Loan Remix And Fee Dependence Will Expose Structural Weaknesses In Coming Years

Catalysts

About KeyCorp

KeyCorp is a regional financial services company that provides banking, lending, payments, wealth management and capital markets solutions to consumer and commercial clients.

What are the underlying business or industry changes driving this perspective?

• Accelerating loan remix from low yielding consumer mortgages into relationship C&I heightens dependence on middle market and institutional borrowers at a time when utilization remains subdued, leaving net interest income and asset driven revenue vulnerable if commercial demand or credit conditions weaken.
• Ongoing hiring of frontline producers and sustained technology spend, even after the initial ramp, risk entrenching a structurally higher cost base if fee growth from capital markets, commercial payments and wealth slows, compressing operating leverage and net margins.
• Ambitious NIM and ROTCE targets that rely heavily on favorable fixed asset repricing, swap benefits and disciplined deposit betas could be derailed by a flatter or lower rate path, limiting the expected 50 basis point NIM lift and muting earnings growth.
• High dependence on fee streams tied to capital markets, commercial mortgage servicing and M&A leaves noninterest income exposed to cyclical deal volumes and refinancing activity, which could reverse recent double digit revenue gains and pressure return on tangible common equity.
• Plans to deploy excess capital into share repurchases and potential balance sheet restructurings assume stable credit quality and constructive regulation, but any turn in credit cycles or more demanding capital standards would constrain buybacks, slow tangible book value growth and cap earnings per share upside.

Assumptions

This narrative explores a more pessimistic perspective on KeyCorp compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming KeyCorp's revenue will grow by 16.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 15.7% today to 28.3% in 3 years time.
• The bearish analysts expect earnings to reach $2.6 billion (and earnings per share of $2.19) by about December 2028, up from $932.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.9 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.8x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the US Banks industry at 11.9x.
• The bearish analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bank is generating record revenue in 2025, with third quarter revenue up 17% year over year and six straight quarters of improving pre-provision net revenue. Management is guiding to another year of outsized revenue and earnings growth in 2026, which, if sustained, would support higher long-term revenue and earnings rather than a declining share price.
• KeyCorp is executing a structural remix from low-yielding consumer mortgages into relationship C&I loans at healthy risk-adjusted returns, while growing commercial and consumer deposits and improving net interest margin to 2.75 percent ahead of schedule, with a further 50 basis point lift targeted. This could drive durable net interest income expansion and support higher net margins over time.
• Fee-based franchises in investment banking, commercial payments, wealth management and commercial mortgage servicing are showing high single-digit to mid-teens growth, with record assets under management of 68 billion dollars and rising M&A pipelines. This is creating diversified, capital-light earnings streams that can compound noninterest income and overall earnings through the cycle.
• Asset quality and capital trends are favorable, with nonperforming assets and criticized loans declining, net charge-offs running within the 40 to 45 basis point target range, CET1 approaching 12 percent and recent rating upgrades. These factors reduce downside credit risk and provide capacity for shareholder returns that can support earnings per share growth.
• Management is targeting return on tangible common equity of at least 15 percent by 2027, with a stated long-term goal of 16 to 19 percent, and has clear levers such as organic growth, operating leverage, balance sheet optimization and share repurchases. Successful execution of this plan could lift valuation multiples, net margins and earnings rather than drive a sustained share price decline.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for KeyCorp is $18.0, which represents up to two standard deviations below the consensus price target of $22.22. This valuation is based on what can be assumed as the expectations of KeyCorp's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $43.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $9.4 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $20.66, the analyst price target of $18.0 is 14.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.