KEYCORP /NEW/

KEYCORP /NEW/ Annual Review: Navigating a Shifting Landscape

For investors considering KEYCORP /NEW/, understanding the company's performance and strategic direction over the past year (ending December 31, 2025) is essential. This summary cuts through the jargon to provide a clear and concise picture.

Business Overview

KeyCorp operates as a diversified financial services company, primarily focusing on commercial and consumer banking. At year-end, KeyCorp managed a substantial loan portfolio of approximately $125 billion. A significant strategic move this year was the complete exit from its Education Lending segment. This segment, which held $1 billion in loans at the end of 2024, was fully wound down to $0. This decision reflects a deliberate effort to reduce exposure to higher-risk, lower-margin assets and streamline operations. It allows KeyCorp to reallocate capital and focus on core banking activities with better return potential, aligning with a broader strategy to enhance profitability and improve the company's overall risk profile.

Financial Performance

KeyCorp's total revenue for the year reached $6.8 billion, a 2% decrease from the previous year. This decrease primarily stemmed from a 5% decline in Net Interest Income (NII) to $4.5 billion, as rising funding costs outpaced improvements in asset yields. However, non-interest income showed resilience, growing 4% to $2.3 billion. Strong fee-based businesses, such as investment banking and wealth management, supported this growth.

Net income for the year stood at $1.8 billion, resulting in Diluted Earnings Per Share (EPS) of $1.95. This marks a 10% decrease from the prior year, largely due to increased provisions for credit losses and the NII pressures mentioned earlier. The company maintained a healthy Net Interest Margin (NIM) of 2.85%.

A key concern emerged from the deterioration in KeyCorp's loan portfolio health. Non-performing loans (NPLs) increased by 25% to $1.5 billion, now representing 1.2% of total loans, up from 0.9% last year. Similarly, "criticized" loans (those showing potential weakness) rose by 18% to $8.5 billion. This trend appeared across both commercial and consumer segments, reflecting a challenging economic environment and higher interest rates impacting borrowers. In response, KeyCorp significantly increased its provision for credit losses to $750 million, up from $400 million in the previous year. While this proactive measure aims to cover potential future losses from deteriorating loan quality, it directly impacts current profitability.

Risk Factors

KeyCorp faces several significant risks:

• Credit Quality Deterioration: Further weakening of economic conditions could worsen credit quality.
• Interest Rate Volatility: Fluctuations in interest rates could impact Net Interest Margin (NIM).
• Regulatory Changes: New regulations could increase compliance costs or capital requirements.
• Operational Risks: Cybersecurity threats and technology failures pose operational challenges.
• Intense Competition: The financial services industry remains highly competitive.
• Economic Downturns: Economic downturns or geopolitical events could negatively affect client activity and asset values.

Management Discussion (MD&A Highlights)

Management's discussion highlights a year of strategic repositioning and navigating a challenging economic environment.

Major Achievements:

• Successful Exit from Education Lending: While this strategic divestment impacted asset size, it is expected to improve the company's long-term risk profile and capital efficiency.
• Growth in Fee-Based Income: A 4% increase in non-interest income demonstrates diversification and strength in areas like investment banking and wealth management, partially offsetting NII pressures.
• Strong Capital Position: Maintaining a Common Equity Tier 1 (CET1) ratio of 10.5% provides a solid buffer against economic uncertainties and supports future strategic initiatives.

Key Challenges:

• Credit Quality Deterioration: The significant increase in non-performing and criticized loans is a primary concern, potentially leading to higher future charge-offs and increased provisions.
• Net Interest Income Pressure: Rising funding costs have compressed NII, impacting the bank's core profitability despite efforts to optimize asset yields.
• Economic Headwinds: The current macroeconomic environment, characterized by persistent inflation, higher interest rates, and potential for slower economic growth, continues to challenge loan growth, credit performance, and overall business activity.

In response to these challenges, management emphasized expense management and prudent risk-taking.

Financial Health

KeyCorp maintains a robust Common Equity Tier 1 (CET1) ratio of 10.5%, signaling strong capital reserves to absorb potential losses and support future growth. The company relies primarily on customer deposits across its commercial and consumer segments, forming a diversified funding base. Wholesale funding sources supplement this stable deposit base as needed to support asset growth and liquidity requirements. KeyCorp actively manages its liquidity, ensuring sufficient cash and marketable securities to meet obligations and fund operations while adhering to regulatory requirements. The company's capital structure supports its strategic objectives and absorbs potential losses.

Future Outlook

Looking ahead, management expresses a cautious outlook, focusing on expense management, capital preservation, and selective growth in core commercial and consumer segments. Management anticipates continued pressure on credit quality in the near term but expects the strategic shift away from certain asset classes to yield long-term benefits. The company aims to leverage its strong capital base to navigate the challenging environment, investing in digital capabilities to enhance customer experience and operational efficiency. Management expects to continue optimizing its balance sheet and refining its business mix to improve long-term profitability and shareholder returns, while closely monitoring economic conditions and their potential impact on credit quality.

Competitive Position

KeyCorp operates in a highly competitive financial services industry, facing a diverse range of institutions including large national banks, regional banks, community banks, credit unions, and non-bank financial service providers. Competition is intense across all business segments, driven by product innovation, pricing, customer service, digital capabilities, and geographic reach. KeyCorp leverages its relationship-based banking model, specialized industry expertise, and integrated service offerings to differentiate itself and attract and retain clients in its target markets. Its competitive advantages include a strong presence in key regional markets, a diversified business mix, and a focus on client-centric solutions.