Q4 2020 KeyCorp Earnings Call
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Okay.
Good morning, and welcome to Keycorp's fourth quarter 2020 earnings Conference call. As a reminder, this conference is being recorded I would now like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead Sir.
Oh, Thank you John and good morning, and welcome to Keycorp's fourth quarter 2020 earnings Conference call. Joining me for the call today are Don Kimble, Our Chief Financial Officer, and Mark Midkiff, Our Chief Risk Officer Slide two is our statement on forward looking disclosure and non-GAAP financial measures. It covers our presentation.
<unk> and comments as well as the question and answer segment of our call. This morning, <unk> reported record revenue and earnings but before we get into the details of the quarter I want to share a couple of broader and contextual comments.
I'm very proud of the way our team continues to navigate the pandemic and related economic downturn.
Their dedication combined with our investments and talent and digital capabilities continue to serve the company our clients our communities and our shareholders well.
Throughout 2020, we successfully executed what I call, our dual mandate by that I mean, responding to the pandemic, which is a real humanitarian and economic crisis, while continuing to position key for both growth and success.
We have taken countless steps to ensure that our teammates and our clients are both safe and well served Additionally, we provided billions of dollars in credit to our clients in 2020, we originated more than 43000 loans amounting to $8 billion through the first round of the page.
Jack Protection program. In fact, we are currently assisting our clients through the second round of the Paycheck protection program as we speak.
As part of our National community benefits plan, we provided billions of dollars in support to our communities. This included affordable housing home lending and small business lending and low and moderate income communities transformative philanthropy and renewable energy financing our commitment also incur.
<unk> programs to advance social justice and economic inclusion across all the communities, we serve and finally I want to thank our teammates for rising to every challenge in 2020 in a way that kept our clients at the center of everything we do I am now turning to slide three.
Getting back to our performance in the fourth quarter, we achieved a record level of revenue for both the quarter and the year the growth in net interest income and fee income.
Net interest income was up almost 4% from the prior quarter with an eight basis point increase in our net interest margin fee income also a record up double digits for both the prior quarter and the year ago period, we continue to benefit from investments that we've made across our company.
<unk>, which drove both fee income and balance sheet growth, let me touch on three specific areas first consumer mortgage we achieved record volume in the fourth quarter with $2 5 billion in funded loans.
For the full year, our consumer mortgage originations were $8 3 billion up 90% from the prior year. This drove both balance sheet growth as well as a 179% increase in fee income approximately one half of our originations last year were.
Purchase mortgages, our pipelines remained strong and we expect to continue to both grow and take share.
The second area I will highlight as investment banking. This is an area, where we have invested in talent and made targeted acquisitions to enhance our capabilities, including areas such as healthcare and technology in the fourth quarter, we generated $243 million in fees, which represents a record quarter.
We enjoyed broad based growth across the platform with particular strength in M&A and loan Syndications 2020 was a record year for investment banking and debt placement fees.
Our investment banking pipelines remained strong we believe this business will continue to be a growth engine for us in the future.
The third area is Laurel road and more broadly the investments we have made in digital across our company Laurel Road continues to originate high quality loans that provide us with an opportunity to build broader digital relationships with health care professionals last year Laurel Road.
Originated over $2 3 billion in loans at.
At the end of March we will launch our digital bank, serving the health care segment, expanding our consumer franchise nationally. This launch will broaden our offering for low road clients to include deposits additional lending products and other value added services, we believe that both low.
For our road and consumer mortgage will continue to be relationship based growth engines for our consumer business.
Our expenses this quarter were elevated they were elevated due to higher production related incentives severance and the funding of our philanthropic foundation. Additionally, COVID-19 related expenses and costs associated with our prepaid card also remained elevated again this quarter.
Don will cover the outlook in his remarks, but we expect expenses to come down in 2021, while concurrently investing in talent and digital capabilities.
This year, we will also be accelerating the pace of branch closures, we expect to consolidate over 70 branches, representing 7% of our network.
Are these closures taking place in the first half of the year.
Our decisions are driven by client behavior as more activity continues to move to our digital channels. It's also informed by our robust analytics we.
We expect limited client attrition as a high percentage of the impacted branches are located within two miles of another key facility.
Importantly, we expect to continue to grow our retail business, while reducing operating expenses and improving overall profitability.
Credit quality remained strong this quarter with net charge offs of 53 basis points within our targeted over the cycle range. Additionally, nonperforming loans declined by almost $50 million. This quarter, we will continue to support our clients while maintaining our moderate.
Our risk profile and concurrently positioning the company to perform well through the business cycle. Finally, we have maintained our strong capital position, while continuing to return capital to our shareholders in the fourth quarter, our common equity tier one ratio increased 30 basis points to <unk>.
Nine, 8%, which is above our targeted range of nine to nine 5%.
The results of our recent stress tests.
Affirm that key is a different company today with loss rates and loss absorbing capital among the best in our peer group our strategic positioning allows us to continue to execute against each of our capital priorities supporting organic growth paying dividends and of course share.
<unk> last week, our board of directors authorized a new share repurchase program of up to $900 million.
Over the next three quarters, we also approved our first quarter common stock dividend of $18.05 a share in closing despite the challenging environment of the last year, we were able to support our clients invest in and grow our businesses, while maintaining our strong risk practices.
Our success was driven by our dedicated team the strength of our business model and our relentless focus on executing our strategy I am confident in <unk> future. We are positioned to succeed and continue to deliver on all of our commitments I'll now turn it over to Don who will provide details on.
Our quarter in addition to our outlook for the coming year Don.
Thanks, Chris I'm now on slide five as Chris said it was a very strong quarter for us with record net income from continuing operations of <unk> 56 per common share up 37% from the prior quarter and 24% from the prior year ago period.
Return on average tangible common equity for the quarter was over 16% up over 400 basis points from the third quarter I will cover the other items on this slide later in my presentation.
Turning to slide six total average loans were 102 billion up 9% from the fourth quarter of last year driven by growth in both commercial and consumer loans commercial loans reflect an increase of over seven 5 billion from the PPP loans.
Consumer loans benefited from the continued growth from lower road and as Chris mentioned strong performance from our consumer mortgage business.
Laurel Road originated $590 million of loans this quarter and $2 3 billion for the full year up over 20% from a full year of 2019.
We also generated another record $2 5 billion of consumer mortgage loans in the quarter, bringing the total for the year to $8 3 billion.
On the investments we have made in these areas continue to drive results and importantly add high quality loans to our portfolio.
Linked quarter average loan balances were down 3%, reflecting paydowns from a heightened commercial loan draws as well as a small reduction in PPP balances related to the initial forgiveness.
Line utilization rates are at the pre pandemic levels, given the strong liquidity levels and the environment.
Importantly, we have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile, we remain committed to performing well through the business cycle and we manage our credit quality with this longer term perspective.
Continuing on slide seven average deposits totaled 136 billion for the fourth quarter of 2020 up 23 billion or 21% compared to the year ago period and up 6% from the prior quarter.
The linked quarter increase reflected broad based commercial growth as well as growth from our from higher consumer balances.
The growth was offset by a continued and expected decline in time deposits.
Growth from the prior year was driven by both consumer and commercial clients.
Total interest bearing deposit costs came down 11 basis points from the third quarter of 2020 exceeding our guidance of a six to nine basis point decline.
We continue to have a strong stable core deposit base with consumer deposits accounting for over 60% of the total deposit mix.
Turning to slide eight taxable equivalent net interest income was one oh for $3 billion for the fourth quarter of 2020 compared to $987 million a year ago, and just over $1 billion from the prior quarter.
Our net interest margin was $2 seven zero percent for the fourth quarter of 2020 compared to $2, 98% for the same period last year and 262% from the prior quarter.
Both net interest income and net interest margin were meaningfully impacted by the significant growth in our balance sheet compared to the year ago period.
The larger balance sheet benefited net interest income, but reduced the net interest margin due to the significant increase in liquidity driven by strong deposit inflows.
Compared to the prior quarter net interest income increased $37 million on the margin improved by eight basis points.
The increase in both net interest income and our net interest margin quarter over quarter are largely due to the lower interest bearing deposit costs and the higher loan fees from PPP forgiveness.
We saw the average rate paid on interest bearing deposits declined 11 basis points from the prior quarter for.
Forgiveness of the PPP loans accelerated about $28 million of additional fee recognition this quarter.
These were partially offset by continued elevated liquidity levels, which had a five basis point negative impact on the margin.
Moving to slide nine for.
Our fee based businesses hit all time highs in the fourth quarter.
Noninterest income was $802 million for the fourth quarter of 2020 compared to $651 million for the year ago period, and $681 million for the third quarter.
Compared to the year ago period, noninterest income increased $151 million.
The primary driver was a record quarter for investment banking debt placement fees, which reached $243 million.
Up $62 million from the year ago period.
Stronger M&A and loan syndication fees drove most of the increase this quarter.
This business also had a record year with $661 million of total fees.
Record mortgage originations drove consumer mortgage fees, this quarter, which were up $22 million from the fourth quarter of <unk> 19.
Cards and payments income also increased $30 million related to higher prepaid card activity from the state government support programs.
Compared to the third quarter noninterest income increased by $121 million the largest driver of the quarterly increase was once again, a record quarter for investment banking, which was up $97 million <unk>.
Commercial mortgage servicing fees also had a strong quarter up $14 million.
Now turning to slide 11, excuse me slide 10.
Total noninterest expense for the quarter was 112 8 billion compared to $980 million last year and $1 <unk> 7 billion in the prior quarter.
The increase from the prior year is primarily in personnel costs driven by higher production related incentives from our record fee production as well as higher severance costs.
Year over year payments related costs reported in other expense were $40 million higher driven by higher prepaid activity and we incurred COVID-19 related expenses to ensure the health and safety of our teammates.
Compared to the prior quarter noninterest expense increased from $91 million. The increase was largely due to a $40 million of higher production related incentives $22 million of severance 12.
$12 million of higher stock based compensation related to the share price and a $15 million additional contribution to our charitable foundation.
Marketing expense was also up $8 million from the prior quarter.
Turning to slide 11 overall.
Overall credit quality remained strong for the fourth quarter net charge offs were $135 million or.
Or 53 basis points of average loans slightly below our guidance range on.
Provision for credit losses was $20 million. This was determined under the seasonal methodology and based on our continued strong credit metrics and leading indicators as well as our outlook for the overall economy credit migration and loan production.
Nonperforming loans were $785 million this quarter or 78 basis points on period end loans compared to $834 million or <unk> 81 basis points from the prior quarter.
Additionally, 30 to 89 day delinquencies actually improved quarter over quarter with a nine basis point decrease while the 90 day plus category remained relatively flat.
We've continued to monitor the level of assistance requests we receive from our customers over the past quarter. The number of requests for loan forbearance has decreased dramatically as.
As of December 31 loans subject to forbearance terms, we're less than $600 million.
Down from a peak of $5 2 billion.
Equating to about a half a percent of our outstanding balances.
One one more observation this quarter and as Chris mentioned earlier in late December the results for the most recent stress test results were published.
These results reinforce the commitments, we have been making over the past several years that we are a different company with a better risk profile than Q showed through the great recession.
Our stress credit losses for the from the tests were peer leading we've been managing the company over the last decade to outperform during challenging times and believe we have positioned the company to achieve this.
Turning to slide 12, we updated our disclosure that highlight certain portfolios that are receiving greater focus in this environment. These areas represent a small percentage of the total loan balances each relationship in these focus areas continues to be subject to active reviews enhanced monitoring.
Importantly, as a group they continue to perform consistent with our expectations.
Now on to Slide 13, Key's capital position remains an area of strength. We ended the fourth quarter with a common equity tier one ratio of nine 8% up 30 basis points from nine 5% in the third quarter. This places us above our targeted range of 90% to 95%.
This provides us with the sufficient capacity to continue to support our customers and their borrowing needs and return capital to our shareholders.
Importantly, the results for the recent stress test support and highlight our strong credit profile and loss absorbing capital.
Last week, our board of directors approved a new share repurchase authorization of up to $900 million for the next three quarters. They also approved our first quarter 2021 common dividend of $18 five per share.
On slide 14, we provide our full year 2021 outlook. This builds on our performance in 2020 and reflects our expectation that we will deliver positive operating leverage for the year.
Guidance range definitions are provided at the bottom of this slide <unk>.
Average loans are expected to be relatively stable. Although at this point I would expect a little downward bias to this range.
This reflects participation in the next round of PPP and continued growth in our consumer loan portfolio from both Laurel Road and our consumer mortgage business.
We expect deposits to be up low single digits, and we will continue to benefit from our low cost deposit base.
Net interest income should be relatively stable, our net interest income will benefit from our higher loan fees related to PPP forgiveness and continued deployment of some of the excess liquidity offset by the ongoing impact of low rates.
Noninterest income should be up low single digits, reflecting growth in book most of our core fee based businesses.
As Chris mentioned noninterest expense should be down in 2021 somewhere in the low single digit range. We will continue to benefit from our continuous improvement efforts and accelerate our branch closures. We also plan to continue to invest in talent and to stay at the forefront of our digital offerings.
Moving on to credit quality net charge offs to average loans should be in the 50 to 60 basis point range, which is consistent with our through the cycle range of 40 to 60 basis points.
And our guidance for our GAAP tax rate should be around 19% for the year.
Our guidance also assumes some variability over the course of the year first quarter will reflect normal seasonality, including a lower day count and an increase in personnel expense driven by heightened employee benefit costs.
Finally, as shown at the bottom of slide our long term targets as Chris said, we expect to deliver positive operating leverage for 2021, we also maintain our moderate risk profile on over time continue to improve our efficiency and overall returns.
I'll close with where Chris started recognizing the effort of our team to support our clients and to deliver strong results for both the quarter and the year. Despite the challenging environment, we are well positioned as we head into 2021 and plan to deliver on our commitments to all of our stakeholders.
With that I'd like to turn the call back over to the operator for instructions for the Q&A portion of the call John.
Thank you and ladies and gentlemen, if you would like to ask a question on the call. Please press one than zero to remove yourself from the queue. You may repeat the one zero command and we do asking for you. Please lift your handset before pressing any numbers and avoid placed on yourself on mute on.
Our first question comes from the line of Scott <unk> with Piper Sandler. Please go ahead.
Good morning, guys. Thank you for taking the question good morning.
I'm curious I guess I can for from the up low single digit guide on on fees, but was hoping you could provide a little more thoughts on your outlook for investment banking.
Ended up being just a terrific and for the year.
But maybe your thoughts on how you see.
The year playing out just in terms of the nuance I feel like last year. It was kind of less traditional M&A sort of other drivers within investment banking or that line item that drove it.
Whereas this year, maybe it's more the traditional stuff that we would think of.
How do you see it planning out and do you think you can sustain this level or grow upon this level of annual revenues in total there.
Sure Scott Thanks for the question just.
Just to step back for a second or invest our integrated corporate and investment bank is a unique and growing franchise. It's unique among all of our peers, it's really hard both to coordinate and collaborate and get it done from a cultural perspective, and as you know Scott we've been at it for a long.
Time, and we've made a bunch of significant investments. If you think about the investments we've made in technology and in healthcare.
With in any year, there's always variability, but as we step back and look at that business over the past five years.
It has had a compound annual growth rate.
About 8%.
And so and if you look at from 2015 to present I think we've had one year, where we were down slightly I think last year down like 3%. So I'm, just giving you that as kind of a backdrop as we look forward. There's no question that it's the transaction business and Theres a lot of variables.
That clearly are not within our control, having said that for us its a relationship business. We continue to grow at our pipelines today are strong our pipelines are in good shape and what's interesting about our business is whereas a lot of people had a huge lift from investment grade debt through the <unk>.
<unk> that really is not core to our business our business was really driven Scott.
By a big surge in M&A and syndications in some cases related syndication. So we feel good about the trajectory of the business and we will continue to invest in it.
Terrific. Thank you and then I guess more of a tiki Tak guidance question expenses I know you have the $22 million in severance costs in the fourth quarter will there be any further charges or did you sort of take care of all of those.
Fourth quarter on if there are any are those included in the full year 'twenty One guide.
We would typically have some severance throughout the year, we would not expect to have any of that size going forward into the each of the quarters and the 2021. So the normal recurring level would be reflected in that guidance, but net.
Not assuming any significant charges on top of that.
Okay perfect. Thank you very much guys. Thank you.
Our next question is from the line of Bill for cash with Wolfe Research. Please go ahead.
Thank you good morning, I wanted to ask about low yields although there were some quarters of relative stability in key's loan yields during the last zerbe cycled the overall trajectory.
Loan yields was lower until we exited <unk>.
Believe you guys have about 70% of your loan book is indexed to the short end of the interest rate complex and so a lot of its repriced already but there is still some on.
On that dynamic happen not just for you guys, but for other banks as well. So can you discuss whether you expect downward pressure on loan yields to persist in this cycle as well.
Or are you simply going to work through to offset those headwinds.
In general is there anything different about this cycle that leads you to expect those dynamics to play out any differently. This time.
Sure a couple of things there one on the loan book that.
Keep in mind that a significant portion of the swaps that we enter into from a balance sheet perspective are matched up against the commercial loan book and so it does convert some of those over to fixed rates and we've talked over the last couple of quarters about the impact of those swaps going forward and so you will see some.
Very modest pressure on yields coming from that as those swaps rollover on the.
The consumer book.
We are seeing rates coming down as far as the new originations compared to what was the existing book, but were also seeing improved credit quality for those new originations and we're also seeing margins.
Little wider on the consumer originations compared to the current rate environment, and where we've been historically and so that will also help and so there will be some pressure going forward.
But.
I would say that we still have other levers to help offset that including the full year benefit of the repricing of our deposit book that we realized in the fourth quarter and then also just this excess liquidity position. We think over time, we can start to absorb some of that and maybe reinvest that over time as well.
Got it thanks, Dan that's Super helpful. Maybe alumnus.
Along the similar lines can you talk about on PPP, how much PPP contributed to loan yields this quarter and how we should expect that contribution to loan yields on NII to trend from here.
Maybe any color on how long the benefits of PPP one point on <unk> are going to last year largely through the rest of 'twenty, one or do they extend to 'twenty two.
That's my last question. Thank you.
Great and we've mentioned just briefly that in the fourth quarter, we had about $1 three of the PPP loans.
Becomes forgiven and so that accelerated about $28 million of fee income for the quarter and so that roughly added about six basis points or so as far as the overall margin and and so that clearly was additive.
If you look at that first wave of PPP loans, we had about $8 billion of issuance.
Mentioned, we had about $1 billion three year forgiveness this quarter and so that puts for about $6 $7 billion. We would expect about 80% of that initial $8 billion to be forgiven and so youll see that come throughout the rest of the year I would say that for example, we would expect about $1 billion of forgiveness in the first quarter.
So thats a little less than what we've seen in the fourth quarter, but still continue to show that kind of a pace.
The next wave of PPP will be helpful for that and we would expect to see about $2 5 billion of originations in the second quarter and so some of that decline that we would be expecting from from debt forgiveness will be.
Directly offset by by the new originations and we'd probably start the end of the first quarter with balances of over $8 billion on so I think that that is helpful. As far as just for perspective there as.
As far as the fee income component to it that if you look at both the normal accretion of the fee income plus the acceleration coming from the forgiveness that was about $110 million of fee income for 2020.
We would expect for the first wave of those $8 billion of loans that number would be up to around $120 million $120 million or so as far as the fee income from both normal accretion and also the impact of forgiveness and so we have a little bit of a lift on a year over year basis from that and then on top of that we would have the benefit.
From the new.
Wave two of the PPP program coming through with low.
<unk> yields and fee income realization from from those credits as well.
So the vast majority by the end of 'twenty, one should be realized you does it spill over into 'twenty two.
I would say that the vast majority of the first wave will clearly be.
Addressed in 2021, we'll probably see some of this next wave continue to hangover into 2022, as well and so I would say that.
Net incremental lift that we're getting from that will be realized in both 2021 and 2022.
Thank you so much guys I appreciate it thank you.
Next question is from Ken <unk> with Jefferies. Please go ahead.
Hey, Thanks, Good morning, Hey, Don just on just to follow up on that last point. So all of that would you just ran through on PPP is inside your NII guidance for this year, that's correct yes.
Okay got it.
And then secondly, just on.
Just on the on the loans and how.
For your point earlier about some of the moving parts and can you just reconfirm for us just how much.
Do you think Laurel road can do this year and how much more of the mortgage business can grow as an offset to the planned run off in the auto portfolio on the consumer side share can that.
As far as consumer loans that debt relatively.
Relatively stable outlook for for total loans would assume consumer loans in aggregate ROE about $2 billion.
From 2020 to 2021 and that growth really coming from both residential mortgage and from Laurel Road.
Just to put that in perspective, we had almost 600 million for originations from Laurel Road in the fourth quarter, just continuing at that pace would be in the $2 5 billion type of range as far as 2021 originations from that category.
On the residential mortgage side that despite what we're seeing and hearing in the industry that we think that we can actually show stable to maybe even increasing our overall residential mortgage originations in 2021.
Keep in mind that we are at the early stages as far as rolling out that that platform throughout our branch network seeing strong growth there.
That two.
$2 $5 billion in the fourth quarter and of the $8 $3 billion for for the full year about half of that was for purchase money as opposed to refinance and so we think that there still will be opportunities to continue to show growth there and that's adding over $1 billion a quarter as far as the.
New loan originations and the residential mortgage side and so.
Net consumer growth in those two areas specifically are at the foundation of how we can get to that kind of a relatively stable outlook for total loans.
Got it and then just a follow up on expenses.
Given the plan for expenses to be overall flat I'm just wondering.
You have some variability in the investment banking stuff, but just in terms of the cadence of it given the plan to reduce branches and the severance related benefits that you get over time is there any way to understand like the cadence of how expenses trajectory of the year, whether or not youre ending lower than youre, starting that type of thing.
Great question, and I think you've hit on some of the challenger which is it.
A number of our drivers of our revenue growth really have a variable cost component to it as far as the origination and so thats a little bit of a challenge I would say that.
As we look going into the first quarter, we would tend to have some seasonality in those numbers and we highlighted a little bit as far as the benefit expense being up in the first quarter.
We would expect expenses are down considerably from from where they were in the fourth quarter, but probably up from from what we were seeing last year or last year on.
Our revenue outlook was.
Negatively impacted by some market valuation adjustments that also had a corresponding adjustment to our incentive compensation and so.
We think that will be in a position to generate positive operating leverage for the first quarter and have positive operating leverage for the full year.
Just want to restate that as far as our expense out what we are saying its down low single digits for down 1% to 3% as opposed to stable and so that's after funding the investments, we're making as part of our strategic initiatives as well.
Okay. Thank you John Thank you.
Next we'll go to Saul Martinez with UBS. Please go ahead.
Hey, good morning, So I just wanted to back up a little just to make sure I understand the mechanics on the PPP.
Dynamics through net interest income so on the on the.
There is an incremental I guess $10 million $10 million, so pretty modest on on the first waves of.
Of PPP and then on top of that you overlay the second round, which I think you said was $2 5 billion. So.
If we were to add adding that second round.
And obviously recognizing that these are five years on the fee rates might be lower.
How much of an incremental lift as that from the second round or we talking it seemed like a modest number but are you talking in the neighborhood for something like $10 million a quarter. If you could just kind of help us square away.
For full year, and then connect the dots fully on the full year 'twenty one versus the full year 'twenty tailwind that you get more broadly from PTP sure can.
As far as the.
The impact of that second wave, but we talked about $2 5 billion in the first quarter I would say that the full year average probably will be somewhere around $3 billion related to that.
Next wave of the PPP loans, if you look at both the stated coupon on those loans and the realization of the fee income it tends to be something a little north of 2% type of yields so youre pick up over 200 basis points on those balances through the year. So youre, probably looking at something for the full year somewhere.
Around $60 million kind of a lift from from from that compared to just having it sit on cash.
So we should think about the tailwind than just 'twenty, one versus 'twenty from PPP more broadly as being sort of that $60 million plus the incremental 10 of 120 versus 110, so something in the neighborhood of $70 million is that a fair way of looking at it.
Well, what I would say is that for the fee income we had $110 million in 2020.
For the first way that's about $120 million for that first wave of loans and then this new origination volume of the roughly $3 billion for average would be on top of that and so we'll actually see a lift year over year.
Say $70 million.
Both Mark and.
And that and that is debt to embedded in your guidance. Obviously that has embarked on our guidance. That's correct, yes, how much of a headwind are.
As far as the roll off for the hedges in 2021 do you have that figure.
How much of a.
That goes the other way.
I presume that those hedge roll offs and the incremental headwind is also embedded in your guidance.
The headwind is embedded in the guidance I don't have the dollar amount for for 2021 as far as the direct impact there, but it is okay. It is reflected in that debt outlook.
Do you know off hand, how much hedge benefit you got this quarter from from the swaps.
From the swaps.
When you say benefit.
I'm reluctant.
No what that is because it is part of our true hedging strategy and so as far as the cash flow swaps.
The net interest income.
Add to us for those cash flow swaps is about $90 million, which is down about 5 million or excuse me about $4 million from the previous quarter got it okay.
Okay, so $90 million, okay perfect. Thanks, so much.
And next we'll go to Gerard Cassidy with RBC. Please go ahead.
Moving Chris Mooney done.
Okay.
Okay.
Don can you share with us when you look at it.
The allowance for loan losses.
Currently based on your slides, excluding the PPP loans, you looks like you are at about 193 basis points.
At the start of the year when all of.
You and your peers center.
Over to the <unk>.
Seasonal reserving I think your reserves are about 122 basis points as we look further out maybe into 'twenty two.
Or do you think the reserve levels could get to do you think they could get back down to where they were in January of this year before the pandemic.
I think we could see trends in that direction I don't know the absolute timing of that I don't know how to predict where the economic outlook will shift over time, but I would say as we go into 2021 that.
The three pieces that impact our provision expense under Cecil are one the economic outlook on that so assuming that's stable with what we would have predicted.
We won't see any impact there credit migration.
Been a positive for us in each quarter as we take a look at what our projected credit losses are that trend continues to get better and so that's <unk>.
Allowing for.
Reductions to the provision compared to normal and then the third piece is for loan production.
On the call a couple of times in the last few quarters is that debt.
Provision each quarter would be in that $80 million to $100 million range and so if.
If the economic outlook doesn't change and if the migration is consistent with expectations that would imply about a $90 million per quarter provision expense on average in about $360 million for the year in which would be below what that charge off guidance would imply and so we would.
To see that allowance ratio come down over time in and could have some opportunity to see that come down more.
More quickly if we continue to see the credit migration outperform like we have.
Very good thank you for this.
And Chris the bigger question for you on a bigger picture.
Obviously.
Key and your peers are positioned to really benefit from a recovery in the U S economy coming hopefully this year as the vaccines are more widespread over the summer by the summertime.
The stock shares included since the Pfizer announcement in November on a real strong run here and so everything is shaping a good and as you pointed out your fourth quarter investment banking numbers for blockbuster. When you go home at night and you go down the elevator one of the risks that you think about since things are.
Shaping a pretty pretty good for you and your peers as we look out over the next 12 months.
Gerard I think for our entire industry.
On the number one risk is cyber I think we're on the trust business and to the extent there was a significant breach in the industry.
Or have any particular company I think that is.
I think thats thats the number one risk.
The number to risk.
That we all need to focus on are just a whole another.
Cadre of competitors, if you think about a lot of the fin techs and you think about what some of those companies have been able to do in terms of garnering new clients I think that is a strategic risk.
For more tactically.
We think about sort of the key areas, where I think you could see significant degradation in asset values and Fortunately, we are well positioned here, but I think the obvious ones are travel and entertainment I think that's as you pointed out I think that debt will come back because I think.
On the vaccine has a lot to do with that I think hospitality industry is one that you need to focus on the other couple of areas and as you know we've been out of them by strategy is both retail and office I think those are areas that as an industry, we need to keep a close eye on so those are kind of starting with <unk>.
Strategic down to tactical.
About.
Great. Thank you.
Thank you.
Our next question is from Erika Najarian with Bank of America Merrill Lynch. Please go ahead.
Yes, Hi, My first question I'm, sorry for another question on your net interest income outlook, but I'm wondering if you could.
And give us a sense Don on what what level of cash deployment or what level of investment Securities. Gross you expect for 2021 and maybe this next one is for Chris.
Embedded in that net interest income outlook, how do you see.
Core commercial loans ex PPP.
Ending throughout the year within your guidance. It seems like a lot of your peers have been quite optimistic surprising the market on loan growth recovery, particularly in the second half of the year.
Sure is for.
Far as the.
Outlook for net interest income and some of the assumptions we would have there for the reinvestment in the fourth quarter we.
Increased our core investment portfolio by about $3 billion and that was.
Investing at a faster pace than.
On the run off and I would and our outlook would have some of that same type of pace continuing throughout.
The current year that were currently sitting on over $14 billion on cash and about $2 billion in T. Bills that we think would be available for us to continue to redeploy either through loan growth or through.
Reinvestment and so that would be the core assumption that we have there.
Just on that component that for.
For the roughly $6 billion that we invested this quarter.
The average reinvestment yield was about a 128% so down from what the runoff level would be but but but.
Reflected some of the strategy as far as investing in certain securities and then swapping them back so that say five years down the road those fixed rate securities would convert over to floating rates. So.
Our expectation would be to continue that kind of a strategy going forward.
Chris on commercial loan growth share Erika So a couple of things as Don mentioned.
Loan growth first of all consumer is an area that we'll continue to be an outlier of growth for us and I think we're well positioned for that.
Next area.
Think about commercial real estate, we have a very very good franchise, we're actually not growing the on balance sheet debt there and that's by strategy I think last year, we probably placed 11 billion with our targeted customers.
In our in our real estate book as it relates to C&I.
We haven't yet seen growth if we're looking at if youre looking at utilization Erika. It is now at or below even pre pandemic, we haven't seen people investing in property plant equipment investing in people, but what we have seen and I think is a very good sign and you saw it in our.
Our investment banking numbers in the fourth quarter as people are starting to make strategic moves and so we're having great strategic discussions with our with our clients and our prospects and I think people are thinking now with the election behind us with the vaccine rollout of really what are they going to do to.
Their business, so I too am optimistic that we will see an increase in line utilization and that we'll see people start to invest in their business. The other thing that would obviously be helpful for line utilization.
If we had a bit of inflation if people actually started investing in going long on inventory and I don't think thats on unrealistic scenario as you think about the back half of the year.
Got it and just one follow up question on expenses on your guidance is offered.
At GAAP basis for <unk> 109 billion, that's correct yes.
Great. Thank you. Thank you.
Our next question is from John <unk> with Evercore. Please go ahead.
Yeah.
Good morning.
Jamie.
I appreciate the color you gave on the reinvestment and the impact on liquidity as well as your NII guidance just wanted to see if you could help us how to think about the trajectory of the net interest margin here in the coming quarters. I know there was also a PPP benefit but just wanted to see if you can give.
For us a little bit of color in terms of how that.
Could trend.
Next coming quarters. Thanks.
Good as far as the margin, it's challenging to predict just because the timing of some of the deposit flows is also creating either pressure or change there and so with our assumption of having deposits growing.
Low single digits.
Implies that our margin will come down slightly from from where it is as of the.
The fourth quarter, so something slightly below the $2 70, and I would say that from quarter to quarter that will be impacted based on like you said the PPP forgiveness timing and also the changes in the overall liquidity position.
Okay, alright, thanks that helps.
And then separately, Chris just wanted to get your updated thoughts on M&A interest both bank and non bank, we've clearly seen some banks there in your backyard move on some deals and I know you flagged competition as one of the risks that you think about and.
You can certainly see that intensifying in the cut.
Coming years, so basically wanted to get your thoughts on.
Whole bank M&A from that perspective, but then also on the non bank front.
Sure. Thanks for your question my comment with respect to intensity of competitors was really non banks and thinking about some of the fintech, but as it relates specifically to your question.
We're not really focused on whole bank.
Consolidation.
Our acquisitions really at all.
We think we have everything we need to be successful, we think the best way for us to generate value is to execute our targeted scale and go out and grow organically.
Having said that obviously, we take that responsibility very seriously of being a public company. We know we have to go out there each and every day and create value as it relates to <unk>.
As it relates to non banks I'm really proud of the job we've done over many years of being able to buy entrepreneurial firms and successfully integrating them into our business and I think about Cain brothers I think about Pacific Crest Securities and most recently Laurel Road that was born digital company debt.
We've been able to.
Not only integrate into our business, but actually.
<unk> key.
<unk> has both key and Laurel road have grown so I think youll see us continue to go out and keeping with our focus around targeted scale buying these niche businesses that can help us really serve our targeted client basis.
That's helpful.
These are businesses would you emphasize in terms of the non bank.
I think we'd probably look at the verticals that we're in and I think we also would probably look at.
If you think let's look at what we've done we bought boutiques that are really focused we bought digital businesses and slash analytics businesses. Those are the kind of businesses that I think really two.
Turbocharge, our existing $3 5 million clients.
Got it thanks, Chris.
Our next.
<unk> from Steve Alexopoulos with Jpmorgan. Please go ahead.
This is Jonathan Lee on for Steve on stock price. So my first question is on deposits, you're guiding to deposits going up even more from here after a 20% gross on 2020.
A function of your customers still holding on to cash on their accounts are.
This has taken any assumption about new client acquisitions from our successful PPP.
Well I would say it's on all fronts and so we are assuming a growth on a continued basis one is it.
And the last three quarters have shown a lot of strong retail household growth and with a focus there on primary operating accounts for the retail customers throughout our commercial customer base, we have increased efforts around making sure that we have that expanded.
Total depository.
Slash operating account relationship there as well and so those will be helpful.
It would also reflect the assumptions like we saw last year that is.
The PPP loans were originated a good portion of those proceeds were deposited into deposit accounts with our customers and so we would expect to see some some lift from that and then just the most recent round of stimulus also add the deposit balances in each.
Each quarter. This year, we've tried to estimate where deposit flows will be and I think each quarter, we probably underestimated.
They actually come through and so I think the customers continue to have.
Liquidity and continue to build those positions and that's essentially why we're assuming that we'll have continued growth there as well on.
The only thing I would add to that is we have a very successful third party commercial loan servicing business, where we are named primary servicer on $300 billion worth of commercial real estate that business has grown very very well and that generates deposits and we also from a strategic.
<unk> are very focused on primacy with both our consumer clients and our commercial clients and we're getting a lot of lift there.
That's helpful and it's positively surprising to hear that you expect over on residential mortgage originations to remain stable to potentially increase from 2021 versus 2022. So do you are you, saying that the consumer mortgage income line on year.
Fee income is that going to be stable or is it going to go down like single debt. How does it set on TD overall on fee income guidance of up low singles that just like where where are the other like offsetting line items, let's see.
Okay, great job.
As far as the outlook for 2021 that we would expect that line items to come down slightly more reflecting the impact of the extremely high levels of gain on sale, we experienced especially in the third quarter of this year. So we saw that come down in the fourth quarter and would expect to see ongoing pressure there so even though the the origination.
<unk> would be stable to maybe up.
We would expect to see some pressure there as far as the other categories on fee income that we would expect good growth in service charge line item that those cat.
Categories were under pressure throughout a good portion of say second and third quarter of 2020, and we would expect to see growth coming from from that category, and especially reflecting the impact of the low rates. We would expect to see good growth in trust and investment services line item between.
What we're doing from a retail and commercial brokerage flash.
Account activity, there and just our overall investment management strategy, we would expect to see some growth there.
And then even though we've had a record year for investment banking debt placement fees, we do expect that to grow again for 2021 and so.
We've got a good pipeline on that business. So we've got a good team and we're expecting to add bankers to that area throughout 2021, as well, which will help deliver those results also.
Alright, thanks for taking my questions. Thank you.
And we'll go to Peter Winter with Wedbush Securities. Please go ahead.
Thanks, Good morning, Good morning, I just wanted to.
Follow up on line.
Line utilization.
Where is it.
Today, and where do you think it can go and kind of what's the sensitivity for.
Every 1% increase to.
For the commercial loans.
So.
This is Chris.
This is an area that frankly through the pandemic.
We've been challenged to really pin down on where we think it's going to go if you think about people drawing on their lines and then paying back those draws were about at 50% and our C&I book right now, which Peter is a little bit below.
Where we would have been pre pandemic and I think the real the real catalyst. There is one our clients are sitting on a lot of cash so arguably they will have to burn down some of their cash before they start to utilize their line. So they have elevated cash positions. That's the first thing and the second thing that I mentioned.
Is there is plenty of there is plenty of slack now in the global supply chains, and so people are really investing in going long per se on <unk>.
Inventories, so I think you'd need those two things to happen. The biggest driver of both of those obviously is to get real economic growth Don what would you add to that no I think that's right I mean as far as a 50% debt implies roughly about $50 billion on outstanding balances on those lines.
For us so just to put that in perspective, if that would increase by 1% in debt.
At 1% growth on the $50 billion.
Got it that's helpful.
And then just one.
A question just.
Net interest income the outlook uplift.
Up low single digits.
2020 on a GAAP basis as well right.
I'm sorry for repeat that please.
Sure.
On the income outlook.
On.
The 2020.
That's a GAAP number.
The 2020 base is the GAAP number and our FTE adjustment isn't assuming much of a change on a year over year basis, there, but I guess, we would have a tax rate change, we would start to see that but but but.
It.
Runs usually about.
$29 million to $30 million per quarter.
For a year excuse me on a year for the FTE adjustment.
Okay.
Got it thank you.
And with no further questions in queue I'll turn it back to the company for any closing comments.
Thanks, John again, we thank you for participating in our call today. If you have any follow up questions. You can direct them to our Investor relations team. They can be reached at 201 6689 for 221. Thank you for your interest in key and this concludes our remarks.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.