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KeyCorp to Incur $700M Loss in Q3 on Balance Sheet Repositioning
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KeyCorp (KEY - Free Report) shares gained 3.1% on Sept. 9 in response to its balance sheet repositioning announcement. The regional lender sold its low-yielding available-for-sale (AFS) investment securities portfolio worth almost $7 billion.
KeyCorp is expected to incur an after-tax loss of $700 million in the third quarter because of the sale. The securities sold had a weighted average book yield of roughly 2.3% and an average duration of nearly six years.
Last month, KeyCorp stated its plan to reposition its balance sheet to improve profitability as it announced a minority equity investment by Canada’s The Bank of Nova Scotia (BNS - Free Report) (also known as Scotiabank).
Details About Equity Stake by Scotiabank in KeyCorp
On Aug. 12, KeyCorp announced a minority equity investment of $2.8 billion (in aggregate) by Scotiabank in two tranches at a fixed price of $17.17 per share. The first phase was completed on Aug. 30, and now BNS holds a 4.9% equity stake in KEY.
The second part involves BNS making an additional $2 billion of investment, expected to close in the first quarter of 2025, pending the Fed’s consent. After this, BNS will have a 14.9% equity interest in KeyCorp.
At that time, KeyCorp announced the divestiture of lower-yielding AFS securities would result in a one-time after-tax loss of almost half of the capital raised. The company planned to invest the proceeds in higher-yielding, more liquid securities.
This is expected to lead to approximately $400 million in additional net interest income (NII) in 2025 and 2026. It will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
Compelling Financial Benefits
Image Source: KeyCorp
This is similar to the steps taken by Truist Financial (TFC - Free Report) in May 2024 to strategically bolster its balance sheet. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add almost $710 million to TFC’s 2024 NII.
KeyCorp’s minority equity stake announcement also led Moody’s Investors Service to change the outlook on the company’s ratings to stable from negative. The company now has a stable outlook and long-term issuer ratings of Baa2/BBB/BBB+ from Moody’s, S&P Ratings and Fitch Ratings, respectively.
What Next for KeyCorp
The company did not reveal its plans for the proceeds from selling $7 billion worth of AFS securities.
On the second-quarter 2024 conference call in July, KeyCorp projected the average loan balance to be down 7-8% this year. Also, NII (tax equivalent) is expected to decline 2-5%.
With the central bank expected to start cutting interest rates soon, KeyCorp’s NII and net interest margin (NIM) are likely to get much needed support. Aggressive interest rate hikes by the Federal Reserve have weakened the bank’s top-line performance due to sluggish loan demand and rising funding/deposit costs. Last year, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
So, once KeyCorp invests the proceeds in some higher-yielding, liquid securities, its NII and NIM are likely to benefit. Hence, the minority equity investment by BNS, interest rate cuts and the company’s efforts to strengthen fee income sources will support top-line growth.
Image: Bigstock
KeyCorp to Incur $700M Loss in Q3 on Balance Sheet Repositioning
KeyCorp (KEY - Free Report) shares gained 3.1% on Sept. 9 in response to its balance sheet repositioning announcement. The regional lender sold its low-yielding available-for-sale (AFS) investment securities portfolio worth almost $7 billion.
KeyCorp is expected to incur an after-tax loss of $700 million in the third quarter because of the sale. The securities sold had a weighted average book yield of roughly 2.3% and an average duration of nearly six years.
Last month, KeyCorp stated its plan to reposition its balance sheet to improve profitability as it announced a minority equity investment by Canada’s The Bank of Nova Scotia (BNS - Free Report) (also known as Scotiabank).
Details About Equity Stake by Scotiabank in KeyCorp
On Aug. 12, KeyCorp announced a minority equity investment of $2.8 billion (in aggregate) by Scotiabank in two tranches at a fixed price of $17.17 per share. The first phase was completed on Aug. 30, and now BNS holds a 4.9% equity stake in KEY.
The second part involves BNS making an additional $2 billion of investment, expected to close in the first quarter of 2025, pending the Fed’s consent. After this, BNS will have a 14.9% equity interest in KeyCorp.
At that time, KeyCorp announced the divestiture of lower-yielding AFS securities would result in a one-time after-tax loss of almost half of the capital raised. The company planned to invest the proceeds in higher-yielding, more liquid securities.
This is expected to lead to approximately $400 million in additional net interest income (NII) in 2025 and 2026. It will also be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
Compelling Financial Benefits
Image Source: KeyCorp
This is similar to the steps taken by Truist Financial (TFC - Free Report) in May 2024 to strategically bolster its balance sheet. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add almost $710 million to TFC’s 2024 NII.
KeyCorp’s minority equity stake announcement also led Moody’s Investors Service to change the outlook on the company’s ratings to stable from negative. The company now has a stable outlook and long-term issuer ratings of Baa2/BBB/BBB+ from Moody’s, S&P Ratings and Fitch Ratings, respectively.
What Next for KeyCorp
The company did not reveal its plans for the proceeds from selling $7 billion worth of AFS securities.
On the second-quarter 2024 conference call in July, KeyCorp projected the average loan balance to be down 7-8% this year. Also, NII (tax equivalent) is expected to decline 2-5%.
With the central bank expected to start cutting interest rates soon, KeyCorp’s NII and net interest margin (NIM) are likely to get much needed support. Aggressive interest rate hikes by the Federal Reserve have weakened the bank’s top-line performance due to sluggish loan demand and rising funding/deposit costs. Last year, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
So, once KeyCorp invests the proceeds in some higher-yielding, liquid securities, its NII and NIM are likely to benefit. Hence, the minority equity investment by BNS, interest rate cuts and the company’s efforts to strengthen fee income sources will support top-line growth.
So far this year, shares of this Zacks Rank #3 (Hold) company have rallied 12.4%, underperforming the industry’s growth of 17.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research