Q3 2024 KeyCorp Earnings Call
your conference will begin momentarily please continue to hold
Thank you for watching!
Speaker Change: Thank you everyone for standing by welcome to the 2024 3rd quarter earnings call. At this time all participants are in a listen only mode. Wait a little we will conduct a question and answer session. If you would like to ask a question, please press 1-0 on your telephone keypad. You will hear an acknowledgement tone that your line has been placed in queue. You may remove yourself from queue by repeating the 1-0 command. As a reminder this conference is being recorded.
Speaker Change: I would now like to turn the conference over to Brian Mauney, the key core director of investor relations. Please go ahead.
Brian Mauney: Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's third quarter, 2024 earnings conference call. I'm here with Chris Gorman, our chairman and chief executive officer, and Clark Khayat, our chief financial officer. As usual, we will reference our earnings presentation slides, which can be found on the investor relations section of the key.com website. In the back of the presentation, you will find our statement on forward looking disclosures and certain financial measures, including non-GAAT measures. This covers our earnings materials, as well as remarks made on this morning's call. Actual results may differ materially from forward looking statements, and those statements speak only as of today, October 17th, 2024, and will not be updated. With that, I will turn it over to Chris.
Chris Cor: Thank you, Brian, and good morning, everyone. I'm on fly too. Before I hand it over to Clark to review our financial results, I want to provide my perspective on a quarter that represented significant progress for key as we position ourselves for the future.
Chris Cor: First, we received the initial $821 million, a little less than one-third of the anticipated minority investment from Scotia Bank at the end of August.
Chris Cor: We use approximately 700 million of the proceeds to reposition our securities portfolio.
Chris Cor: In retrospect, this trade was for two-oddously-time. Long dated securities were sold near recent bond market highs in mid-September, which enabled us to sell over $7 billion of market value securities out of a total available for sale portfolio of $37 billion.
Chris Cor: At this point, we have fully invested the proceeds at better than anticipated yields.
Chris Cor: in more liquid, less capital intensive, shorter duration agency and BS. We anticipate these actions will add over $40 million to quarterly net interest income in the fourth quarter.
Chris Cor: As for the remainder of the 2.8 billion Scotia Bank Minority Investment, we are now through the public comment period. And we continue to expect to receive regulatory approval by the first quarter of 2025.
Chris Cor: Secondly, we saw the long anticipated step-up in our net interest income this quarter. A 7% quarter of a quarter. This reflected a combination of a more meaningful amount of low yielding short-term swaps and treasuries maturing, as well as proactive management of our funding costs.
Chris Cor: We also continue to grow our client deposits of 4% year and 2% sequentially. We achieved this NII growth despite some near-term impact as a result of the Fed's 50 basis point rate cut in mid-September.
Chris Cor: We mitigated a portion of the cut through a very proactive and disciplined deposit repricing plan, which is a testament to the preparedness of our consumer and commercial deposit teams.
Chris Cor: As a result, our beta in the initial said cut is anticipated to be higher than we had previously modeled and communicated.
Chris Cor: Thirdly, we continue to see strong momentum across our most important fee-based organic growth initiatives.
Chris Cor: Investment Banking and debt placement fees were very strong at $171 million. One of the best third quarters in our history. Activity was broad-based with volumes particularly robust across loan syndications as well as debt and equity originations.
Chris Cor: Hightlines remain at historically elevated levels, despite the third quarter pull through.
Chris Cor: Pipelines are stable compared to the June 30th levels and up meaningfully compared to year end and year ago levels.
Chris Cor: M&A backlogs, which we have set in the past, have a two to three times multiplier effect. We're near record levels, and up 10% compared to the prior quarter.
Chris Cor: At this point, I am confident we will hit the high end of our full year target for investment banking fees of $650 million.
Chris Cor: with an opportunity to exceed the high end if our pipelines pull through prior to year-end. Again, assuming markets remain hospitable.
Chris Cor: In commercial payments, leveraging our focus on primacy, commercial deposits were up 5% year over year and 2% sequentially. As a reminder, 93% of these balances are tied to an operating account.
Chris Cor: Underlying court treasury service activities remain strong, growing in the low double digits. We believe we are well positioned in this area to benefit as rates continue to decline.
Chris Cor: Our third party commercial mortgage servicing business posted a record quarter due to a small portfolio acquisition over the summer. Additionally, active special servicing balances reached a record $7.5 billion.
Chris Cor: As a reminder, this is a counter cyclical off us business that also provides us with unique insights into the commercial real estate market.
Chris Cor: We are currently seeing high rates of transfers into special service and concentrated in office and to a lesser extent multifamily. Even as we have also seen resolutions accelerate as we move through the year.
Chris Cor: is well.
Chris Cor: Assets Under Management reached an all-time high of $61 billion of 16 percent from the prior year. Sales production was a record this quarter and we are on track for a record year. While the entire wealth business is performing well, we continue to see particularly strong traction in our massive fluid segment.
Chris Cor: This quarter we enrolled an additional $5,000 in households and added $620 million of assets to the platform.
Chris Cor: In only 18 months, we have added over 36,000 households and about 3.6 billion of new household assets to keep.
Chris Cor: As a reminder, over 1 million of keys retail households have investable assets of over $250,000 and only about 10% have an existing investment relationship with us.
Chris Cor: Bill de Remains, a significant opportunity to continue to grow in the massive launch segment.
Chris Cor: Lastly, with respect to credit, we continue to demonstrate a conservative, de-risk credit profile.
Chris Cor: Not performing assets and loans as well as provision for credit losses were essentially flat. Net charge jobs as expected were up and reflected a few specific C&I credits that were known and had been mostly reserved against.
Chris Cor: Importantly.
Chris Cor: Curtis-Size Williams declined by $132 million. We also saw Mark Improvement in our net credit upgrades to downgrades trends, which, while still slightly negative, moved back to our trailing 13-quarter average.
Chris Cor: We believe that MPLs are peaking and criticize loans will continue to decline from current levels.
Chris Cor: and Subway.
Chris Cor: I am proud of the significant progress we made as a company this quarter.
Chris Cor: We announced the strategic minority investment from Scotia Bank, closing on the initial one-third trunch a few weeks later. We deployed most of that successfully completing one half of our anticipated securities portfolio restructuring.
Chris Cor: At the same time, we continue to drive broad-based momentum across the franchise.
Chris Cor: Grew our pipelines to deliver the first meaningful leg of the uplift and net interest income that we've been communicating over the past year and took proactive actions across the deposit books to prepare ourselves for the rate cuts.
Chris Cor: All while continuing to demonstrate a strong credit risk profile, as a result.
Chris Cor: Despite the one-time impact of the restructuring, we improved our CET-1 ratio this quarter by another 35 basis points that 10.8%. With that, I'll turn it over to Clark to provide more details on our financial results.
Clark: Thanks Chris and good morning everyone. I'm now on slide four.
Clark: The third quarter we reported earnings per share of negative 47 cents, including 77 cents impact from the previously disclosed securities portfolio repositioning.
Clark: Scrooting the Repositioning EPS with 30,000 per share.
Speaker Change: Chris mentioned in mid-September, we sold roughly $7 billion market value of mostly along with dated CMOs and CNBS, which had a weighted average yield of about 2.3% and an average rate of almost six years.
Speaker Change: and at this point, we reinvested all of the proceeds. Mostly in October when we saw term rates rise by 30 to 40 basis points.
Speaker Change: As a result, we will see roughly 260 bases point yield pick up on approximately 7 billion of security starting in the fourth quarter.
Speaker Change: The news securities will also provide liquidity and capital benefits relative to what was previously owned.
Speaker Change: As a reminder, we currently contemplate doing a similar magnitude-repositioning upon receiving the second launch of the Scotia Bank Investment, assuming we get that approval.
Speaker Change: Reporter revenue is down approximately 55% sequentially and from the prior year, but excluding the security to repositioning revenue is up 6% sequentially and up 3% year over year, with growth across both net interest income and fees.
Speaker Change: Experances remain well controlled, down 1% compared to the prior year, a little better than we previously expected.
Speaker Change: This implies about 400 basis points of positive operating leverage on a year-rear basis, excluding the security support polio repositioning.
Speaker Change: We're going to discuss the second quarter, including a $60 million release of our allowance for credit losses. We're collecting primarily three charge-off credits that had specific reserve allocations held against them as well as lower loan balances.
Speaker Change: Our common equity tier one racial increase to 10.8% and tangible book value increase nearly 16% sequentially.
Speaker Change: Moving to the Bound sheet on slide 5. Average loans decline 2.5% sequentially to $106 billion and ended the quarter just above $105 billion.
Speaker Change: The decline reflects continued tepacline demand, flat utilization rates, are disciplined approach as to what we're willing to put on the balance sheet, and the intentional run-off of low yielding consumer loans as they pay down in mature.
Speaker Change: Additionally, we built the business to be able to serve clients with on and off-balance sheet solutions, whichever works best for them. This quarter we raised $28 billion of capital for our clients, and as Chris mentioned, we had a very strong quarter of investment banking fees.
Speaker Change: At the end of the third quarter, we warehouse approximately $600 million of loans for commercial clients that you can see in loans held for sale. Additionally, throughout the quarter, we were finished about 300 million of CRU loans off our balance sheet and department mortgages through our capital market screw.
Speaker Change: We continue to have active dialogue with clients and prospects in our loan pipelines continue to build.
Speaker Change: On slide six, average deposits increase 2.5% to quench the lead in nearly $148 billion.
Speaker Change: Crushing growth across consumer and commercial deposits.
Speaker Change: Police deposits were up about 4% year-rehears we managed broker deposits down by roughly $2.2 billion from year ago levels.
Speaker Change: reported non-introspecturing deposits to claim 1% to 19% of total deposits, and when adjusted for non-interpreting deposits in our hybrid accounts, this percentage remains flat, length quarter at 24%.
Speaker Change: So, the total and interest bearing deposit cost increased by 11 basis points during the quarter.
Speaker Change: 7 basis points of the increase reflected reduction of roughly 4.5 billion of that HLB funding yielding almost 5.6 percent that was replaced with lower cost client deposits.
Speaker Change: Our overall interspering cards increased just one basis point this quarter.
Speaker Change: As Chris mentioned, we've been proactive across our deposit book and preparations to the fed-easing cycle that we all anticipated would begin last month. ahead of the cuts, we shortened CD centers and took promo rates down, and on the commercial side, we moved significant amount of deposits into index accounts.
Speaker Change: Following the cut, we took rage down further across both front and back looking consumer.
Speaker Change: In commercial, we effectively pass along the majority of the cut-to-clontants.
Speaker Change: are the positive beta on the first rate cut as expected to be low to mid 30s, which would benefit our fourth quarter net interest income.
Speaker Change: Moving to net interest income in the margin on slide steps.
Speaker Change: Tax equivalent net interest income was $964 million, up 7% or $65 million, and the net interest margin increased 13 basis points from the prior quarter.
Speaker Change: The welcome-inocated net interest in come opportunities now providing more benefit as a greater portion of low yielding short-term swaps and treasuries mature.
Speaker Change: Scott Shabank investment and our midst of 10-year securities portfolio repositioned at a roughly $12 million at about two basis points, the third quarter NIN and NIM respectively.
Speaker Change: Turning to slide eight, reported non-interesting cum was negative $269 million, and included a $918 million loss related to the securities reposition, as well the $14 million visa related charge. Adjusting for those items, non-interesting cum was up 3% year over year.
Speaker Change: That's an Indian death placement fees increased over 20% from the prior year and 36% from the prior quarter, reflecting a strong quarter for syndication debt and equity underwriting fees.
Speaker Change: Commercial Mortgage servicing had a record quarter reflecting higher active special servicing balances and growth in the overall portfolio.
Speaker Change: At September 30, we've serviced about 690 billion of assets on behalf of third-party clients, including about 230 billion of special servicing, 7.5 billion of which was an active special servicing.
Speaker Change: Given lumpiness of some of these beings and his interest rates come down, we would expect fourth quarter commercial mortgage servicing to use to look more like the second quarter.
Speaker Change: Trust and Investments Services being through 8% year of year, as that's its underman's degree of record level, $61 billion.
Speaker Change: On slide nine, second quarter, nine interest expenses were $1.09 billion, up to 1% quarter over quarter, and down 1% year-over-year. On a year-over-year basis, higher personnel costs were more than offset by lower fraud losses, marketing expenses, and a modest reduction in the estimated FDIC Special Assessment Church.
Speaker Change: The question to leave the increase was driven by higher incentive compensation from stronger investment banks.
Speaker Change: Moving to slide 10, credit quality remains solid. That charge off for $154 million or 58 basis points of average loans, and 90 day delinquents he picked up a few basis points.
Speaker Change: That charge officer elevated due to three credits, two consumer goods companies, and one equipment manufacturer that were largely reserved for them.
Speaker Change: Now, performing London Athens, we're essentially stable of 2.5 and 2% respectively compared to the prior quarter. NPA is a percentage of loans remain low at 70-based points.
Speaker Change: Criticized loans declined by 2% in third quarter, reflecting lower rates and increased loan modifications with credit enhancements.
Speaker Change: We believe NPAs are peaking and criticized loans will continue to decline from here, assuming no material macro deterioration.
Speaker Change: 30 to fly in 11. We continue to build our capital position with the CET-1 ratio of 35 basis points to 10.8% as of September 30.
Speaker Change: Our Mark C21 ratio, which includes unrealized AFS and pension losses, improved nearly 130 basis points to 8.6%.
Speaker Change: Our AOCI improved by about $1.9 billion to negative $3.3 billion at quarter end, reflecting lower interest rates and the security's
Speaker Change: We expect AOCI to further improve by about 1-3rd by year and 2025 and about 40% by year and 26. With approximately half of that improvement reflecting a second contemplated securities portfolio repositioning, once the full investment from Scotia Bank closes.
Speaker Change: Line 12 provides our outlets for full year 2024 relative to 2023.
Speaker Change: We currently expect net interest income to fall in the middle of the full year guidance range of down 2% to 5%, albeit with about 150 basis points of positive impact from the Scotiabank investment and the security portfolio restructuring this past month.
Speaker Change: We are tweaking our year-end loan forecast by 1% to down 5% to 6%.
Speaker Change: We are also positively revising our average deposit guidance to up 1.2% including expectations for client deposits to grow by 3 to 4%.
Speaker Change: We now inspect fees, excluding this past quarter's securities portfolio restructuring, and grow 6% for better this year, depending on how the capital market's environment plays out in the fourth quarter.
Speaker Change: Given the strong female men's and our higher stock price, we expect expenses to be of approximately 2% this year. It also includes the funding of our charitable foundation.
Speaker Change: As we've previously communicated, we expect the boy your net charge operation to be closer to the high end of the 30 to 40 basis point range, given lower loan balances than we had expected coming into the year.
Speaker Change: For the full year we expect provision for credit losses to come in around $400 million, which is unchanged from what we expected back in January.
Speaker Change: Moving to slide 13.
Speaker Change: The last time we were updating the net interest income opportunity from swaps and short-dated treasuries maturing, as we sold the remaining roughly $3 billion of treasuries, yielding 50 basis points that were to mature in the fourth quarter at the end of September , meaning we now expect the final chunk of benefit from this opportunity to come in the fourth quarter.
Speaker Change: The cumulative annualized opportunity ended up being about $830 million of which 80% has been achieved today.
Speaker Change: Finally, on slide 14, we've laid out for you the path of how we intend to get from the $964 million of reported net interest in some of the third quarter to the fourth quarter exit rates that we targeted at the beginning of the year.
Speaker Change: Regardless of whether the Fed cuts 50 or 75 basis points in the fourth curve, quarter, we believe fourth quarter and I will be at least 10% higher year a year, which equates to $1,000,000,000, or better in the fourth quarter.
Speaker Change: We've spent about $40 million of incremental benefit from the September Port-Bullier Restructuring and Initial Tronge Investment from Scotia Bank.
Speaker Change: We expect another $50 million or so of that if it from fixed rate, asset repricing, including from the accelerated sale of short-term treasuries I just described.
Speaker Change: We also think we can drive a modest amount of commercial loan growth and some further funding optimization, offset by some short-term impact from the expected bedway cuts.
Speaker Change: While fewer cuts would be better for fourth quarter NII that is largely a training impact.
Speaker Change: Keep in mind that we would expect to capture more benefit of any rate cut over the ensuing 6-12 months. And rate cuts would likely provide benefits to other parts of our business, such as higher client transaction activity, or demand for credit, and improvements to capital.
Speaker Change: With that, I will now turn the call back to the operator to provide instructions for the Q&A portion of our call. Operator?
Speaker Change: i
Speaker Change: Your first question comes from the line of Scott Seafers from Piper Sandler. Please go ahead.
Scott Seafers: Thank you. Good morning, everybody. Thanks for taking the question. Good morning. Mark, I think you might have touched on this. Hey, you might have touched on this a bit toward the end of your marks, but there's been so much movement in your balance sheet over the last 90 days. Not only the new capital and the repositioning, but now it looks like the funding profile is starting to look a little different with the improved deposit outlook as well. Maybe just some thoughts on the updated rate sensitivity of the company as a whole. And as you look at things, what would be sort of best and worst that you would like just in terms of what happens with the rate path?
Speaker Change: Thank you.
Speaker Change: You know, look, we've been moving towards rate sensitivity. That's obviously often viewed over kind of a 12-month period. So, as all of us in the industry talked about, the early cuts take a little bit of time to work their way through, particularly on the deposit side. As we noted, we took a little bit more deposit action than we had previously planned. Beta is kind of low 30s or so, which we were very happy with. And we think over the course of 2025, we'll be able to get back to, you know, more standard beta paths over time. I think on the overall rate profile.
Speaker Change: Look, I think the best version of the world is the one we appear to be headed in if a soft lane is coming, which is a steepening curve right now. We got some rally in the term rates, so you know, nearing again 4%. We all think the front end is coming down, so something that's flat to upwards sloping, I think is the best profile for all of us, but on the flip side, I think.
Speaker Change: We took some actions as you noted in getting out of higher cost, wholesale funding.
Speaker Change: We funded that with deposits at a lower cost, we feel really good about that deposit base and the customer profile.
Speaker Change: We feel good about our ability to price that over time.
Speaker Change: and given that the swaps positions are coming off. You know, we feel better just about our overall rate sensitivity. The other point I'd make is...
Speaker Change: You know, we had a little bit of concern on the repositioning early just given the amount of cash we thought we'd be holding for potentially an extended period of time. Obviously that cash is pretty as sensitive so those rates come down that that impacts us and we were able to get all of that into the market in the last few weeks. When those term rates did rally and we did it at better than expected values so that's obviously going to help our rate sensitivity position going forward. And we put those proceeds in kind of 490, 495 range in a duration that's just under four years so we felt very good about that repositioning.
Speaker Change: and that'll again, that'll eat us going forward.
Speaker Change: Yeah, perfect. All right. Thank you for that color. And then sort of a sort of related one. I think last month you all had to discuss an N.I. improvement next year in kind of the 20% plus range. I think that was before you were fully invested because if I'm recalling the time correctly, that was when you had just announced the repositioning. So, you know, the actual investment probably a little better than you thought, which presumably should be helpful. But I guess the thrust of question is just we still thinking 20% plus N.I. improvement next year, and maybe just if you can expand a little on sort of the main puts and takes to get there in your mind.
Speaker Change: Sure, so I'm going to start with a couple qualifiers because I feel like that's necessary, you know, the first being, you know, a constructive macro environment kind of soft landing is folks expect so that's point one point two is, you know, we're in the middle of, you know, planning for next year so, you know, we'll give our full guidance here in January, but on the, on the 20%
Speaker Change: I'd say roughly half of that we think comes from the incremental impact of the repositioning, so assuming, and this would be the other qualifier, assuming the second leg of this gets approved, and we can do the repositioning early in 25, so we can get the full year impact of that. We think about half of that lift comes from the complete repositioning. [inaudible]
Speaker Change: at Completion, so that's part of it. The other components would be, you know, continued.
Speaker Change: Priced at that price repricing through the course of a year and that's a combination of some swaps, not the ones we've been talking about, but some additional swaps still at rates kind of below 2%.
Speaker Change: We've got a consumer book that's running down at rates like 3%, and then we've got some other fixed rate securities that are a little bit higher that won't be as valuable as they would have been previously with rates coming down. But we do have some continued opportunity there. And then the last piece, the last two pieces. Let's see what this is.
Speaker Change: and I'll finish with the most important one. We do have at this point, and again subject to changes we get through our planning process, relatively, of you on relative stability of loans through 2025, but recall that that is a mixing of, you know, consumer coming down and being replaced with commercial. So we will need some commercial growth, not curculean efforts, but something. Thank you very much.
Speaker Change: our pipelines would tell us that that should becoming but in fairness it's been telling us that for a quarter or two so we'll see how that transpires and then the most important piece is just continued to ability to manage beas we've talked a lot about how the commercial book is position we've actually proved that throughout the year getting more deposits into index we think the use of our hybrid accounts and treasury court treasury services that are covered by deposits there will be a benefit as well and we've taken some
Speaker Change: Action in the consumer book that would give us confidence that we can get baited to the right level throughout the course of 2025. So all those components kind of make up the other half of the 20 and at this point we feel good that that's achievable, but we owe you a more detailed explanation when we come back in January.
Speaker Change: Perfect. All right, good. Thank you very much, Clark. Yep.
Speaker Change: Your next question comes from the line of Mike Mayo from Wells Fargo. Please go ahead.
Speaker Change: Hey, Chris, you talk about re-saying M&A backlogs are up 10% quarter of a quarter, and what's the change now, why, we've seen this at the big players, and also, there's a little debate, is the cat-to-market activity taking away from long growth, or are they separate? Are you seeing some disintermediations from lending to cat-to-market as it relates to KeyCorp? Thanks.
Chris Cor: Sure, thanks for your question. I think the fundamental difference is...
Speaker Change: The private equity universe is really starting to transact. I think they have a perspective, obviously there's an inverse relationship between the whole period and the returns.
Speaker Change: and in addition to that with the 10 year, which is really what matters, sort of settling in somewhere around 4%.
Speaker Change: That's in an environment where I think the private equity world is very comfortable transacting, and as a consequence, I think you're really starting to see a pickup on the M&A side, and I think that will continue, by the way. With respect to the dissent or mediation, there's no question that it is. I mean...
Speaker Change: You know Mike, we raised $28 billion last quarter and we have a pretty good eye on this because we're distributing a lot of paper and a lot of places and there's no question in my mind that some of the capital markets activity does in fact disintermediate the banks and I think the private capital, private credit markets do as well and of course we distribute paper to all those places.
Speaker Change: And the only thing I might add to that might just a couple specific examples. We touched on this, but about half a billion of loans we put directly into our warehouse. They're on their way to the markets. And then another 300 million, we refinanced off the balance sheet into the market. So that's always been our model. We'll continue to do what makes in those sense for clients. And I think you saw that this quarter in our strong investment banking piece.
Speaker Change: And just to follow up on the private equity comment, it said the private equity universe is starting to transact. I got the sense there. Deploying from the drive powder but honestly monetizing the investments but you get different stories depending on who you ask. How much of your business is driven by private equity and how do you see the private equity factor playing out because you've never had this much drive powder in a cycle like this. Thanks.
Speaker Change: Sure. So I think broadly, the private equity universe represents about a third of all the fees that are paid in the investment banking arena. Our mix wouldn't be much different, and your observation is good, and that the private equity firms that are putting product out into the market, that's a process that takes 12 months or so as opposed to buying businesses that are available, which is relatively, there's a short, shorter time line on that. Thanks for your questions, Mike.
Speaker Change: All right, thank you.
Speaker Change: Your next question comes from the line of Gerard Cassidy from RBC. Please go ahead.
Gerard Cassidy: and Chris, and Clark. Thank you.
Gerard Cassidy: Chris, you mentioned in your opening remarks about the special servicing. I was curious for a perk my interest, you mentioned how there seems to be an accelerated resolution to the inflows that may have come in six months ago or three months ago. Can you give us any color on how that resolution is going? Is it big price discounts and then being refinanced or what are your guys seeing on the resolution side to move these properties out?
Speaker Change: So it's a combination of things to our, if you go to the office market, frankly, there's just some capitulation because there has to be, and things are starting to trade.
Speaker Change: All be at a significant discount, not a lot of new capital coming in, frankly, to the office market. I can speak to that in greater depth in a moment.
Speaker Change: On the other hand, with respect to multi-family, we've said before, most of the multi-family...
Speaker Change: Projects that are in special servicing are concentrated in the southeast. Most of them, frankly, are not financed by banks. Most of them were done relatively recently with some very aggressive assumptions, i.e. trending rates, having, you know, sub-det in them, etc. In those instances, we are able to attract new capital on a restructuring basis. So it's a little bit different for office vis-a-vis for the multi-family.
Speaker Change: Very good. And then you guys talked about the outlook for loans or what you're experiencing in loans and we're seeing from the H8 data that comes out on Fridays that seems like commercial and industrial loans have hit a bottom and are starting to creep up a bit. Any sense that you might be seeing that soon as well or is it just some of your customers, were you physically located in your customers, it's still going to be flat for or flat to down I should say over the near term.
Speaker Change: So there's a few things going on. And first of all, we are without question growing clients. So there's no doubt that we're out there bringing on new clients. We have been obviously a bit frustrated by the lack of take up of our existing clients in terms of borrowing money. And I think, I think what's going on Gerard's a few things. On the positive side, I mentioned the mic, there is transactional finance happening. So that's a positive. On the negative side, you just have to supply significantly exceeding demand on the demand side. Here's some of the things that
Speaker Change: We need to see before we get significant growth from our existing customers. One.
Speaker Change: There hasn't been a lot of investment in CapEx and that has typically a lead time of about 18 months.
Speaker Change: Based on all the uncertainties. The next thing is utilization. This one's a complex one.
Speaker Change: Everyone basically went long on inventory during the pandemic because there was a lot of inflation and there were supply chain issues
Speaker Change: Now, people are getting back to really managing their working capital and I assume, obviously, rising rates has something to do with that as well.
Speaker Change: So I think there's just been a fundamental adjustment there.
Speaker Change: We do see it coming back. We see it coming back first on the transaction side. We'll see it next.
Speaker Change: I think on our clients engaging in CAPEX, and I think the last piece that will happen is to really get a kick-in utilization because for all the reasons I just described, these companies are throwing off a fair amount of cash as they get sort of top-line declines and all the other things in the mix. Does that answer your question, Gerard? No, it does. It's good, Chris. And just one real quick. You guys in the past have always had a comment on student lending. Any changes here? And will it rates coming down a bit on your student lending plightful?
Speaker Change: Yes, so that is that is upside for us as rates continue to come down. We basically had a negligible amount of originations in the last quarter in our student loan business.
Speaker Change: We think a decline of 150 basis points
Speaker Change: will get that business back to ramping up. To state the obvious, every quarter, every semester, there's a bunch of new customers at different...
Speaker Change: Levels, but clearly with the hiking cycle it's gonna take a while to work through that. And we're still peeling off the moratorium so people are just getting used to paying their student loans again or maybe not yet used to paying their student loans again so there's probably a little bit of transition and just seeing that sticker shock a little bit and then going out and figuring out if there's a better alternative.
Speaker Change: Great, thank you.
Speaker Change: Your next question comes from the line of John Pancari from Evercore. Please go ahead. Cross with this and so those are relatively good underlying drivers to get to the number you're talking about without being done.
Speaker Change: So that's helpful. Thank you. And on the expense run rate, I think, operator can you move to the next one.
Speaker Change: Next, we'll go to the line of Matt O'Connor from Deutsche Bank. Please go ahead.
Speaker Change: Hey everyone, this is Nathan Stein on behalf of Mad O'Connor. So you talked about the rise in C&I net charge off this quarter, which were from the three credits that had been previously reserved for. I want to ask what industries were these loans in and we saw the updated charge up guidance for full year 24, but are you expecting others similarly sized losses in the coming quarters?
Speaker Change: So Nathan, this is Chris, so specifically the three credits. Two of them were in consumer products. One of them was in equipment manufacturing, having nothing to do with consumer products. So those were the three credits. Each had their own idiosyncratic issues that I don't think you can get a huge read through on broad industries on those. Thank you very much.
Speaker Change: Okay, thank you. And then if I could just ask a question on the name. You flagged a 2.40 level in 4K just given all moving pieces. I think in September, you guys have flagged a 3% name with a just assuming a steeper yield curve down the road, not necessarily the next year, but could you provide your updated thoughts on the long-term name just given the moving rates or the past few weeks and everything else you want on a key? Thanks.
Speaker Change: Well, Nathan, I think from a broad perspective what we've said is, and there's obviously a bunch of puts and takes in this, we said that based on our business model there's no reason by the end of 2025 we can't be in a range of 2.8 to 3% and obviously we're looking at different models every single day but we still feel very comfortable with that.
Speaker Change: Thank you.
Speaker Change: You're next question comes from the line of Zach Westerland from UBS. Please go ahead.
Speaker Change: Hi, good morning. This is Zach on for Erika. My question is just around deposit betas. We saw a decent uptick in the cost of interfering deposits this quarter. Just kind of wanted to get your thoughts on how you're thinking about the trajectory for that deposit betty going forward.
Speaker Change: Yes, sure. So maybe just get to the quarter movement first and then transition to beta. So up 11 basis points.
Speaker Change: and just very deposit cost in the quarter.
Speaker Change: Seven of that was an intentional move.
Speaker Change: into...
Speaker Change: Piracastipazins, but...
Speaker Change: Deposit Center, lower cost and wholesale funding. So we paid off about 4.5 billion of...
Speaker Change: FHLB advances at a higher rate, and I think the more important number versus the 11 basis points on the positive cost is overall funding costs only up a basis.
Speaker Change: Point so...
Speaker Change: You know, the end of the day what we're managing is the overall funding class and obviously deposit or critical part of that.
Speaker Change: As it relates to beta, you know, we had expected something.
Speaker Change: in the maybe loaded mid-20s on the first cuts.
Speaker Change: We are expecting to be closer to, you know, low to mid-30s potentially. Some of that is we just leaned into different portfolios a little bit more aggressively than we thought we could because we felt comfortable that we understood the dynamics of those. The other piece is the 50 basis point cut in September . Give us a little bit more room to take action. If that had been 25, I think you would have seen a lower beta on that first cut. So, as we. Let's see.
Speaker Change: Say pretty frequently, I think, you know, the not only absolute level of rates, but how much they're moving on any one cut tends to impact how much beta you can see as a reaction to that. So the 50 basis points on a net basis, you know, creates a little bit more drag in 2024, but it also gave us the ability to take a little bit more of a reaction on the positive risk.
Speaker Change: Thank you, and just as a follow-up to that, I'm the non-interest bearing deposit front. Any color that you can share on that in terms of when you think that we'll reach a bottom there or pivot to growth. Any thoughts there would be helpful next.
Speaker Change: Yeah, so...
Speaker Change: Maybe just a reminder there are two, so what are reported numbers shows down at the tech?
Speaker Change: Around 19%
Speaker Change: Recall that we use pretty actively a hybrid account for a commercial client that has a fair bit of not interfering deposit in it.
Speaker Change: If you adjust for those, which we think is appropriate.
Speaker Change: you get pretty flat at 24% quarter to quarter so I think in aggregate it's starting to stabilize.
Speaker Change: Um...
Speaker Change: We would expect with great cuts that
Speaker Change: You know, it's going to be stable and if the rate cuts continue, we would expect it to potentially start to tick up. And some of that is frankly the way those hybrid accounts work. So over time we're thinking this is at or near the bottom of that percentage.
Speaker Change: Thank you for taking my questions.
Speaker Change: Church, thank you.
Speaker Change: You're next question comes from the line of Manan Gosalia from Morgan Stanley. Please go ahead.
Speaker Change: Good morning. Good morning. Good morning, given up.
Manan Gosalia: Hey, I apologize if this has already been covered, but can you talk about expenses for 2025? You're just given that, you know, you have a lot more capital to work with now. I mean, a growth should be accelerating next year. You have some investment spend to make plus, you know, you have been, you know, pretty good with managing expenses over the past few years. So just given all of that, how should we think about expenses? This is in 2025.
Speaker Change: Sir, fair question. We're obviously going through the planning cycle now, but I've mentioned before, and this won't change. We will be targeting kind of load of mid-single digits for 2025. Our discipline around expenses.
Speaker Change: Won't change in spite of the fact that we're going to obviously have a significant amount of capital. You do see in the fourth quarter and we gave guidance on this that we're investing a little bit in the fourth quarter and that's really just some unique opportunities that we have to kind of advance the business in light of the tailwinds that we're picking up from both the rundown of our swaps and treasuries and also the repositioning of the balance sheet that Clark walked everyone through. [inaudible]
Speaker Change: So the maybe one additional point, just I think it's embedded in Chris's comment, but I just want to make it explicitly Manan, which is we would tell you not to annualize that Q4 number going into 25. I don't think that's appropriate as Chris mentioned where, you know, we're leaning into higher fee growth. So we're going to see, instead of comp go up a bit, stock price is a little bit higher. We've got some unique investment opportunities. We're assessing in the fourth quarter that were, you know, interested in...
Speaker Change: taking to get a head start on 25.
Speaker Change: But I think the underlying point that Chris made is worth repeating, which is, we don't see the benefit of higher earnings or the investment as a path to losing our expense discipline here.
Speaker Change: Perfect. And then I appreciate the comments on the near deposit betas, but one of the good thoughts on just, you know, longer term, as you think through the cycle, should deposit betas in the way down match deposit betas in the way up, or, you know, given that long growth will be stronger this time than it was when deposit, when rates were going up, will deposit betas likely be a little bit slower through the cycle? No.
Speaker Change: It's a great question with no simple answer because you had a bunch of the moving parts, so subject to...
Speaker Change: You know, funding needs on the balance sheet that obviously drives, you know, the requirement to have deposit balances which in effect then hit your pricing. What I would say maybe more broadly is I think the absolute level of rates matter and the amount of movement in rates matter. So if you know we hit kind of peak at mid 50s, 56% I think made on the way up. I think that's more than probably you would have expected at the beginning of the cycle, but it's also a function of rates moving up over 500 basis points off of zero. So your relative starting point zero, you're moving up by 500, 550 basis points at the huge move.
Speaker Change: and you're getting obviously to that 5% level. I think on the way down I would expect it to be somewhat parallel, but probably not getting to the mid-50s, maybe it's a 50 number because you're not likely to get back to zero unless some exogenous event occurred. So if we hit some terminal rate path, that's...
Speaker Change: 2.5% I think you're going to see data deployed and data deployed, you know, over time fairly aggressively, but I don't think you get to the same levels just because the magnitude of the change is, you know, 50 to 60% of the way up.
Speaker Change: and that then you have to account for the other element which is, you know, loans and required balances for funding.
Speaker Change: God, thank you.
Speaker Change: As a reminder, if you'd like to ask a question, please press 1-0.
Speaker Change: Next, we'll go back to the line of Mike Mauney from Wells Fargo. Please go ahead.
Speaker Change: Hey, can you comment on the increase in NPL? It's a little bit more.
Speaker Change: Do you know what's that?
Speaker Change: Like how many credits was that? Is that a trend? Is that something that you guys are worried about? Was that unexpected? Thanks
Speaker Change: Yeah, Mike, it's Christmas. We think that sort of peaking, it's there's nothing in particular, it's kind of broad based. And as we said in our opening comments, we don't think it's material or reflect, I don't think there's any read through from that.
Speaker Change: So, next quarter we shouldn't expect anything like that is what you're saying.
Speaker Change: Well, I think NPLs will be pretty flat as we go forward. I mean, that would be what I would assume for your models. If you're talking NCOs, Mike, the three credits, then yeah, we don't expect that to recur. The benefit to the extent there is some there is that those were almost entirely reserved and that was a big portion of the release as well.
Speaker Change: and then one last cleanup question. So you had already thought that NIH would be 20% higher next year, and then you sold $7 billion of the security near highs. So I assume you got a nice, sealed pickup. Better lucky than smarter, maybe you have some great timing there. So why wouldn't that 20% number for the increase in NIH in 2025 or 2024 go higher? Because of that fortuitous investing of those securities.
Speaker Change: Yeah, so...
Speaker Change: I'll take lucky or good either, but just to remind you, Mike, the 20% that we shared contemplated the repositioning, so what we're talking about is marginal improvement on the reinvestment. We're really happy with where we did it and we took advantage of that pick up in rates. But that's relative to maybe as a handful of basis points. That's better or not, that that's 20% wasn't.
Speaker Change: had already contemplated the repositioning of that portfolio. Again, I think all the more still, in fact, contemplates the second version of this. Yeah, correct. So, it is a marginal benefit, which we'll take, but it isn't the entire magnitude of that trade that is at an on top of the 20.
Speaker Change: God, thank you.
Speaker Change: Sure.
Speaker Change: Your next question comes from the line of John Pencarry from Evercore ISI. Please go ahead.
John Pencarry: Good morning and sorry about the technical problems earlier. That's a problem. Good morning, John.
John Pencarry: Good morning. A couple of real quick questions. On the capital markets revenue side, I know you applied some very solid pipelines and building pipelines there, and your expectation is at the high end of the 600 to 650 guide. Chris, I know when you've had this type of confidence in the past, you actually called out the likelihood of a record year, the following year as well. I believe you may be providing your thoughts on 2025 here, just given the progression your CM, maybe how we see that playing out in terms of your capital markets revs as you look at heading
John Pencarry: Graham.
Speaker Change: Fair question.
Speaker Change: So clearly sort of embedded in our guidance for 2024.
Chris Cor: If you kind of do the math, is another step up in the fourth quarter, maybe 180 million or so if you kind of just back into it. I feel good about the trajectory. I think if we continue to have this kind of an environment where rates are stabilizing and people are able to transact. I'm optimistic about 2025. We'll give more guidance on that, John . When we gather after the end of the year, but I think you should assume that a lot of these pipelines have pretty long tails and so we should go into 2025 with a fair amount of momentum.
Speaker Change: That's helpful. Thanks, Chris. And just two quick ones. On the lone growth front, I believe you mentioned relative stability as you look into 2025, given the trends you're seeing, given consumer likely declining, but commercial increases. Are you able to give us a better idea of the piece of growth that you think is reasonable? And what type of growth more specifically on the commercial side do you think that can help all second consumer pressure? Thank you.
Speaker Change: So we'll provide a little bit more color there, but just maybe broadly think about consumer loans coming down 2-3 billion in a year just by natural kind of maturity and pay down. Now that could change based on rate levels.
Speaker Change: and Mortgage Markets, but that's kind of a decent rule of thumb there. As it relates to where we would see some pick up in.
Speaker Change: in commercial, you know, I'll make a couple comments and then Chris.
Speaker Change: can add on to it but...
Speaker Change: You know, in places where we have...
Speaker Change: Demonstrated Strength, and I think mostly of like affordable and renewables, which are tend to be project transactions.
Speaker Change: They tend to be construction in nature, so they build through time and then we perm them out in some form.
Speaker Change: Those, I think, are places where we're starting, where we're affordable, we've been pretty consistent, but we're seeing pickup there.
Speaker Change: I think the opportunity to build that over time, and those loans do take time to materialize just because they are a large project, they do build, you know, from a draw standpoint before they're ready to be fully, fully drawn and...
Speaker Change: So those are two places where I just continue to feel confident about our abilities and the market.
Speaker Change: but there's some broader based opportunities I think as well. Yeah, the only thing I had at Clark is I mentioned earlier, I think the transaction business will generate loans.
Speaker Change: because that's picking up.
Speaker Change: So the wild card that all of us are watching is what's going to happen when our existing clamp base in terms of really investing in CapEx and what's going to happen with utilization. And I think that's just a watch point for all of us.
Speaker Change: I do have one last one, sorry about that. On the loan loss reserve, you did on a loan reserve ratio basis. You did lead the reserve modestly this quarter. Perhaps provide a little bit of thoughts around the potential for incremental releases here, as you see credit playing now, given the economic outlook.
Speaker Change: You know, look, so we view your right three basis points. I think down on the ACLs of pretty stable. We've built it up quite significantly over the last several quarters. I think if you did alone kind of portfolio by portfolio mix.
Speaker Change: It might dictate that we could even be lower, but right now we're still looking at, you know, we're being cautious around migration and where some of the late cycle pieces of this are taking us. I think if rates continue to come down and is crisp-noted, the environment remains constructive, that may give us some opportunity, but right now we feel like stability is probably the right place.
Speaker Change: John , there's really three things that drive these. One is your view of the macro, and, you know, you obviously have a perspective on that. The next is sort of idiosyncratic, and obviously if we were aware of idiosyncratic things, we would be as we aggressively took on the three loans that we talked about today, we'd be moving on those. And the third element is the size of the book. So those are kind of the three elements. And so if you think about each of those three obviously, it begs the question of where should the reserve be, we'll continue to evaluate it.
Chris Cor: Thank you, Chris. Appreciate it.
Speaker Change: Your next question comes from the line of Peter Winter from DA Davidson. Please go ahead.
Peter Winter: Good morning. I wanted to follow up on John's questions on the loans just for the fourth quarter. You didn't change the earlier guidance for the average.
Peter Winter: which would imply that there's going to be some decent growth in the fourth quarter. And I just wondering if you could talk about maybe just what you're expecting for fourth quarter loan trends.
Speaker Change: Yeah, so, I mean, we took the ending point down a bit, I think that'll take us.
Speaker Change: To the overall kind of lower end of the average guy.
Speaker Change: I look, I think we're expecting.
Speaker Change: some stability on the loan side at this point, not a huge amount of growth. I'd say some modest growth, but, you know, whether or not we get that, I don't think really impacts our view on, you know, NII in the quarter. We'd obviously like to start seeing some loan growth. So at this point, I'd say it's more stabilizing than it is really picking up.
Speaker Change: Okay. And then Chris, if I could just ask one big picture question, obviously you're getting the second tranche of the investment from Scotia, the focus would be the securities restructuring along with organic growth, but just with now that you've built up your capital levels, just going to ask how you think about Bank M&A going forward.
Speaker Change: Sure, so the premise of your question is right, so think about us raising 2.8 billion.
Speaker Change: and we basically in the aggregate spend a billion for on the restructuring, then we have an additional 1.5 billion and on a pro form of basis, I think you'll see our CET1 at say 12% and you'll see our marked CET1 at say 10%. So clearly we'll have, we'll have dry powder that, you know, we'll be able to, you know, if there's this location in the market, we'll be able to take advantage of that. We'll probably run with a little higher capital, just in the near term until there's finalization of the Basel 3N game, the liquidity rules, the long term debt. But I do believe Peter that there will be consolidation in our industry.
Speaker Change: Lee. There certainly hasn't been for all the reasons that you were well aware of. I think last year there were three significant deals completed. My experience with consolidation is when it happens it happens kind of in waves and clearly with with this additional capital I think we'd be we'd be well positioned if and when that were to happen. It's not something we're focused on now however.
Speaker Change: Dammit. Thanks for taking the questions. Sure.
Speaker Change: You're next question comes from the line of Scott Seafers from Piper Sandler, please go ahead.
Scott Seafers: Yes, thank you for taking the follow-up. Clark, if possible, I wanted to just revisit the, um...
Scott Seafers: I'll look particularly in the fourth quarter. It seems to be generating a lot of traffic this morning. I know you said higher stock price will impact incentive comp.
Scott Seafers: and then I think you said some kind of proactive investments as well. But at a point, I think I might have heard foundation contribution as well. Are you able to sort of pour parts if we're going to see maybe a hundred million dollars of total expense lift in the fourth quarter? How much of that is ongoing stuff versus what people might sort of pull out as transitory? And then also appreciate that you get it already not to annualize that, but just hoping for a little more. Deep dive in there as possible.
Speaker Change: Yeah, it's a good question, I think.
Speaker Change: The main point, which you picked up on, which was don't analyze that number, I think the fair point is...
Speaker Change: Some of our business is variable in nature based on performance so hard to quantify that but frankly if we have the revenues that
Speaker Change: We should be paying compensation on that. We would take those. It's not like any.
Speaker Change: I think you have to think about some of that expense growth in the context of the revenue that's driving it.
Speaker Change: Um...
Speaker Change: As Chris said, we're potentially leaning into some unique opportunities in the quarter, those are going to be...
Speaker Change: It's not appropriate to take the full amount of that and I think we've got to find to do in a little bit of how much expense.
Unknown Executive: And a lot of that's going to be based on how much revenue we think it's supporting.
Speaker Change: Rolls into the run rate quarter, and a lot of that's going to be based on how much revenue we think it's supporting. We just need to do a little bit more work to give you a clean look.
Unknown Executive: So, we just need to do a little bit more work to give you a clean look. But, as you think, again, the appropriate guide at this point would be mid to single digits for next year. And, you know, we owe you because I said more detail when we come back at the end of the year.
Speaker Change: As you think, again, the appropriate guy at this point would be made to single digits for next year. And, you know, we owe you, because I said more detail when we come back at the end of the year.
Unknown Executive: Gotcha. Okay, perfect. Thank you again.
Speaker Change: Gacha. Okay, perfect. Thank you again.
Unknown Executive: And, at this time, there are no further questions.
Christopher Marrott Gorman: I'd now like to turn the call back to Chris Gorman for any closing comments. Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to Brian and our Investor Relations team.
Speaker Change: And at this time there are no further questions. I'd now like to turn the call back to Chris Gorman for any closing comments.
Chris Gorman: Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to Brian and our investor relations team. We appreciate everyone's interest in key and help everyone has a great day. Goodbye.
Unknown Executive: We appreciate everyone's interest and key and hope everyone has a great day.
Unknown Executive: Goodbye.
Unknown Executive: 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. Thank you.
Speaker Change: 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.
Unknown Executive: We're sorry. Your conference is ending now. Please hang up.