KeyCorp Lifts Interest Income as Margin Gains Slow
Taxable-equivalent net interest income rose 2.3% sequentially to $1.258 billion.
KeyCorp (KEY), the Cleveland-based regional lender, increased taxable-equivalent net interest income by $28 million from the first quarter to $1.258 billion, a 2.3% QoQ gain that reaccelerated from 0.6% in the prior period. Net interest margin expanded 2 bps QoQ and 23 bps YoY to 2.89%, though the quarterly increase slowed for a third consecutive quarter.
Commercial lending drove the increase. Average loans rose 4.1% YoY and 2.2% QoQ to $110.1 billion as average C&I loans climbed 11.7% YoY and 5.0% QoQ. Consumer balances declined as KeyCorp continued to allow lower-yielding loans to run off. Reinvestment of maturing securities and fixed-rate swaps at higher yields also supported the margin.
The Commercial Bank remained the balance-sheet engine, with average loans up 10.3% YoY and 4.2% QoQ to $76.2 billion. Its net income fell 6.4% sequentially to $423 million, however, as weaker capital-markets fees weighed on results. Consumer Bank net income increased 16.7% QoQ and 23.0% YoY to $203 million even as its average loans contracted.
Noninterest income declined 2.4% QoQ to $706 million as investment-banking and debt-placement fees fell 14.2% and commercial-mortgage servicing fees dropped 21.0%. Cards and payments income rose 9.3%, while trust and investment-services income increased 1.3% and assets under management reached a record $74.2 billion. Expenses rose 3.0% to $1.217 billion, pushing the cash efficiency ratio to 61.9% from 60.4%.
KeyCorp returned $341 million through common-share repurchases, down from $389 million in the first quarter, and kept its quarterly dividend unchanged. Its estimated CET1 ratio declined 20 bps sequentially to 11.2%, extending the reduction from 11.8% at the end of 2024.
Credit indicators weakened as the bank released reserves. Net charge-offs increased to $115 million, or 42 bps of average loans, from $101 million and 38 bps in the prior quarter, while nonperforming loans rose to 0.73% of loans from 0.62%. KeyCorp released $23 million of reserves based on resilient economic assumptions and an improved commercial-loan mix, reducing provision expense 13.2% QoQ to $92 million and lowering allowance coverage by 4 bps to 1.56%.
Average deposits were nearly flat at $147.6 billion, though non-time deposits rose 3.0% YoY as time deposits declined 24.7%. Total deposit cost fell another 2 bps to 1.63%, extending its decline from 1.97% in the third quarter of 2024. Heading into the second half, further net-interest gains depended increasingly on C&I growth and reinvestment yields as the benefit from falling deposit costs moderated.