Full Transcript: KeyCorp Q2 2026 Earnings Call

On Tuesday, KeyCorp (NYSE: KEY ) discussed second-quarter financial results during its earnings call. The full transcript is provided below. This content is powered APIs. 89%.

1 billion, while deposit costs declined by 2 basis points. KeyCorp repurchased $340 million in common stock and announced an agreement to acquire Clearwater UK, expanding their middle market advisory franchise. The company increased its full-year guidance for net interest income, revenue, and loan growth, expecting revenue to grow 7% to 8% and net interest income to increase 9% to 11%. KeyCorp aims to achieve a return on tangible common equity exceeding 15% by the end of 2027, with a focus on disciplined capital deployment and client growth.

Investment banking pipelines are at historically elevated levels, with third quarter fees expected to rise by over 20% quarter-over-quarter. Nonperforming loans increased modestly due to idiosyncratic items, but asset quality remains stable, and the net charge-off ratio was 42 basis points. KeyCorp aims for a net interest margin of 3% by year-end 2026, supported by loan growth and fixed-rate asset repricing. The company anticipates average loans to increase 4% to 5% for the full year, with commercial loans expected to grow 8% to 10%.

Full Transcript Megan, Operator Good morning and welcome to KeyCorp's second quarter 2026 earnings conference call. My name is Megan and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question during that time, simply press star 1 on your telephone keypad.

As a reminder, this conference is being recorded and I would now like to turn the conference over to Troy Gates, KeyCorp's Director of Investor Relations. Please go ahead. Troy Gates, Director of Investor Relations Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's second quarter 2026 earnings conference call.

I'm here with Chris Gorman, our Chairman and Chief Executive Officer, Clark Khayat, our Chief Financial Officer, and Mo Ramani, our Chief Risk Officer. com website. In the back of the presentation you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call.

Actual results may differ materially from forward-looking statements and those statements speak only as of today, July 21, 2026, and will not be updated. With that, I will turn it over to Chris. Chris Gorman, Chairman and Chief Executive Officer Thank you, Troy, and good morning, everyone. Our second quarter results reflect strong business momentum and continued progress against our strategic and financial commitments.

44 per share, up 26% year over year. 89% and we are on track to meet or exceed 3% by year end supported by several tailwinds that we expect will contribute to accelerated margin expansion in the second half of the year. 1 billion or 3% sequentially reflecting continued success in attracting new clients across our markets while concurrently deepening existing relationships. Our deposit franchise continues to perform well in a competitive environment with total deposit costs declining 2 basis points during the quarter.

Asset quality remains strong while nonperforming loans increased modestly during the quarter reflecting idiosyncratic items. Broader portfolio performance remains stable, tightly managed, and consistent with our expectations. Our net charge-off ratio was 42 basis points during the quarter and our year-to-date charge-offs remain at the low end of our 40 to 45 basis point full-year outlook. Given our stronger-than-expected business performance, I have even greater confidence in our ability to generate a return on tangible common equity exceeding 15% by the end of 2027 on our path to achieving our 16 to 19% long-term target.

Importantly, we continue to deploy capital in a disciplined manner, supporting client growth, investing in the franchise and returning capital to shareholders through ongoing share repurchases. 3 billion. As we continue to repurchase our shares, our strong capital position enables us to concurrently drive organic growth and invest in our business. As an example, during the quarter we announced an agreement to acquire Clearwater UK.

This transaction represents a strategic extension of our leading middle market advisory franchise and expands our ability to serve M&A clients and prospects internationally. We expect this transaction to close in the second half of 2026. While the macroeconomic environment remains uncertain, our momentum continues to be strong. We are seeing healthy client engagement, solid activity levels across our businesses and remain well positioned to perform through a range of potential economic scenarios.

We continued to grow clients in the second quarter, relationship households increased 3% and commercial clients increased 2% from the prior year. Commercial loan pipelines remained strong, up 6% from the prior year. Our priority fee-based businesses, investment banking, commercial payments and wealth, continue to perform exceptionally well. In the first half of the year, these businesses collectively grew 8% when compared to the first half of 2025.

Investment banking pipelines are up 9% sequentially and remain at historically elevated levels supported by record M&A and DCM pipelines. While middle market M&A activity has yet to normalize, we continue to see significant client engagement and remain confident in our expectation for mid-single digit investment banking fee growth this year. In commercial payments, total gross payment fees increased 12% compared to the prior year as investments we continue to make in bankers and scaling embedded banking build momentum in wealth. In wealth, assets under management reached another record $74 billion.

Since the launch of our mass affluent strategy in 2023, we've added 59,000 households, over $4 billion of AUM and nearly $8 billion of total client assets. Key Wealth remains a significant opportunity for us as we are less than 10% penetrated with respect to our base of currently existing mass affluent households. Overall, we are encouraged by our second quarter performance and the sustained momentum across the business. As a result of our continued favorable loan momentum, we have increased our full-year guidance with respect to net interest income, revenue and loan growth.

Our guidance implies substantial positive operating leverage as we expect to grow revenues twice as fast as expenses in 2026. As always, our guidance reflects a range of potential interest rate scenarios and assumes markets remain constructive. We enter the second half of the year from a position of strength. The underlying trends across Key remain favorable.

We will continue to drive disciplined execution across our franchise. With that, I'll turn it over to Clark Khayat, Executive Vice President and Chief Strategy Officer Thanks, Chris. 44. Revenue was up 7% year over year while expenses increased by 5%.

Tax-equivalent net interest income increased 9% year over year and 2% sequentially, primarily driven by commercial loan growth and portfolio repricing. Noninterest income increased 2% year over year. Loan loss provision of $92 million included $115 million, or 42 basis points, of net charge-offs and a reserve release of $23 million. The net release was driven by improvement in Moody's economic scenarios and a continued remix to higher credit quality relationships, partially offset by a qualitative build to account for increased economic uncertainty.

We grew tangible book value per share 6% year over year. 3 billion sequentially. 1 billion, or 3%, partly offset by the ongoing planned runoff of low-yielding consumer loans. Growth was largely from new relationships and broad-based across industries and regions.

The largest industry contributors were utilities, power and renewables, real estate, and technology. C&I line utilization decreased 50 basis points sequentially to 31% driven by higher commitments. Turning to slide 6, average deposit balances were relatively flat sequentially and year over year, consistent with historical seasonal trends. 3% sequentially, representing 19% of total deposits or 24% when adjusted for our hybrid accounts.

As expected, the average deposits for the quarter were consistent with Q1 and we saw end-of-period deposits up versus prior quarter after troughing in May. At the end of June, deposit balances, which closed the quarter at $153 billion, were temporarily elevated by about $4 billion due to the timing of transaction activity among our relationship clients. 63%. Our cumulative interest-bearing deposit beta held steady at 56%.

To support our continued strong commercial loan growth, we supplemented funding with short-term borrowings. Given our expectations that client deposits will grow in the second half, we used wholesale funds in the second quarter rather than repricing existing deposit relationships. As a result, total funding costs increased by one basis point. We continue to pay close attention to deposit dynamics and will take proactive and strategic actions to manage funding effectively to achieve our goals.

We expect to increase average client deposits by more than 2% through year end. Slide 7 provides drivers of NII and NIM this quarter. 89%. The increase was driven by commercial loan growth, fixed-rate asset repricing, and an additional day in the quarter.

We continue to manage our balance sheet to a fairly neutral interest rate risk position as we move through the remainder of 2026. On slide 8, noninterest income increased 2% year over year. Investment banking and debt placement fees were $169 million for the quarter. In the first half of 2026, investment banking fees were $366 million, an increase of 4% compared to the same year-ago period.

As Chris mentioned, our pipelines are at historically elevated levels compared to the prior quarter. Overall pipelines are up 9% and M&A pipelines are up 7% to a new record. We expect third quarter investment banking fees to be up 20% plus quarter over quarter and remain confident in delivering mid-single-digit investment banking fee growth for the year. Trust and investment services income grew 9% year over year reflecting higher market values, and assets under management reached a new record high of $74 billion.

Service charges on deposit accounts and corporate services fees each increased by 5% year over year. The increase in service charges was driven by growth in commercial payments, while corporate services income was driven by higher loan commitment fees. Commercial mortgage servicing fees were $49 million, down $21 million year over year, largely driven by lower deposit placement fees and special servicing fees. At quarter end, we were named primary and special servicer on approximately $735 billion of commercial real estate loans, of which about $270 billion is special servicing.

Active special servicing third-party assets were flat sequentially at $10 billion, about half of which is office. We continue to expect commercial mortgage servicing fees to run about $50 to $60 million per quarter the remainder of the year. 2 billion, an increase of 3% sequentially and 5% compared to the year-ago quarter. The increase was driven by higher personnel expenses related to the investments in frontline bankers, impact of KeyCorp's higher stock price on incentive compensation, as well as higher benefits costs.

Sequentially, expenses increased due to higher incentive compensation, professional fees, and marketing expenses, as well as an additional day in the quarter. Expenses are expected to modestly pick up through the second half of the year, reflecting our ongoing investments in people and technology and incentive compensation associated with expected seasonally higher fees. We continue to expect to be within our full-year expense growth guide of 3% to 4%. Turning to credit, net charge-offs were $115 million, or an annualized 42 basis points of average loans.

9%. Nonperforming assets increased by $126 million sequentially to an annualized 74 basis points of loans. The increase was largely driven by three credits in the real estate, consumer goods, and agriculture industries. Based on our current assessment, we do not expect these credits to result in meaningful incremental losses and they do not alter our outlook for net charge-offs.

Moving forward, we expect several sizable nonperforming loans to resolve through the rest of the year. Overall, our portfolio remains healthy; fundamental performance of our borrowers remains resilient and is tracking in line with expectations. 8% at quarter end. 3 billion of our shares for the year.

Moving to slide 12, we are increasing our 2026 guidance to reflect our loan growth outperformance. We now expect revenue to grow 7% to 8% compared to approximately 7% that was previously communicated. We also now expect full-year net interest income to increase 9% to 11% compared to the prior guide of 9% to 10%. This guidance holds under a fairly broad range of interest rate scenarios, including a Fed hike scenario.

We now expect to exit the year with a net interest margin in the range of 3 to 3 point, with average earning assets increasing between $1 to $2 billion from the second quarter. This outlook assumes continued loan growth in a stable, competitive deposit environment. While incremental balance sheet growth may be modestly margin dilutive, we are willing to trade NIM to a degree to add quality relationship clients with a strong return profile. Additionally, we continue to expect the benefits of over $9 billion of low-yielding, fixed-rate asset repricing through year end and disciplined deposit management to more than offset that impact.

We now expect average loans to increase 4% to 5% compared to our previous guidance of 2% to 4%, and average commercial loans are now expected to increase 8% to 10% this year. The higher outlook reflects strong loan growth through the first half of the year, continued success in adding and expanding client relationships, and healthy commercial loan pipelines that continue to support growth in the second half of 2026. All other guidance remains unchanged.

In summary, subject to the usual macro caveats and a constructive environment that remains broadly consistent with today, we expect to maintain our strong momentum through the second half of the year and deliver a solid return on and return of capital to shareholders. With that, I would like to now turn the call back to the operator to provide instructions for the Q&A session. Megan, Operator Thank you. We will now begin the Q&A session.

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove your question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question.

The first question will go to the line of Ryan Nash with Goldman Sachs. Ryan, your line is open. Ryan Nash, Analyst at Goldman Sachs Hey, good morning, guys. Clark.

Maybe to start on the net interest margin— Chris Gorman, Chairman and Chief Executive Officer Hey, Ryan, it's Chris. We can't hear you. Ryan Nash, Analyst at Goldman Sachs Can you hear me now, Chris? Chris Gorman, Chairman and Chief Executive Officer Yes, sorry about that.

You started to talk about NIM and then you faded out. Sorry about that. Ryan Nash, Analyst at Goldman Sachs So I was saying, what drove the main pieces that drove the NIM miss? 05, including deposit costs, fixed-rate asset repricing, and any other impacts you think we could see that happened this quarter that may not repeat.

Thank you. And I have a follow-up. Chris Gorman, Chairman and Chief Executive Officer Yeah, well, Ryan, first of all, thanks for the question. Let me just make a quick brief comment.