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KeyCorp Navigates Uncertainty with Resilient Q1 Performance

Philip CarterThursday, Apr 17, 2025 10:35 pm ET

4min read

KeyCorp’s Q1 2025 earnings call underscored the bank’s ability to deliver robust results amid persistent macroeconomic headwinds. With revenue surging 16% year-over-year, driven by strong net interest income and record-breaking fee-based revenue streams, KeyCorp demonstrated resilience in a period of heightened uncertainty. This analysis explores the drivers of its success and evaluates its preparedness for the challenges ahead.

Financial Highlights: A Diversified Engine of Growth

KeyCorp’s Q1 performance was powered by a dual-engine strategy: a 25% year-over-year jump in net interest income (NII) to $1.1 billion, fueled by a widening net interest margin (NIM) to 2.58%, and a 3% rise in noninterest income to $668 million. The latter’s growth was particularly notable, with commercial mortgage servicing fees soaring 36% YoY to a record high. These fees, tied to $12 billion in active special servicing assets, highlight KeyCorp’s deepening relationship with institutional clients in real estate.

Meanwhile, investment banking fees hit a first-quarter record of $175 million, driven by syndication and debt capital markets activity. This underscores KeyCorp’s success in capturing fee-based revenue streams that are less sensitive to interest rate fluctuations. Combined with a 10% rise in commercial payments and wealth management fees, the bank’s diversification beyond traditional lending is paying dividends.

Balance Sheet Strength: Liquidity and Prudent Loan Growth

KeyCorp’s balance sheet remains a fortress. Total loans grew by $500 million year-over-year, with $1.5 billion in C&I loan expansion, reflecting broad-based demand across industries. Management strategically reduced low-yielding consumer and residential mortgages, optimizing the loan portfolio for profitability.

Deposits grew at mid-single-digit rates, with noninterest-bearing deposits holding steady at 19% of the total—a critical buffer against rising deposit costs. Notably, deposit beta (the proportion of rate hikes passed to depositors) fell to 46% through Q1, signaling effective cost management. This, combined with excess cash exceeding 30% of the balance sheet, positions KeyCorp to weather potential liquidity strains.

Credit Quality: A “Stable to Improving” Outlook

KeyCorp’s credit metrics improved sequentially, with nonperforming loans (NPLs) dropping to 65 basis points, near historic lows. Despite adding $8 million to reserves in anticipation of economic softness, net charge-offs remained muted at $110 million, reinforcing management’s confidence in the portfolio’s health.

The bank’s fifth consecutive quarter of improved credit migration suggests that underwriting discipline has insulated the portfolio from broader macro risks. While management acknowledged potential recession risks, their “stable to improving” outlook is supported by middle-market clients’ restructured supply chains—many shifted to Mexico and the U.S.—reducing exposure to trade disputes.

Strategic Positioning: Capital, Capital, Capital

KeyCorp’s Common Equity Tier 1 (CET1) ratio of 11.8%—among the highest in its peer group—provides a critical buffer. The recent Scotiabank strategic minority investment bolstered liquidity and flexibility, enabling the bank to approve a $1 billion share repurchase program, set to begin in H2 2025.

The bank’s 2025 guidance is ambitious yet achievable: 20% NII growth is backed by $11 billion in low-yielding fixed-rate securities maturing at ~2.7%, while fee growth targets 5% or better, driven by syndication and wealth management. Management’s base-case scenario assumes a recession can be avoided, though stress tests for stagflation scenarios are underway.

Risks and Client Dynamics: Navigating the Tariff Crossroads

KeyCorp’s middle-market clients, a core segment, remain cautiously optimistic. While trade tariffs have prompted a “name-by-name” review of client exposures, top-down analysis suggests limited direct exposure. Pipelines remain elevated, with clients pausing transactional activity but not abandoning deal-making. This cautious optimism aligns with KeyCorp’s strategy to retain ~17% of client capital raised (via on-balance-sheet financing) if capital markets tighten.

Conclusion: A Bank Built for Turbulence

KeyCorp’s Q1 results paint a compelling picture of a bank prepared to navigate 2025’s challenges. Its 25% NII growth, 36% surge in commercial mortgage fees, and fortress-like CET1 ratio of 11.8% collectively signal a robust earnings engine and ample capital flexibility. Even in a worst-case scenario, the bank’s 30% liquidity buffer and low-risk loan book provide a safety net.

With $1 billion in buybacks and a 20% NII growth target, KeyCorp is positioning itself to capitalize on a potential rebound in economic activity. While trade tariffs and a possible 2025 recession loom, the bank’s diversified revenue streams, prudent credit culture, and strategic investments—like the Scotiabank partnership—make it a standout in a sector grappling with uncertainty. For investors seeking stability in volatile markets, KeyCorp’s Q1 performance reinforces its status as a high-quality, defensive play in regional banking.

In short, KeyCorp’s Q1 results are more than a snapshot of resilience—they are a blueprint for thriving in an era of uncertainty.

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