KeyCorp Earnings: Net Interest Income Shows Solid Growth, 2024 Expense Guidance Increases

Key Morningstar Metrics for KeyCorp

• Fair Value Estimate: $19.20
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of KeyCorp’s Earnings

KeyCorp’s KEY third-quarter results largely met our expectations. Adjusting for losses of $0.77 per share related to selling lower-yielding securities, earnings per share of $0.30 came in 3.4% higher year over year, aided by a 20%-plus increase in investment banking fees and a 4% increase in net interest income. The bank also updated its 2024 outlook, revising expense growth to 2%. It expects 2024 net interest income to come at the midpoint of previous guidance, and raised fee income guidance to “up 6%-plus” from “up 5%-plus.” As we incorporate the results and updated guidance, we will maintain our fair value estimate of $19.20 per share, and believe the stock is slightly undervalued.

KeyCorp reported net interest income of $952 million in the quarter, a 7.3% sequential increase. We think the bank is on track to realize a 10% increase in fourth-quarter net interest income from a year ago. As the Federal Reserve cuts interest rates more, we expect KeyCorp to have lower funding costs. The bank replaced some of the higher-cost wholesale funding sources with deposits in the quarter, and overall interest-bearing liabilities costs only increased 1 basis point from a quarter ago. KeyCorp should realize the benefit of balance sheet repositioning as well as hedges rolling off later in 2024 and into 2025. The management team maintained its outlook for 2025 net interest income to be 20% higher than in 2024, which is also largely in line with our forecast.

The updated 2024 expense guidance implies fourth-quarter expenses growing 10% from a year ago, driven by some one-time investments, the variable component of investment banking fees, and higher stock market valuations. However, the bank indicated that 2025 expense growth should be in the low-single or mid-single digits. We view expense control as vital for the firm.