KeyCorp's optimistic forecast for 2024 represented a marked change from last year, when its focus was largely on balance-sheet restructuring and expense control.
Kim Raff/Bloomberg
KeyCorp Chairman and CEO Chris Gorman said the $187.5 billion-asset company is "clearly playing offense," despite his view that the country is likely to fall into a recession.
High interest rates and market volatility have left a number of companies in a wait-and-see mode, Gorman said Thursday on a conference call with analysts.
"I am not seeing a lot of people making significant investments in property, plants and equipment, and I'm not seeing people make significant investments in inventory, in technology and in people," said Gorman, who has led the Cleveland-based Key since May 2020. "Rates clearly have an impact [and] uncertainty as to the path and direction of the economy is also a factor."
Against that cautious economic outlook, Key reported an outsize $101 million provision for loan losses, even after reporting only $81 million in charge-offs — 29 basis points of average loans — for the quarter ending March 31. Key also reiterated its full-year guidance, which envisions net charge-offs ranging from 30 to 40 basis points of average loans.
The $20 million reserve build "was completely proactive," Gorman said on the conference call. "I am of the mindset that we are in [a] higher-for-longer" interest rate environment. "As a consequence, we have been stressing all of our portfolio."
"My view is we probably will have a recession," Gorman added.
Gormon's comments match the tone set by JPMorgan Chase CEO Jamie Dimon, who said last week that chances of a tougher economy "are higher than other people think."
Gorman's prognosis for Key itself is considerably more optimistic than his macro outlook.
The company reported first-quarter net income of $183 million, driven by net interest income totaling $886 million. While the net interest income figure represents a 20% year-over-year decline, Key expects spread revenue to grow throughout the remainder of 2024, and to eclipse $1 billion in the final quarter of the year, beating the fourth quarter 2023 result by about 10%.
"We continue to confirm our ability" to reach that target, Chief Financial Officer Clark Khayat said on the conference call. "This first quarter of 2024 reflects the low point for net interest income."
Net interest income, which is generally a bank's largest revenue source, is calculated by subtracting funding costs from overall interest income.
Key's forecast for 2024 represents a marked change from last year, when its focus was largely on balance-sheet restructuring and expense control. Gorman called 2023 a "reset" year for Key. Its 2024 outlook, by contrast, was well received by analysts.
"It looks like the story's favorable drivers for the remainder of the year and beyond all remain intact," Piper Sandler analyst Scott Siefers wrote in a research note.
Investor response on Thursday was muted. Key's share price rose 3% by midday, though it yielded those gains as the day progressed. Shares closed down by 0.4% at $14.38.
Noninterest income was probably the brightest spot in Key's quarterly report. At $647 million, it was up 6% year over year, driven by strong results in investment banking, wealth management and mortgages. Investment banking generated $170 million of revenue during the quarter ending March 31, with Gorman projecting as much as $650 million for all of 2024. "There's no reason we can't get back to that level of growth," he said.
"I am encouraged by the strong, broad-based results we saw in our capital markets business," Gorman said.
Key's asset quality remains solid, despite upticks in net charge-offs and nonperforming assets, Gorman said. The company performed what he termed a "deep dive" on loans likely to be impacted the most in a higher-for-longer interest rate scenario, covering more than 80% of commercial non-investment grade credits.
The review determined that more than 90% of Key's criticized commercial loans remain current in payments. It "confirmed our view that there would be low loss content in these loans," Gorman said.
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