What Falling Interest Rates Mean for KeyCorp's Net Interest Income

KeyCorp KEY has been witnessing a volatile trend in its net interest income (NII) over the past few years. While the company’s NII increased in 2020, 2021 and 2022, the metric declined in 2023 and 2024. In the first nine months of 2025, NII increased year over year, supported by lower deposit costs, the reinvestment of proceeds from maturing low-yielding investment securities, fixed-rate loans and swaps repricing into higher-yielding investments and balance sheet repositioning.

Now, following the initial easing in 2024 and three subsequent rate cuts in 2025, interest rates stand at 3.50-3.75% currently. When benchmark interest rates fall, banks generally earn less interest on loans and variable-rate assets, because many of those rates reset downward. Moreover, if the interest that banks pay to depositors or on other funding does not fall as quickly, the spread between earnings and costs (what we call NII) narrows.

However, with lower rates, funding costs gradually stabilize, supporting increased borrowing, which means more loan volumes. Thus, while lower interest rates might impact margins and NII to some extent in the near term, KEY is expected to witness decent growth in NII in the quarters ahead, supported by lower funding costs, increased loan volumes and repricing of maturing assets into higher yields.

Declining rates reduce the burden of carrying debt, often improving borrower solvency and easing payment stress. This dynamic tends to lower delinquency rates and reduce charge-offs.

Management anticipates KeyCorp’s 2025 NII (tax-equivalent) to rise 22% year over year. Fourth-quarter 2025 NII is expected to grow 13% or more year over year. Likewise, net interest margin (NIM) is expected to be 2.75-2.8% in the fourth quarter of 2025 and rise above 3% by the end of 2026. Notably, in 2024, KEY’s NIM (on a tax-equivalent basis) was 2.16%.

How Are KEY’s Peers Faring in Terms of NII?

KEY’s peers, including Fifth Third Bancorp FITB and U.S. Bancorp USB, are similarly influenced by the Fed’s interest rate trajectory.

Fifth Third has maintained solid momentum in NII growth, seeing a five-year (ending 2024) CAGR of 4.2%. In the first nine months of 2025, the bank’s NII (tax-equivalent basis) rose 6.2% year over year to $4.4 billion. Fifth Third’s NIM also increased year over year to 3.10% from 2.88%. The company’s adjusted NII is expected to grow 5.5-6.5% in 2025 from $5.6 billion in 2024, supported by stabilizing funding costs and steady loan growth.

U.S. Bancorp has witnessed consistent NII growth, registering a five-year (2019-2024) CAGR of 4.4%, with the upward momentum continuing in the first nine months of 2025. The company’s NII (tax-equivalent basis) was $4.251 billion, up 2% from the same period a year ago. As of Sept. 30, 2025, U.S. Bancorp’s NIM stood at 2.75%, slightly higher than the 2.74% reported a year earlier.

Looking ahead, stabilizing funding costs, loan growth and investment portfolio repositioning are expected to support NII expansion.

KeyCorp’s Price Performance & Zacks Rank

KEY shares have risen 16% in the past six months compared with the industry's growth of 17.4%.

The company currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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