + Discontinued assets = 1,743 + 17,504 + 1,283 + 797 + 8,797 + 263 = 30,387
      Current Liabilities = Deposits in domestic offices + Federal funds purchased and securities sold under repurchase agreements + Bank notes and other short-term borrowings + Accrued expense and other liabilities = 149,760 + 14 + 2,130 + 4,983 = 156,887
      Current Ratio = 30,387 / 156,887 = 0.194
  • Quick Ratio (Acid-Test Ratio):

    • Ratio/Metric: (Current Assets – Inventory) / Current Liabilities. Since KeyCorp is a bank, inventory is not applicable.
      Quick Ratio = (30,387 – 0) / 156,887 = 0.194
  • Cash Ratio:

    • Ratio/Metric: Cash / Current Liabilities = 1,743 / 156,887 = 0.0111

Solvency/Leverage

  • Debt-to-Equity Ratio:

    • Ratio/Metric: Total Liabilities / Total Equity = 168,992 / 18,176 = 9.297
  • Debt-to-Assets Ratio:

    • Ratio/Metric: Total Liabilities / Total Assets = 168,992 / 187,168 = 0.903
  • Interest Coverage Ratio (Times Interest Earned):

    • Ratio/Metric: EBIT / Interest Expense = (Net Income + Income Tax Expense + Interest Expense) / Interest Expense = (-161 + (-143) + 4,662) / 4,662 = 4,358 / 4,662 = 0.935

Activity/Efficiency

  • Inventory Turnover: Not applicable for a bank.
  • Days Sales Outstanding (DSO): Not directly applicable, but can be approximated using interest income from loans.
  • Days Payable Outstanding (DPO): Not directly applicable.
  • Asset Turnover:

    • Ratio/Metric: Total Revenue / Average Total Assets = (3,765 + 809) / 188,855 = 4,574 / 188,855 = 0.0242

Valuation

  • Price-to-Earnings Ratio (P/E):

    • Ratio/Metric: Market Cap / Net Income = (16.93 * 1,106,786,000) / -304,000,000 = 18,747,449,800 / -304,000,000 = -61.67
  • Price-to-Book Ratio (P/B):

    • Ratio/Metric: Market Cap / Book Value of Equity = 18,747,449,800 / 18,176,000,000 = 1.031
  • Price-to-Sales Ratio (P/S):

    • Ratio/Metric: Market Cap / Total Revenue = 18,747,449,800 / (3,765,000,000 + 809,000,000) = 18,747,449,800 / 4,574,000,000 = 4.1
  • Enterprise Value to EBITDA (EV/EBITDA):

    • Ratio/Metric: EV = Market Cap + Total Debt – Cash and Cash Equivalents = 18,747 + 12,105 + 444 – 1,743 = 29,553
      EBITDA = Net Income + Interest + Taxes + Depreciation and Amortization = -161 + 4,662 + (-143) + 73 = 4,431
      EV/EBITDA = 29,553 / 4,431 = 6.67

Growth Rates

  • Revenue Growth:

    • Ratio/Metric: (Current Year Revenue – Prior Year Revenue) / Prior Year Revenue = (4,574 – 4,706) / 4,706 = -0.028 or -2.8%
  • Net Income Growth:

    • Ratio/Metric: (Current Year Net Income – Prior Year Net Income) / Prior Year Net Income = (-161 – 967) / 967 = -1.166 or -116.6%
  • EPS Growth:

    • Ratio/Metric: (Current Year EPS – Prior Year EPS) / Prior Year EPS = (-0.32 – 0.89) / 0.89 = -1.47 or -147%

Other Relevant Metrics

  • Adjusted Noninterest Income (Non-GAAP): KeyCorp presents adjusted noninterest income, excluding the loss on sale of securities for securities repositioning and Scotiabank investment agreement valuation. This metric provides a clearer view of the company’s core noninterest income generation.
  • Adjusted Noninterest Expense (Non-GAAP): KeyCorp presents adjusted noninterest expense, excluding efficiency-related expenses and FDIC special assessment. This metric provides a clearer view of the company’s core operating expenses.

Commentary

KeyCorp’s financial performance in 2024 was weak, marked by a net loss and declining profitability ratios. The negative net income was driven by a significant loss on securities available for sale. While adjusted noninterest income increased, this was offset by rising adjusted noninterest expenses. Capital ratios remain strong and above regulatory requirements, providing a buffer against current headwinds.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️