Q4 2022 KeyCorp Earnings Call
Speaker 2: from Silver to the Chairman and CEO Chris Gorman. Please go ahead.
Speaker 3: Well, thank you for joining us for KeyCorp's fourth quarter 2022 earnings conference call. Joining me on the call today are Don Kimball, our chief financial officer, Clark Kayyett, our chief strategy officer.
Speaker 4: Upon Don's planned retirement, Clark will assume the CFO role. And also, Mark Midkiff, our Chief Risk Officer.
Speaker 5: On slide two, you will find our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments, as well as the question-and-answer segment of our call.
Speaker 6: I am now moving to slide 3. This morning, we reported earnings of $356 million, or 38 cents per common share. Our results included $265 million of provision for credit losses, which exceeded net charge-offs by $224 million.
Speaker 7: or 20 cents a share. The additional provision builds our allowance for credit losses, adjusting our credit models to reflect a more cautious economic outlook. Our results reflect continued growth in both our consumer and commercial businesses.
Speaker 8: In our consumer business, we have added new households, with younger clients being our fastest growing segment. Our commercial business also has continued to add and expand relationships.
Speaker 9: In 2022, we raised a record level of capital for our clients.
Speaker 10: Net interest income was up 2% from the third quarter, reflecting continued relationship-based loan growth supported by stable deposits.
Speaker 11: Deposit costs continued to move higher with a step up in deposit rates late in the quarter.
Speaker 12: At the end of the fourth quarter, nearly 60% of our deposits were in low-cost retail and escrow balances.
Speaker 13: In our commercial businesses, over 80% of our deposits are from core operating accounts.
Speaker 14: Our average loan balances increased 3% from the prior quarter as we continue to add relationships and offer the best execution with both on and off balance sheet solutions.
Speaker 15: We continue to benefit from investments we have made in our business, including the health care sector. In 2022, we continued to grow relationships with significant health care providers and expanded our Laurel Road business.
Speaker 16: Despite the student loan payment holiday, we originated over 1.5 billion dollars of Laurel Road loans last year and increased our member households by over 30%.
Speaker 17: Additionally, we expanded our offering to nurses, added new products and capabilities, and completed the acquisition of GradFent.
Speaker 18: Since acquisition, GradFin has held nearly 30,000 individual consultations for refinance and public service loan forgiveness.
Speaker 19: These consultations are with pre-qualified credentialed prospects, all new to Key.
Speaker 20: Our fee-based businesses in the fourth quarter reflect the continued slowdown in capital markets activity and the impact of changes to our NSFOD fee structure.
Speaker 21: Investment banking and debt placement fees were up 18 million dollars from the prior quarter but down meaningfully from the year ago period reflecting broader capital markets trends.
Speaker 22: The new issue equity market is virtually non-existent and the M&A market continues to be engaged in price discovery. Our pipelines remain solid, particularly in M&A. However, the pull-through rates continue to be adversely impacted by market uncertainty.
Speaker 23: We have also continued to see more activity moving onto our balance sheet.
Speaker 24: In 2022, we raised a record $136 billion of capital for our clients, of which 23% was retained on our balance sheet, well above our long-term average of 18%.
Speaker 25: Credit quality remained strong this quarter, with net charge-offs as a percentage of average loans of 14 basis points.
Speaker 26: Non-performing loans declined again this quarter, and delinquencies, criticized and classified loans all remained near historically low levels.
Speaker 27: We will continue to support our clients while maintaining our moderate risk profile, which positions the company to perform well through all business cycles.
Speaker 28: Our capital remains a strength, providing us with sufficient capacity to support our clients and return capital to our shareholders, including a 5% increase in our common stock dividend in the fourth quarter.
Speaker 29: Before I turn the call over to Don, I want to share some thoughts on our outlook and priorities for 2023 and beyond.
Speaker 30: First, we will continue to execute on our differentiated business model and strategy. We will focus on expanding our presence in our fastest growing markets and targeted industry verticals.
Speaker 31: As we demonstrated again in 2022, we are uniquely positioned to support clients through various market conditions.
Speaker 32: Secondly, we will continue to benefit from our balance sheet and interest rate positioning.
We have been very deliberate and intentional in the manner in which we have managed our interest rate risk with a longer term perspective.
Although our positioning is providing less current benefit, we have significant upside over the next two years as swaps and short-term treasuries mature and reprice.
If we were to reprice our existing short-term treasuries and swaps at today's interest rates, we would have an annualized net interest income benefit of $1.1 billion.
Thirdly, we will maintain our strong credit quality.
We've spent the last decade de-risking our portfolio, positioning the company to outperform through the business cycle.
Despite our strong credit metrics, we built our loan loss reserve this quarter, which, using our 2023 Net Charge Off outlook, now represents almost five years of coverage.
To put this in perspective, our reserve is now above our CECL Day 1 level, while non-performing loans and delinquencies are roughly one half of our pre-pandemic levels.
Finally, we will continue to create capacity to make targeted investments in our business by reducing expenses.
Although expense management has been an ongoing area of focus, we will be accelerating our cost takeout plans early in 2023.
We will pursue cost opportunities across our company, including areas where we can leverage technology, automation, and process improvement to reduce redundancy, improve efficiency, and enhance effectiveness.
Our 2023 targets represent a cost reduction of approximately 4% relative to our full year 2022 level.
The acceleration of our expense reduction plans will benefit us in two ways.
First, we cannot grow if we are not investing.
This will give us the capacity to continue to drive our targeted scale strategy, investing in points of differentiation.
With the benefit of our cost reduction plans, we expect to hold expenses relatively stable this year compared to our full year 2022 results.
which would be a significant accomplishment given inflationary pressures and our commitment to continue to invest in our future.
I am confident in our long-term outlook and our ability to create value for all of our stakeholders. With that, I'll turn it over to Don to provide more details on the results for the quarter and our 2023 outlook. Thanks, Don.
Thanks, Chris. I'm now on slide 5 for the fourth quarter net income from continuing operations with 38 cents per common share, down 17 cents from the prior quarter, and down 26 cents from last year.
Our results included 20 cents per share of additional loan loss provision and excess of net charge-offs as we continued to build our reserves reflecting a more cautious economic outlook.
For the full year, we delivered positive operating leverage marking our ninth time in the last 10 years. This is a testament to our differentiated and resilient business model and our ongoing focus on discipline expense management despite the inflationary environment.
Turn to slide six.
Average loans for the quarter were $117.7 billion, or up 18% from the year-go period, and up 3% from the prior quarter, as we continue to add and deepen client relationships across our franchise.
Commercial loans increased 17% from the year ago quarter driven by growth in commercial and industrial loans and commercial real estate balances.
Relative to the year-ago period, consumer loans increased 22 percent, reflecting growth in consumer mortgage and Laurel Road.
Compared with the third quarter of 2022, commercial loans grew 3% and consumer loans were up 2%.
Our commercial growth continues to reflect the strength in our targeted industry verticals in higher line utilization.
Our consumer business continues to benefit from residential real estate originations, which were just under a billion dollars for the fourth quarter.
Approximately one third of our originations came from targeted healthcare professionals.
Continuing on to slide seven, average deposit totaled $145.7 billion for the fourth quarter of 2022, down 4% from the year-go period and up $1.4 billion, or 1% compared to the prior quarter.
Year over year we saw declines in non-operating commercial deposit balances and retail deposits.
The increase in deposit balances from the prior quarter reflect higher commercial deposits due to seasonality and our focus on maintaining relationship business.
Consumer balances declined in the quarter driven by inflationary spending and the movement of interest rate sensitive balances.
Interest-bearing deposit costs increased 49 basis points from the prior quarter, and our cumulative deposit beta was 19% since the Fed began raising interest rates in March of 2022.
We continue to view our strong deposit base as a competitive strength with approximately 60% of our balances in core consumer and escrow deposits.
In addition, over 80% of our commercial deposits were from core operating accounts.
Turning to slide 8, taxable equivalent net interest income was $1.2 billion for the fourth quarter compared to $1.0 billion in the year-ago period and $1.2 billion in the prior quarter.
Our net marginal is 2.73% for the fourth quarter compared to 2.44% in the same period last year and 2.74% for the prior quarter.
Year over year, net interest income and net interest margin benefited from higher earning asset balances and higher interest rates.
Quarter over quarter net interest income and the net interest margin were negatively impacted by higher interest-bearing deposit costs and a change in the funding mix.
Later in the quarter, we experienced changing market conditions and customer behavior.
Market rates increased more than we expected in the migration from non-interest bearing to interest bearing commercial deposits picked up.
This resulted in a higher deposit beta, lower than expected net interest income and net interest margin.
Our outlook for 2023 has our cumulative deposit beta peaking in the mid to high 20% range.
well below our historic levels.
Included in the appendix is additional information on our future net interest income opportunities and asset liability position.
Based on our feedback from our shareholders, we have also included detailed maturities of our interest rate swaps and short-term treasury securities.
As Chris mentioned in his remarks, we have been very intentional in the way we manage interest rate risk with a long-term perspective.
Although our position has provided less near-term benefit, we have significant upside over the next two years as our swaps and short-term treasuries mature and reprice.
We expect this to drive both our net interest income and our net interest margin higher over the next few years.
We believe this is a true differentiator.
Moving to slide nine, non-interest income was $671 million for the fourth quarter of 2002 compared to $9 million for the year-go period and $683 million in the third quarter.
The decline in non-interest income from the fourth quarter of 2022 reflects a $151 million decline in investment banking and debt placement fees.
along with a $35 million reduction in other income.
primarily from market-related gains in the year-ago period.
Additionally, service charges on deposits were $19 million lower due to changes in our NSF ODP structure that we implemented in September as well as lower consumer mortgage income than $16 million.
Partially offsetting these declines is an increase in corporate services income of $13 million due to higher derivatives income.
Relative to the prior quarter, not interest incomes declined $12 million.
Service charge on deposit accounts accounted for the majority of the decline, down $21 million, once again reflecting our new NSF ODC terms.
Additionally, corporate services income decreased $7 million, driven primarily from my evaluation adjustment benefit in the prior quarter.
Investment banking fees increased $18 million.
I'm now on the slide 10.
Total non-interest expense for the quarter was $1.16 billion down $14 million from the year-ago period and up $50 million from last quarter.
Our expenses reflect our ongoing investments in digital, analytics, and our teammates.
Compared to the year ago quarter, we saw declines across most non-personnel line items, including business services and professionalities, and operating lease expense.
Personnel expense remains flat compared to year-ago period, reflecting higher salaries and employee benefits, offset by lower incentive and stock-based compensation.
Compared to the prior quarter, not just expenses of $50 million.
Higher non-personnel costs drove most of the increase.
Other expense increased 17 million dollars reflecting a pension settlement charge in the fourth quarter
Also, professional fees were higher in the quarter, some of which were temporary in nature.
Personnel expense also increased reflecting lower deferred costs from slower loan origination.
Moving on to slide 11, overall credit quality remains strong. For the fourth quarter, net charge-offs were $41 million, or 14 basis points on average loans, which remain near historical low levels.
Non-performing loans are $387 million this quarter, or 32 basis points appeared in loans, a decline of $3 million from the prior quarter.
Our provision for credit losses was $265 million for the fourth quarter, which exceeded net charge off by $224 million.
The excess provision increases our allowance for credit losses, reflecting a more cautious model-driven assumption set.
For our CECL modeling, we start with the Moody's consensus scenario.
This quarter, the consensus estimates reflected a marked slowdown in the economy and meaningful reductions in home prices.
both of which impacted our allowance levels.
Despite the increases in the allowance, our outlook for net charge-offs in 2023 of 25-30 basis points
remains well below or through the cycle loss levels of 40 to 60 basis points.
Now on to slide 12. We ended the fourth quarter with common equity tier one ratio of 9.1%, within our targeted range of 9 to 9.5%.
This provides us with sufficient capacity to continue to support our customers and their borrowing needs and to return capital to our shareholders.
We will continue to manage our capital consistent with our capital priorities of first supporting organic growth in our business.
Second, paying dividends. In the fourth quarter, Board of Directors approved a 5% increase which now places our dividend at 20 and a half cents per common share per quarter.
And finally, repurchasing shares.
Our current share repurchase authorization of $790 million is in place through the third quarter of 2023.
who did not complete any SUREI purchases in the fourth quarter.
On slide 13 is our full year 2023 outlook. Good guidance is relative to our full year 2022 results.
Importantly, using the midpoints of our guidance ranges would result in another year of positive operating leverage in 2023.
We expect average loans will be up between 6 and 9 percent. And average deposits will be flat to down 2 percent.
Net interest income is expected to be up between 6 and 9 percent, reflecting growth in average loan balances and higher interest rates.
Our guidance is based on the forward curve assuming a Fed funds rate peaking at 5% in the first quarter and starting to decline in the fourth quarter.
These interest rate assumptions, along with our expectations for customer behavior and competitive pricing environment are very fluid and will continue to impact our outlook prospectively.
Non-interest income is expected to be down 1 to 3%, reflecting the implementation of our new NSF ODP structure last year and continued challenging capital markets activity, at least for the first half of the year.
We expect non-interest expense to be relatively stable with the benefit of the cost takeout opportunities Chris described in his remarks, along with ongoing investments that we will make in our business.
For the year, we expect credit quality to remain strong and that charge-off will be in the 25 to 30 basis point range, well below the through the cycle range of 40 to 60 basis points.
Our guidance for our GAAP tax rate is approximately 19 to 20 percent.
Finally, shown at the bottom of our slide are our long-term targets, which remain unchanged.
We expect to continue to make progress on these targets by maintaining our moderate-risk profile and improving our productivity and efficiency which will drive returns.
Overall, it was a solid quarter and a very good finish to another successful year for Pea.
We remain confident in our ability to grow and deliver on each of our long-term targets.
With that, I'll now turn the call back over to the operator for instructions on the Q&A portion of the call. Operator.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press 1 and 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 and 0 at this time. And one moment please for your first question. If you'd like to ask a question, please press 1 and 0 at this time.
Your first question comes from the line of John Pankari from Evercore. Please go ahead.
Morning.
I know you mentioned that you saw a step up in deposit rate late in the fourth quarter. I want to see if you could give us a little more detail of what products and the magnitude that you saw, maybe how you see that following through. And then related to that, you also said it up.
higher than expected pressure on deposit costs as well, not just a step up, but a greater than expected amount of pressure. Just trying to get a feel around what area surprised you and why do you think, given the outlook around the positive pressures and rates, what attributed to this surprise?
Thanks. Sure can John and as far as late in the quarter and in late November December we started to see a different migration pattern as far as some of the deposits and the rates. We saw market conditions start to pick up as far as rates and many products. Our expectation coming into the quarter was
continuing to drift up some of the money market rates on deposits. The customers were migrating more towards time deposits, which had a higher incremental cost than what our assumptions were as far as money market deposit accounts.
We also saw a shift away from non-interest bearing accounts at a faster pace than what we would have expected late in the quarter. And so both of those had an impact of driving net interest income down for the current quarter compared to what we would have expected even coming into the end of the quarter. And it is also reflected in our outlook going forward.
a rotation out of non-interest bearing to interest bearing and we saw the ending balance of non-interest bearing around 29%. That's a little bit of seasonality and we've seen that come back. That's a ratio, kind of high 20s, that we would expect through the year and that's a little bit better than where we've been historically which would have been sort of mid-20s.
In terms of products and rates, as Don said, CDs coming through, we'd expect betas for the year to be mid to high 20s, as Don said in his prepared remarks. And again, a little bit more movement to CDs than money markets than we expected, but we factored that in.
would have ever been as low as 9%. And as we got to the end of the year, it really accelerated a lot of it was on the commercial side, a lot of it were excess deposits and places like our private banking area. So it's been interesting, you know, this has been the steepest rate of increases.
the feds history and I think I think some of the some of the conventional curves are sort of out the window.
Okay, thanks, Chris, that helps. And then I know you mentioned the need for investment and you're focusing on ratcheting up investment in certain areas. So I wanna see if you can give us additional color on what changed there in terms of areas that you're investing in.
That necessitated a greater pullback in costs elsewhere. Thanks.
Yeah, so it's really a continuation of the investment, John , that we've been making. And the point I was making there was we're not going to cease to invest as we take out costs. And when we were at Investor Day a year ago, we talked about growing our consumers by 20% by 2025, focusing really on our growth markets.
we're having a lot of success with our younger customers and we're going to continue to focus both products and marketing in that regard. Also we talked about hiring bankers. We talked about we think we have these unique platforms that are under leveraged and we talked about increasing our banker population by 25% by 2025.
Admittedly, last year we tapered off in the back half of the year. The market was obviously overheated and also frankly we saw the downturn coming in the economy. We think it will be a very good environment to recruit and successfully bring people onto the platform going forward.
And then lastly was Laurel Road and the commitment we made around Laurel Road where we've continued to invest is that we were going to grow our members from 50,000 to 250,000. This year we successfully grew by 30% and we've made a lot of investments expanding to nurses.
having a full product line there, buying GradBend, being a leader in public service loan forgiveness. And we're also going to get into the income based forgiveness game as well. So those are the three areas. And so it wasn't really new investments so much.
It's a continuation of the investments we've made in critical areas of the business, including around things like continuing to migrate to the cloud and investing in digital.
Okay, Chris, that helps clarify that. I appreciate it. And that's it from me and best of luck to you, Don.
Thank you so much.
Your next question comes from the line of Manan Gosalia from Morgan Stanley . Please go ahead.
Hey, good morning. Can you give us some more color on the reserve bill this quarter? To your point, your NCO guide for 23 is well below your long-term target. So I guess what changed in the macro environment that necessitated the...
First of all, thank you for your question and you're right, despite the fact that we have really good credit metrics, we did in fact build the reserve. And so if you kind of step back for a second, kind of look at the macro perspective, we believe the economy is clearly slowing. We think the probability of a
for us. The second is loan growth and we obviously have some loan growth. The third is really idiosyncratic risks, specific portfolio, specific credit. That is not driving our reserve build at all. So just to kind of bring it to life for you from the third to the fourth quarter as we look at our models.
We looked at GDP declining by about two-thirds from sort of 1.3 percent to 0.4 percent. Unemployment going from, say, in the third quarter we thought it would peak at 4.1. We now think it will peak around 5 percent. But significantly, when we look at things like home price index,
In the third quarter we thought homes were going up by 1.3%. In the fourth quarter as we modeled it, it was a decline of 4.6%. So fairly significant quarter to quarter change of 5.9%. Now to bring it back to kind of our portfolio, we for example have $21 billion.
of mortgages. That's about 18% of our loan book.
at booking about the FICO scores on those are say 761 from memory or some such number. We also say that 40% of our mortgages are 800 or above. I share this texture for you because we are not worried about our mortgage book.
But, as we drive our CECL models, which are forward looking, the macro drivers have significant impact. I'm using that as an example for why the reserve bill.
Does that answer your question?
Yeah, that's really helpful. Thanks so much for the color. And then if you could just round that out with how you're thinking about the NIM and just managing the NIM as you go through 2023. Earlier on you were in the camp of the Fed keeping rates higher for longer.
evaluate that. I think the challenge that we all have is just with this inverted yield curve is when do you pull the trigger to start to lock in some of that rollover risk and outlook. And so right now we've not embedded any of that into our base assumptions but that it's something we'll continue to have.
Good morning. Good morning, Abraham. I just want to follow up on credit.
We talked about the consumer book and the FICO's. When we look at the commercial book, both on the CNI, CRE, just talk to us about the idiosyncratic risks, means the leverage lending book you provide on slide 15, relatively small, but when we think about the impact from higher rates.
and you talked about mild recession as your base case. Where within the CRE and the CNI portfolios do you expect delinquencies to start moving higher and where is the lost content?
Sure.
Well, Abraham, thanks for the question. So you started at the right place where we focus. We focus any place where there's leverage. And obviously, if you think about leverage finance, which by the way, for us is only about 2.5% of our entire loan book. And it's focused in our seven industry verticals. And it has a pretty high turnover.
But you're exactly right, where there's leverage and you go into a mild recession and you have declining EBITDA, you have to watch that very closely. We feel good about that portfolio. Nothing has bubbled up to the surface, but as you can imagine, we're modeling it very, very regularly.
The next area that you mentioned, which I think is really appropriate, is real estate. And real estate is an area that we look at closely.
What we've done with our real estate business is we've completely rebuilt it around a business that not we now I put Real estate loans on our books, but we also distribute a lot of paper So it's a it's a little bit of a different business than a lot of our competitors have Fannie, Freddie, FHA, the Life Companies, the CMBS Market, etc.
So we distribute a lot of risk. We're also focused very specifically on certain asset classes.
the certain asset classes that we're focused on first and foremost multi-family in its broadest sense but within multi-family on affordable housing.
We're watching those closely. So far, the rent uptakes are good. Rents are still holding firm. So we feel really good about that portfolio. We have a portfolio that we look at very closely and fortunately we have very little of it. There's actually two portfolios.
The first is B and C class office space in central business districts.
Right now we're down to $250 million, but we're watching that very closely because those buildings are multi-tenant buildings. And the reality is whether it's key cutting expenses and getting rid of occupancy costs or any other business.
I think that's at real risk going forward. So we're watching that closely. The other area where we only have about a billion dollars of exposure is in retail. And retail is an area where we keep a close eye. So that's kind of how we're thinking about it. And as you can imagine,
We are continually modeling this portfolio as we look at the delta between where they're borrowing and where their debt rolls over.
Got it. And I think in there, you mentioned that you're actively de-risking some of these loans. What's the market for that in terms of being able to get out of some of these credits without having to take a big mark to market or credit charge? There hasn't been, there really hasn't been a lot of movement yet.
of more pain before there's a meeting of the minds on kind of how to restructure, how to bring in fresh equity, etc.
In this one question, on NII, do you think the mid to high 20s beta is conservative enough? I'm just wondering, in a world of 5% fat fans, and QT, it's...
like a lot of banks are kind of nudging their expectations a bit higher. Do you think that sets you up for more downside risk over the next few quarters? Just give a sense of your comfort level with that beta guidance.
I'll go ahead and offer up some thoughts and ask Clark to go ahead and chime in as well. But I would say that keep in mind that as Chris mentioned earlier on, we really were kind of best in class for the first few quarters of this rate increase cycle. Our cumulative deposit beta is at 19%. The peers I'm seeing are closer to 30% already.
that will continue to pay dividends for us as far as keeping our overall deposit costs down. Clark, anything that you would add there? Yeah, the other point I would add is just that it's less for us about new deposit acquisition. We're always going to.
acquire deposits from new clients and new relationships, but a lot of what we're looking at this year is managing clients from product to product, and that just allows us a little bit more flexibility on pricing.
Abraham, the only thing I would add, I agree with everything that Don and Clark said, the thing that I will share with you though, this is sort of uncharted territory and while we're really pleased with the trajectory of our deposit betas, we're not going to win the deposit battle, deposit beta battle and lose the, win the beta battle and lose the deposit war because
It's very important that we serve our clients and we keep them here at Key. That makes sense. All right, thank you very much. Thank you.
Your next question comes from the line of Stephen Alexopoulos from JP Morgan. Please go ahead.
Hey, good morning everyone. Good morning.
I wanted to start on the loan outlook. If I look at where period end and average loans end in 2022, it appears that you're not looking for much loan growth in 2023 on a period end basis. Can you confirm that and maybe give some color on why such a sluggish outlook? I don't know if you're tightening the credit box or whatnot.
Steve, this is Don. And as far as the outlook, period imbalances sometimes can be a little misleading. So if you just take a look at the fourth quarter average for total loans at $117.5 billion, our midpoint of our guidance range is in the $120 million range. And all of that really is coming from commercial. And so Thanks,
with this change in our economic outlook that also influenced our or determined what our allowance was. We've also pulled back on some of the long growth outlook.
You also see, Steve, that our consumer loan balances are flat throughout next year and what our expectation is there is that we'll continue to have residential mortgage originations but that we'll continue to see some of the home equity balances trade down and relatively flat on other consumer categories. So I'd appreciate that.
It is very modest incremental growth from here, but we think it's appropriate given the backdrop of the economic outlook we have.
Got it. Okay, Don, that's helpful.
And then on the reserve build, if the reserve build was a change in the economic assumptions and not idiosyncratic risk, why did this specific reserve not go up materially in some of these consumer categories? I know they're smaller, but home equity, consumer direct card, I would have thought of you change unemployment rate, et cetera. That's right.
We would have seen an increase in those as well. One of the biggest things that Chris talked about were the larger moves with the GDP coming down and also the home price index. And so what you would have seen is the residential real estate backed credits having a larger increase than some of the others.
You also factor in the position that our delinquency levels and our criticize and classify levels are still very benign. I think that's why you're not seeing some of those other, quote, higher risk categories showing increased reserves because we're not seeing the migration of those portfolios at this point in time.
Got it. Okay.
If I could squeeze one more in, just looking at the NII guidance, you have 6 to 9%. I know you said mid to high 20% range for deposit beta, but what is the assumption? Is it mid or high that's underlying this guidance range? And what are you assuming the mix of noninterest bearing is by the end of 23? Thanks. Once you when youards on multiple than 600,000 you have fuel that you produce. That's a tester 100 to 4 times larger.
Yeah, it's Steve, it's Clark. So it's.
The mid to high question is sort of mid to high. It's at a 27-ish, 28 area for the year on the beta. And the non-interest bearing percentage is 29%, roughly, high 20s for the year.
Okay, so staying pretty flat. Okay.
Great, thanks for taking my questions.
Got it. Thanks a lot.
Thank you. Your next question comes from the line of Gerard Cassidy from RBC. Please go ahead.
Bye guys. Good morning Gerard.
Don, I think you mentioned in your remarks that there wasn't any share repurchases completed in the fourth quarter. Maybe Chris or Don, what's the outlook for stock buybacks? I may have missed your comments if you gave it, but what's the outlook for stock repurchases in 2023?
that there wasn't any share repurchases completed in the fourth quarter. Maybe Chris or Don, what's the outlook for stock buybacks? I may have missed your comments if you gave it, but what's the outlook for stock repurchases in 2023?
Gerard, we're not assuming that there's going to be any meaningful stock repurchases. As we look at our balance sheet and supporting our clients and we look at our second priority, which is paying our dividend, I just don't see us out there repurchasing a lot of shares based on our current modeling.
Very good. And then you talked a lot about what went on with the deposit bettors and the mix of deposits in the quarter. Obviously your peers have had similar comments and the difference that we saw with Key was that the margin.
was essentially flat where others went up. How much of the borrowings I noticed in your average balance sheet that you included in the press release, your short-term borrowings and long-term borrowings have gone up and they're much more expensive of course than deposit funding. Can you share with us your thinking on how you're using those and why?
address the funding needs. I would say that our loan growth outlook and our deposit outlook wouldn't suggest a continuation at the same pace as far as building that other funding sources and so we wouldn't expect to see that same type of a growth rate going forward.
near term we work fine with that. That I would say traditionally we would look at a loan to deposit ratio in the 90 to 95% range and we're still well below that and so we've got plenty of capacity to continue to leverage that funding source as needed.
Very good. And Don, good luck in your future endeavors. Thank you. Thanks, Darrar. I appreciate it.
Your next question comes from the line of Scott Seifers from Piper Sandler. Please go ahead.
Good morning, everybody. Thank you for taking the call. Don, with regard to the $1.1 billion of NII repricing benefits to which you guys alluded, I was wondering if you could just sort of walk through the trajectory of how those kick in. I mean, I see the repricing numbers in the appendix, which is very helpful, but just would be curious to hear.
kind of more vocally how you think about it. Maybe put it another way, or I wonder if there's an easy frame of reference. What would first quarter 23 NII look like versus, say, fourth quarter 23 or first quarter 24? Not looking for specific numbers, but is there an easy way to say, hey, we sort of trough here and then start to accelerate meaningfully.
off of here and if there's a time frame around that, something like that.
Good, and I will offer up a couple quick comments, but turn it over to Clark, because Clark is going to be the one that's here to deal with that going forward, and I won't be around. So we'll go ahead and pass it on from that perspective. One thing I want to highlight, though, Scott, is as we take a look, for example, you mentioned the first quarter of 23. Why are Hispanic Americans here today? Why?
Keep in mind there are some things that impact the first quarter relative to the fourth quarter that are more seasonal. Day count related issues costs about $20 million from where the fourth quarter is to the first quarter. We also typically see fee income drop from the fourth quarter to the first quarter given some of the refinance activity on the loan side.
And so we would see the first quarter traditionally being the low point for both our net interest income and net interest margin and would expect to see growth from there. And Clark has been spending a lot of time taking a look at strategies as far as the swaps and treasuries of Clark. When you take it from there as far as other insights. Sure. Just.
Just to try to address your question directly, Scott, I think that really the majority of the value is going to come in 24. If you think about what's coming off in swaps and treasuries in 23, that number is about 7 to 7.5 billion. It's more like 15 in 24.
think about that kind of two-thirds, one-third almost ratio. I'd say of the number we've shared, which is, again, just to remind you, kind of taking all 29 billion of swaps and nine billion of treasuries and spot pricing them.
Again, I think you'd see about a third of that benefit in the 23 exit run rate. So the beginnings of some steepness in that NIM and then more of that pulling through in 24 as you'd see. You know, again, the majority of that, maybe two thirds to three quarters of that value started to come through.
by the end of 24.
Okay, perfect. Thank you. And I guess out of curiosity, I'm a little surprised at how well the estimate was.
kind of held in, you know, 1.1 billion dollars, I think you were saying 1.2 billion dollars last quarter, just given all the changes in the, you know, the way the curve has behaved. What does it take to really move that number one way or another? Is that sort of a 1 billion plus, kind of a pretty sturdy number, almost regardless of the way things behave?.
I'd say the biggest impact there is the movement in the 2 year into the curve and what we saw was the longer end rates moved a lot more significantly than the 2 year point.
in the two year end of the curve and what we saw was the longer end rates moved a lot more significantly than the two year point.
Okay, all right, perfect. Thank you all very much and Don, best wishes. Thanks so much.
Your next question comes from the line of Mike Mayo from Wells Fargo. Please go ahead.
Hey, good morning, Mike. You guys see financing to wholesale companies from both the lending side and the capital market side. One topic during this earnings season is
You know, the capital market conditions are a lot tougher.
Whereas the lending conditions are not that much tougher. So when do you think these will converge? In other words, the pricing in capital markets is much more difficult than the pricing in the lending markets. Are you seeing any firming up or not?
So the answer is like it depends and when I say it depends it depends on kind of what the customer strata is. So 50% of our loans are to investment grade customers.
And the adjustments there are immediate. There's a bunch of different inputs, whether people are hedging, putting a swap on, there's multiple people looking at it, et cetera. Where there's a disconnect, and I don't really think the disconnect goes away, is in those kind of quality middle market companies.
that one bank or one fund can finance. And I don't think we've seen, not I don't think, we haven't seen the adjustment there that you would expect.
Okay. Do you expect that to change coming up and just your general outlook on capital markets? That's a nice tailwind at times recently it's been ahead with. Sure. I think ultimately...
things get repriced and it takes time whether you're talking about bank debt going into the middle market or you're talking about people doing major strategic acquisitions.
My experience is it takes literally over a year for people to kind of readjust their expectations. And so we're obviously easily six months into this, but I think the first half in capital markets is going to be challenging because people still remember what the business or the financing was worth.
say six or eight or nine months ago, but eventually, and by the way, anyone that's a buyer is acutely aware of how things have been repriced, but those will converge, and I think it's gonna be, I think it'll be challenging in the first half of the year, Mike, and I think this big pent up.
backlog will start to kind of as people go through price discovery will start to clear out in the second part of the second half of the year.
start to kind of as people go through price discovery will start to clear out in the second part of the second half of the year.
Thank you, Mike.
Your next question comes from the line of Ken Usden from Jefferies. Please go ahead.
Hey, good morning and Don, best of wishes as well for me. I just have to come back and just super clarify, Don, the 27-28% beta for cumulative, that is interest bearing that compares to the 19% through three quarters.
Good morning and Don, best of wishes as well for me. I just have to come back and just super clarify, Don, the 27, 28% beta for cumulative, that is interest-bearing, that compares to the 19% through three quarters? Absolutely, yes.
Okay, cool. And then, so just to, you know, I guess the comparison question that I think continues to come up is just that, you know, many peers are talking mid-30s, even low 40s in some of the some of the calls that we've heard so far. So can you just kind of go one step deeper into
the type of pricing assumptions and, you know, I guess within products and businesses that just, you know, gives you that much better relative confidence to peers. Thanks.
Sure, Ken, it's Clark, so I'll pick that up. Again,
For us, what we saw in the fourth quarter and what we're looking at in 23 is much less about new to key deposits where those kind of new business rates are much higher and necessarily have to be higher to bring them in.
versus motion in the book of non-interest-bearing to interest-bearing or from different account to different account where we can manage that transition a little more comfortably. And given that, what we're avoiding, we think in large parts is the significant marginal cost of funds.
that the new price or new offer dollar requires in re-pricing the larger book. The only other thing I would add, Ken, is that right now we're at 19% cumulative. I think most of our peers are close to 30%. And so by them going to 40% is the same thing as us going to high 20. So...
The incremental change from this point forward is probably fairly consistent. It's just that we're at a better starting point than theirs.
Yeah, that makes sense. It does seem like though to get to that point, your incremental interest bearing deposits costs have to be, the betas have to be lower than the 33% in the fourth quarter to square to that.
As far as the cumulative, probably not because you've only got a 50 base point increase going forward as far as the rates in 2023. We can go back and reverse engineer the math but I think it still lines up.
Okay, just one quick one. Laurel, Road Origination Outlook, can you give us your updated thoughts there? Thanks, guys.
Sure can. So the world road obviously from a straight origination outlook perspective has been challenged. It's been challenged really by three things. One is the federal loan student payment holiday. That's a challenge. I think that's been extended several times.
But the next is just the rising interest rates which are challenged in the third challenge that we've had there
is all the discussion around student loan debt forgiveness obviously I think has some borrowers wanting to stay on the sidelines to preserve optionality. Having said all of that, I was impressed that we were able to originate last year $1.5 billion of refinance loans.
But even a bigger picture, Ken, is we are trying to create a national digital affinity bank. So first of all, those originations will come back, and they'll come back when there's clarity around all the issues I just talked about. And there's a bunch of raw material being priced right now that you'll be able to refinance advantageously. But in the meantime…
What we've done is build this national digital affinity bank that has a full suite of products for doctors, a whole suite of products for nurses. We're getting a 30% cross sell on the business that we do. So there's no question that originations have been challenged and they'll continue to be challenged in the very near term.
But what we're trying to do there is a lot broader. This grad-fin business that we bought is really interesting because they're the leader in public service loan forgiveness. And where you're going to see a lot of discussion going forward is around this income-based repayment.
and we're kind of uniquely qualified to be in there advising on that. Anytime we advise people, obviously we'll bring them on as full customers. So, does that answer your question?
No, it does. Thank you, Chris. Sure, Ken.
Your next question comes from the line of Matt O'Connor from Deutsche Bank. Please go ahead.
Good morning. Sorry if I missed it, but what part of the yield curve are we most concerned about as we think about your fixed rate assets rolling? And I realize it might be a variety of kind of parts because some of the short term, some of the longer term. But as you think about it, I think that 1.1 billion you said, you know, what part of the yield curve should we watch, which obviously.
you know, longer rates coming in, but shorter rates, you know, staying high.
Yeah, Matt, as far as the 1.1 billion, it's really a two to three year into the curve, and that's where we would be looking to extend those swaps when we're in a position to do that. And so it is in that portion of the yield curve. Beyond that, we also have a little over a billion dollars a quarter in rollover in our bond portfolio.
Thank you. Thank you.
Your next question comes from the line of Peter Winter from DA Davidson. Please go ahead.
Good morning. Chris, I heard the comments on the capital markets in the second half of the year. I was just wondering if you could give some more color about the moving parts to the fee income in 23 for it being down 1 to 3 percent.
Sure, so there's a few areas where we will get pick up and then there's a few areas where we've got some headwinds. The areas where we'll get pick up is in our investment banking area. We'll get some pick up in cards and payments. We'll get some pick up in trust. Do you want to cover the other puts and takes? Sure, the largest decline for us will be in the...
come will be down year over year just because we've had such a strong program this year as far as derivatives, interest rate swaps, and what have you for customers and we think that with less rate volatility we'll see less opportunity there for that category.
That's the blended impact as to how we get to that down 1 to 3 percent.
Got it.
And then the loan to deposit ratio is now at 85%. Is there a certain level that you don't want to go above? And secondly, I'm assuming that you're going to continue to let you go above.
securities cash flows and use those to kind of help support loan growth.
We typically would target between 90 and 95 percent. It's been a long time since we've been up at that level but that's where we think our balance sheet is still very efficient and access to the capital markets for that national funding sources is available and supports that.
The second part of the question was, I apologize Peter, remind me.
Sure, just using securities cash flows. Oh, I apologize. Yes. What we've talked about a lot is that we've got that $9 billion of short-term treasuries that start to mature later in 23 and throughout 24. That can be a very good source of liquidity for us, and we're really indifferent whether that replaces funding or whether we roll that over into a new...
overall equity management position.
Peter, the other thing I would add to that is you think about the puts and takes. you
on the balance sheet is that in the fourth quarter, for example, we put 24% of the capital that we raised, which was 33 billion on our balance sheet. Historically, that number has been 18%. So with the dislocation in all the capital markets, we're able to structure things in a manner that we want and put them on our balance sheet.
these capital markets work their way out that won't you know it will basically start deviating back to kind of 18 type percent as opposed to 24 percent that's just a little bit of a different wrinkle that I think's pretty you know as I said short term over the next half year or so.
Thanks and Don, best of luck and it's been a pleasure working with you over these years.
Right back at you, Peter. Thanks so much.
And at this time there are no further questions. I'll turn it back to you for any closing remarks.
Well, thank you operator and thank you for participating in our conference call if you have any follow-up questions You can direct them to our investor relations team 2 1 6 6 8 9 4 2 2 1 and I just want to thank everybody for your interest in key and on that note We will hang up. Thank you
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.
We're sorry. Your conference is ending now. Please hang up.