KeyCorp 2026 Q3 Earnings Call

Please go ahead. Thank you operator, and good morning everyone.

I'd like to thank you for joining KeyCorp's third quarter 2026 earnings conference call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer, Clark Khayat, our Chief Financial Officer and Head of Technology, and Mo Ramani, our Chief Risk Officer. As usual, we will reference our earnings presentation slides, which can be found in 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-GAAP measures. This covers our earnings material 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 20, 2026, and will not be updated. With that, I will turn it over to Chris.

Thank you Troy, and good morning everyone. We reported third quarter earnings of $0.51 per share, up 24% year-over-year, reflecting the strength of Key's relationship driven franchise, the disciplined execution of our strategy, and the momentum we continue to build across the business. We reported record quarterly revenue of over $2 billion, which represents 8% year-over-year growth. PPNR growth of $60 million on a linked quarter basis, and importantly, return on tangible common equity that exceeded 15%. As we continue to make significant progress with respect to achieving and sustaining a 15% plus return on tangible common equity by year end 2027. On our path to achieving our current long-term target between 16% and 19%. We continue to deliver on the commitments we have made. Our relationship focused business model continues to differentiate Key and was evident again this quarter.

Our deposit franchise continues to perform well in a competitive environment. Average total deposits grew $3.6 billion, while interest bearing deposit costs increased only three basis points during the quarter. Overall funding costs rose just one basis point. Net interest margin expanded six basis points sequentially to 2.95%, reflecting the continued fixed asset repricing and funding optimization. Our capital markets team delivered strong results with investment banking and debt placement fees increasing 27% sequentially with growth in M&A and syndications. Asset quality remains strong. Our net charge-off ratio improved to 32 basis points and our non-performing asset ratio improved 19 basis points to 55 basis points. During the quarter, we repurchased $320 million of common stock, keeping us on pace to achieve our full year share repurchase target of $1.3 billion. We remain comfortable with our current capital levels.

With strong organic capital generation, we will continue to take a measured approach to capital management. As a reminder, our capital priorities remain unchanged. First, we will continue to support our clients and prospects. Second, we will continue to invest in people and technology. Third, we will maintain our strong dividend. Finally, we will return capital to shareholders through share repurchases. While we continue to successfully complete tuck-in acquisitions like Clearwater, traditional whole bank M&A is not a priority. The economic environment remains constructive and our momentum continues to be strong. We are seeing healthy client engagement and activity across our businesses. We continue to organically grow clients. In the third quarter, commercial clients increased 3% and relationship households increased 2% from the prior year. Commercial loan growth remains strong and broad-based by both industry and geography.

Period-end C&I loans increased 5% sequentially, reflecting both new client acquisition and a 200 basis point increase in line utilization to 33%, the highest level in over three years. The line utilization increase is reflective of clients continuing to invest in their businesses. Our consumer trends remain strong and resilient as our clients continue to benefit from a healthy labor market and the wealth effect. We continue to see strong performance and are gaining share across our priority fee-based businesses, investment banking, commercial payments and wealth management. In the third quarter, these businesses collectively grew 12% compared to the prior year. Investment banking pipelines are up 5% sequentially, despite significant pull-through in the third quarter, and remain at historically elevated levels, supported by record M&A pipelines.

While middle market M&A activity has yet to normalize, we continue to see significant client engagement and remain confident in our expectation for mid-single digit investment banking fee growth this year. In commercial payments, total gross payment fees increased 8% compared to the prior year. We continue to scale embedded banking and are encouraged by our trajectory. In wealth, assets under management reached another record this quarter. Wealth remains a significant opportunity for us as we are less than 10% penetrated with respect to our current base of mass affluent households who bank with Key. We continue to invest in people and technology. We are attracting top talent and continue to hire frontline bankers. Our $1 billion technology budget this year has supported new product and service capabilities while allowing us to position the company for the future.

We continue to embed AI in enterprise-wide end-to-end processes, currently targeting four domains: commercial onboarding and servicing, commercial originations, consumer servicing, and software engineering. Earlier this year, Clark assumed leadership of our technology organization, creating even tighter alignment among our business strategy, operating model, and technology investments. Under his leadership, we are accelerating the deployment of AI across these domains to simplify processes, increase productivity, and help our teammates spend more time delivering advice and solution to clients. While we remain in the early stages, we are encouraged by the opportunity in front of us. As we look ahead, the geopolitical and macro outlook remain uncertain. At Key, we remain focused on managing what we can control and remain well-positioned to perform through a range of potential economic scenarios. While our results are strong, we acknowledge there is uncertainty in the broader market.

We are actively managing the risks and maintaining discipline throughout the bank. We are well positioned for a range of potential rate scenarios and continue to intentionally manage our balance sheet to be fairly neutral from an interest rate perspective. In summary, we are proud of our third quarter performance and the sustained momentum across our business. These results would not be possible without the contributions from each of our teammates. Thank you for your dedication that will result in what we expect to be both a record revenue and record PPNR year in 2026. We are currently in the midst of our planning process, and will have more to say on 2027 at year-end. But with our strong trajectory and healthy pipelines, I believe we are well positioned to drive another year of outsized revenue and earnings growth in 2027.

With that, I'll turn it over to Clark.

Thanks, Chris. As Chris highlighted, continued execution of our relationship-based strategy drove strong performance in the quarter. For the third quarter, revenue exceeded $2 billion. PPNR reached a record level and improved returns inclusive of improving credit quality. Starting on slide 4. We reported third quarter earnings per share of $0.51. Revenue was up 8% year-over-year, while non-interest expenses increased by 5% when excluding the FDIC special assessment in the year-ago quarter. Tax-equivalent NII increased 10% year-over-year and 4% sequentially. Non-interest income increased 6% year-over-year. Provision for credit losses was $61 million, including $89 million or 32 basis points of net charge-offs and a reserve release of $28 million. The net release reflected improved portfolio performance, scenario impacts, and continued remix to higher credit quality relationships, partially offset with some qualitative builds to reflect ongoing economic and geopolitical uncertainty.

We remain well reserved for a range of economic outcomes. Return on average tangible common equity increased 260 basis points year-over-year to 15.1%. Moving to the balance sheet on slide 5. Average loans were up $1.5 billion sequentially. Average C&I loans increased 4% or $2.3 billion, partly offset by the runoff of low-yielding consumer loans. On a period end basis, C&I loans increased by $3.3 billion or 5%. As Chris mentioned, growth came from a combination of broad-based new client acquisition and an increase in utilization. Turning to slide 6. Average deposit balances increased $3.6 billion or 2.4% sequentially, exceeding loan growth and allowing us to reduce wholesale funding. Client deposits, which exclude growth from CDs, grew $2.8 billion or 1.9%, driven by growth in commercial operating balances.

Last quarter, we communicated expectations for $3 billion or more of client deposit growth in the second half of 2026, and based on the growth in the third quarter, we have nearly achieved that. While we continue to monitor deposit dynamics in a higher rate environment, we now expect incremental client deposit growth beyond the original $3 billion, and we expect our loan growth for the remainder of 2026 to be fully client deposit funded. Total deposit cost increased three basis points sequentially to 1.66%, and total funding cost rose just one basis point. If market expectations materialize as currently estimated, we expect beta in the rate hiking cycle to be roughly symmetrical to the rate easing cycle, reaching a mid-fifties cumulative beta over time with a beta lag in the first few quarters. Turning to the drivers of NII and NIM on slide seven.