KeyCorp reports its lowest net interest income in more than six years

KeyCorp posted its lowest net interest income in more than six years on Thursday, a sign that the regional bank is still struggling under the weight of high deposit costs and investment decisions made in a lower-rate environment.

Net interest income at the Cleveland-based bank totaled $923 million in the third quarter, the weakest total since the first quarter of 2017. The metric, which measures the difference between what a bank earns in interest and pays in interest, fell 23% in the third quarter from a year ago.

Key isn’t the only regional bank that has seen a decline in net interest income during the current high-rate environment. Citizens Financial Group in Providence, Rhode Island reported a 9% drop during the third quarter.

But the $195 billion-asset Key’s pain is more acute than many of its peers. That is, in part, because its balance sheet includes a sizable portion of assets that are yielding rates well below the market average.

The bank is working to offload some of those assets. In July, Key detailed a plan to shrink its balance sheet and refocus on core customers.

But the bank is also paying customers more for their deposits. Interest expenses rose to $1.1 billion in the third quarter, more than four times their level during the same period last year.

Short-dated Treasuries and Key’s portfolio of interest-rate swaps reduced net interest income by $370 million in the third quarter, executives said Thursday. Still, the bank believes a turnaround in net interest income is near.

“We expect that we are at or near the bottom in net interest income,” Key Chief Financial Officer Clark H.I. Khayat said on a call with analysts.

Key executives said they expect significant opportunities as interest-rate swaps and Treasuries reprice over the next five quarters. The bank upped its estimated benefit from the repricing of those assets to $1 billion, higher than the $900 million the bank forecasted in July. Key also revised upward its forecast for net interest income in the fourth quarter, a positive for investors worried about the bank’s profitability.

Key shares rose more than 5% in Thursday morning trading before paring their gains to close down more than 1%. The bank’s stock price is down 39% this year. That is well above the 25% decline in the KBW Nasdaq Banking Index, which tracks 24 leading U.S. banks.

Key’s earnings per share of $0.29 beat the consensus estimate of $0.27, thanks in part to lower-than-expected provision for credit losses. Revenue totaled $1.57 billion in the third quarter, a 17% drop from the year-ago period.

Reduced service charges, trading revenue and investment banking and capital markets fees drove noninterest income down 6% in the third quarter compared with the same period last year. But executives painted a brighter picture on fee income in the fourth quarter, when Key expects activity in its capital markets and investment banking businesses to increase.

“Key’s financials finally look as though they may be inflecting for the better,” Scott Siefers, an analyst at Piper Sandler, wrote in a research note.

The share of earnings that Key uses to cover its dividend is more than 70%, higher than that of many of its peers. The company’s so-called dividend payout ratio has been high enough this year that some investors have become concerned that Key might decide to lower or suspend the payments. But Key CEO Chris Gorman dismissed that idea Thursday during the call with analysts.

“My views on our dividend are unchanged,” Gorman said.

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