KeyCorp's (KEY) Restructuring Initiatives Aid Amid Rising Costs

Core Viewpoint - KeyCorp (KEY) is well-positioned for growth due to strategic acquisitions, restructuring initiatives, solid loan and deposit balances, and higher interest rates, although funding costs and elevated expenses pose challenges [1] Group 1: Growth Catalysts - KeyCorp has experienced solid loan growth contributing to top-line expansion, with a compound annual growth rate (CAGR) of 0.3% in tax-equivalent revenues over the last six years ending in 2023 [2] - Loans and deposits recorded a CAGR of 4.3% and 6.8% respectively over the four years ending in 2023, with deposits showing year-over-year growth in the first half of 2024 [3] - Management anticipates gradual stabilization and potential growth in loans in the second half of 2024, supported by decent loan demand and initiatives to boost fee income [3] - Total revenues are projected to dip marginally in 2024 but are expected to rebound with growth rates of 11.2% and 6% in 2025 and 2026 respectively [3] Group 2: Interest Margin and Funding - The Federal Reserve is likely to maintain high interest rates, which may enhance KeyCorp's net interest margin (NIM) despite rising funding costs [4] - NIM is expected to improve in the near term, with estimates of 2.18%, 2.52%, and 2.60% for 2024, 2025, and 2026 respectively [4] - The acquisition of a 14.9% stake by the Bank of Nova Scotia is anticipated to enhance capital availability, aiding loan portfolio restructuring and NIM expansion [4] Group 3: Business Restructuring and Expansion - KeyCorp's restructuring initiatives include acquisitions such as GradFin in 2022 and XUP Payments in 2021, aimed at enhancing digital capabilities and revenue diversification [5][6] - The company is consolidating its branch network to meet the rising demand for digital banking services, with a projected CAGR of 3.8% for total non-interest income by 2026 [7] Group 4: Challenges - KeyCorp faces challenges from an escalating expense base, which has seen a CAGR of 3.6% over the past five years, primarily due to higher personnel costs [8] - Although total non-interest expenses are expected to decline by 5.4% in 2024, they are projected to rise by 4.8% and 2.6% in 2025 and 2026 respectively [8] - Weak asset quality is a concern, with provisions expected to decline in 2024 while net charge-offs (NCOs) are projected to rise by 48.6% year-over-year [9]