KEY Q1 Deep Dive: Loan Mix Shift, Fee Momentum, and Macro Uncertainty Shape Results

Regional banking company KeyCorp (NYSE: KEY) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 15.9% year on year to $1.76 billion. Its non-GAAP profit of $0.34 per share was 7.2% above analysts’ consensus estimates.

Is now the time to buy KEY? Find out in our full research report (it’s free).

StockStory’s Take

KeyCorp's first quarter results were shaped by robust revenue growth and resilient fee-based businesses, but the market responded negatively as adjusted operating income fell short of Wall Street expectations. Management discussed continued strength in commercial loan pipelines and highlighted that sequential credit quality improvements were partially offset by a cautious reserve build, reflecting an uncertain economic outlook. CEO Chris Gorman acknowledged, “Recent events are clearly having an impact on markets and client sentiment as the outlook for the economy is becoming more uncertain.” The company emphasized its efforts to navigate macro volatility with a strong balance sheet and targeted lending strategies.

Looking ahead, management reaffirmed its guidance for the year, underpinned by structural tailwinds in net interest income and ongoing investments to support client growth. CFO Clark Khayat stated that much of the expected income growth is "already in from actions we took last year" and emphasized flexibility to manage expenses if deal activity remains muted. However, both Gorman and Khayat noted increased risks from persistent inflation, evolving tariffs, and pauses in client activity, with Gorman adding, “We are currently managing Key to an even broader range of potential scenarios.” Management remains focused on disciplined capital deployment and maintaining capacity for opportunistic share repurchases, pending greater economic clarity.

Key Insights from Management’s Remarks

Management attributed first quarter momentum to commercial loan growth, proactive deposit management, and strong performance in countercyclical fee businesses, while acknowledging that market and client uncertainty led to a pause in some transactional activity.

• Commercial loan growth: KeyCorp reported broad-based growth in commercial and industrial lending, driven by new teams in regions like Chicago and Southern California, and project-based deals in affordable housing and renewables. Management expects continued funding of in-flight projects, though new activity may pause until there is more economic clarity.
• Deposit strategy and costs: The company continued to grow consumer and commercial deposits year-over-year, while managing down interest-bearing deposit costs and reducing reliance on more expensive wholesale funding sources. This disciplined approach supported improved net interest margins.
• Fee income diversification: Record commercial mortgage servicing and investment banking fees highlighted the resilience of KeyCorp’s fee businesses. The commercial payments segment also saw double-digit growth, with management citing these businesses as countercyclical and likely to perform well even if macro conditions soften.
• Credit quality and reserves: Asset quality indicators trended positively for the fifth consecutive quarter. However, KeyCorp chose to build reserves by over $100 million due to rising economic uncertainty, reflecting a cautious approach despite currently favorable credit metrics.
• Capital deployment flexibility: With a CET1 ratio at the high end of peers, management highlighted flexibility to support clients, invest in technology and talent, and pursue opportunistic share buybacks. The timing and pace of share repurchases will depend on clarity around the macroeconomic outlook and regulatory developments.

Drivers of Future Performance

KeyCorp’s outlook is shaped by expectations for net interest income growth, expense flexibility, and prudent risk management, with uncertainties around economic conditions and client activity.

• Structural net interest income tailwinds: Management expects high net interest income growth in 2025, largely due to actions taken in 2024, such as loan portfolio restructuring and the Scotiabank investment. These changes have created predictable revenue streams, though a sharp decline in loan demand or a flatter yield curve could pose risks.
• Expense management and investment priorities: While operating expenses are expected to rise in line with investments in technology and personnel, KeyCorp believes it has flexibility to adjust spending if fee income weakens. Management stressed readiness to protect profitability without sacrificing long-term opportunities.
• Macro and regulatory uncertainty: Persistent inflation, evolving tariffs, and geopolitical risks could affect loan growth and client activity. Management is also monitoring the impact of potential regulatory changes (like Basel III endgame) on capital planning and share repurchase timing.

Catalysts in Upcoming Quarters

As we look ahead, the StockStory team will be watching (1) whether commercial loan pipelines continue to convert into funded balances, (2) the pace of recovery in investment banking and capital markets activity amid ongoing client caution, and (3) management’s ability to manage expenses and deploy excess capital through share buybacks as regulatory and economic clarity improve. Asset quality trends and evolving deposit dynamics will also be important indicators of success.

KeyCorp currently trades at $16.35, up from $14.07 just before the earnings. At this price, is it a buy or sell? See for yourself in our full research report (it’s free).

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