KEY Q3 Deep Dive: Margin Expansion and Strategic Shifts Amid Market Skepticism

Regional banking company KeyCorp (NYSE:KEY) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 176% year on year to $1.89 billion. Its non-GAAP profit of $0.41 per share was 7.6% above analysts’ consensus estimates.

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StockStory’s Take

KeyCorp’s third quarter results were met with a significant negative market reaction, despite the company achieving revenue in line with Wall Street expectations and reporting higher-than-expected non-GAAP earnings per share. Management attributed recent performance to improved net interest margin, ongoing growth in fee-based businesses, and a favorable shift in deposit mix. CEO Chris Gorman noted that both net interest income and pre-provision net revenue saw sequential improvements, driven by strong commercial loan activity and disciplined cost control. However, Chief Financial Officer Clark Khayat highlighted that higher personnel costs and technology investments contributed to a rise in expenses, signaling increased investment in growth initiatives.

Looking forward, management emphasized a path toward higher profitability through strategic balance sheet optimization, continued fee income expansion, and disciplined expense management. The company believes that improving net interest margin, supported by ongoing loan portfolio remixing and prudent deposit pricing, will be central to achieving its targeted returns. Gorman stated, “We believe we can achieve a return on tangible common equity of 15% or better by 2027,” underlining a focus on organic growth and selective share repurchases. Management also highlighted expectations for steady noninterest income growth and positive operating leverage, with Khayat cautioning that future expense increases will be tied to continued technology upgrades and frontline hiring.

Key Insights from Management’s Remarks

Management highlighted that the quarter’s performance was shaped by net interest margin gains, a strategic loan portfolio remix, and ongoing investments in fee-generating businesses.

• Net interest margin improvement: The company achieved its full-year net interest margin (NIM) target of 2.75% a quarter ahead of schedule, supported by growth in higher-yielding commercial loans and a decline in deposit costs. Management indicated this was driven by both balance sheet optimization and favorable loan mix changes.
• Fee income expansion: Fee-based businesses, particularly in investment banking, commercial payments, and wealth management, posted high single-digit growth rates versus last year. Assets under management in the wealth segment reached a record $68 billion, and commercial pipelines nearly doubled year over year.
• Deposit and loan mix shift: Average deposit balances grew, with a stronger contribution from lower-cost commercial and non-interest-bearing accounts. Simultaneously, the bank actively reduced exposure to low-yielding consumer mortgages in favor of commercial and industrial (C&I) loans, which offer better risk-adjusted returns.
• Expense discipline and investment: Expenses rose, primarily due to increased hiring in frontline and advisory roles and ongoing technology investments. Management stated that these investments are expected to drive higher productivity and fee income over the next 12 to 18 months.
• Capital position and share repurchases: The company’s CET1 capital ratio approached 12%, giving it flexibility for selective share buybacks and potential balance sheet restructurings. Management confirmed plans to repurchase approximately $100 million of stock in the fourth quarter, with additional capital deployment under review for 2026.

Drivers of Future Performance

KeyCorp’s outlook centers on disciplined balance sheet management, further margin expansion, and continued growth in fee-based businesses, balanced against ongoing investment and expense pressures.

• Margin and balance sheet optimization: Management aims to further lift net interest margin by 50 basis points over the medium term, targeting 3.25% or higher by 2027. The strategy includes remixing low-yielding assets into higher-yielding commercial loans and maintaining rational deposit pricing, with expectations for favorable loan growth and limited rate sensitivity.
• Fee income and organic growth: The company plans to compound gains in fee-generating businesses such as investment banking, commercial payments, and wealth management. These segments are expected to deliver strong returns on tangible equity while utilizing minimal incremental capital, supporting the path to a 15%+ return on tangible common equity.
• Expense management and risk discipline: Ongoing investments in technology and frontline talent are expected to drive productivity, but management cautioned that expense growth will be carefully managed through continuous improvement programs. Credit quality remains a focus, with nonperforming assets and criticized loans trending positively, though management acknowledged that macroeconomic uncertainty could still pose risks.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will watch closely for (1) evidence that net interest margin and loan portfolio remixing continue to drive higher profitability, (2) sustained growth in fee-based businesses like investment banking, payments, and wealth management, and (3) disciplined expense management as technology and staffing investments ramp up. The pace and scale of share repurchases and the successful execution of new client initiatives will also serve as key indicators of momentum.

KeyCorp currently trades at $16.81, down from $17.76 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free for active Edge members).

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