KEY Q2 Deep Dive: Commercial Loan Momentum and Deposit Discipline Drive Results

Regional banking company KeyCorp (NYSE:KEY) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 20% year on year to $1.83 billion. Its non-GAAP profit of $0.35 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

KeyCorp posted a solid second quarter, with the market responding positively to its performance. Management attributed revenue growth primarily to robust commercial loan activity, improvement in fee-based businesses, and disciplined management of deposit costs. CEO Christopher Gorman emphasized that commercial loan pipelines and client backlogs were strong, and that the bank had already achieved its full-year commercial loan growth target by midyear. Fee income from investment banking, commercial payments, and mortgage servicing also contributed, benefiting from increased client activity. Gorman noted, “Revenues were up 21% from a year ago, while expenses were up about 6%, excluding the charitable contribution.”

Looking ahead, KeyCorp’s outlook is shaped by continued investment in technology and frontline talent, as well as ongoing monitoring of market dynamics. Management remains optimistic about delivering higher net interest income and loan growth, supported by healthy pipelines in both institutional and middle-market segments. CFO Clark Khayat added, “We now expect full-year net interest income growth of 20% to 22% compared to prior guidance of approximately 20%.” While client sentiment is described as cautiously optimistic, the company is watching for potential headwinds in deposit competition and credit quality. Gorman highlighted that investments in technology and recruiting are expected to drive operating leverage and future growth.

Key Insights from Management’s Remarks

Management highlighted commercial loan momentum, strong fee-based revenue, and disciplined deposit cost management as the primary drivers of second quarter performance and the updated outlook.

• Commercial loan growth: KeyCorp achieved its targeted full-year commercial loan growth by midyear, with most growth originating from new clients in both large institutional and middle-market segments. Management reported that pipelines continue to build, supporting expectations for further lending momentum.
• Deposit cost discipline: The company managed down its deposit costs below 2%, aided by a low loan-to-deposit ratio and active management of higher-cost deposit products. CFO Clark Khayat noted that cumulative deposit betas—measures of how deposit rates respond to changes in market interest rates—remained favorable compared to expectations.
• Fee-based business strength: Priority fee-based businesses such as investment banking, commercial payments, mortgage servicing, and wealth management all grew at mid-single-digit rates or higher. Investment banking posted its second-best first half ever, buoyed by capital markets normalization and increased client transaction activity.
• Technology and talent investment: KeyCorp accelerated hiring for frontline bankers and expanded technology spending by nearly $100 million year-over-year, including cloud migration and digital enhancements. Management attributed recent business wins in new markets, such as Chicago and Southern California, to these investments.
• Credit quality improvement: Credit metrics, including net charge-offs and criticized loan balances, improved for the sixth consecutive quarter. The company maintained a cautious stance on leveraged loans and sectors dependent on government funding, but overall credit migration trends were stable to improving.

Drivers of Future Performance

KeyCorp’s guidance is driven by continued commercial loan growth, technology investments, and disciplined deposit and expense management.

• Sustained loan and fee growth: Management expects commercial loan pipelines to remain robust, with additional upside possible if client capital expenditures accelerate. Fee growth is projected at 5% or higher, contingent on continued strength in investment banking and payments segments.
• Expense and investment discipline: Despite increased hiring and technology spending, expenses are guided to rise only in the low- to mid-single-digit range. Management believes that ongoing efficiency initiatives and digital transformation efforts will support positive operating leverage.
• Deposit and margin headwinds: The company anticipates competition for commercial deposits to intensify in the second half of the year, which could pressure deposit costs and net interest margin. Management is also monitoring macroeconomic uncertainty and potential shifts in credit quality as key risks.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will be watching (1) the pace of commercial loan growth and whether institutional and middle-market pipelines remain strong; (2) the impact of deposit pricing competition on funding costs and net interest margin; and (3) continued execution of technology investments and frontline hiring. We will also monitor any shifts in credit quality metrics and the company’s approach to capital deployment, including potential share repurchases.

KeyCorp currently trades at $18.46, in line with $18.32 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).

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