KeyCorp’s SWOT analysis: stock outlook amid strategic investments, NII growth

KeyCorp (NYSE:KEY), a prominent player in the U.S. Large-Cap Banks sector with a market capitalization of $20.23 billion, has been navigating a complex financial landscape characterized by strategic investments, robust net interest income (NII) growth, and ongoing market challenges. The stock has shown strong momentum, delivering a 39% return over the past year. This comprehensive analysis examines KeyCorp’s current position, future prospects, and the factors influencing its stock performance.

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Company Overview and Recent Developments

KeyCorp, operating under the ticker KEY, provides a wide range of financial services, including retail and commercial banking, investment management, consumer finance, and investment banking products. With a market capitalization of approximately $18.38 billion as of June 2025, KeyCorp has maintained a significant presence in the banking industry.

The company recently completed a major investment deal with Bank of Nova Scotia (TSX:BNS) (NYSE:BNS), totaling $2.8 billion, with the final tranche of $2.0 billion closing in early 2025. This strategic move has positioned KeyCorp to pursue its ambitious growth targets for the year.

Financial Performance and 2025 Outlook

KeyCorp’s financial performance in the first quarter of 2025 has set a positive tone for the year. The company reported record investment banking fees and net interest income that met expectations. With its next earnings report scheduled for July 22, 2025, investors are watching closely as analysts expect the company to return to profitability this year. Additionally, KeyCorp demonstrated effective expense management, which contributed to its overall performance, earning a "Fair" overall financial health score from InvestingPro analysts.

For the full year 2025, KeyCorp has maintained its outlook, projecting:

• Net Interest Income (NII) growth of 20%
• Fee income growth exceeding 5%
• Expense growth contained between 2-3%

The company anticipates at least a 12 basis point expansion in net interest margin (NIM) over the subsequent three quarters of 2025, indicating potential for improved profitability.

Strategic Investments and Capital Management

KeyCorp’s recent $3 billion securities repositioning in Q4 2024 resulted in a yield increase of 400 basis points, demonstrating the company’s proactive approach to optimizing its portfolio in a changing interest rate environment. While this move led to a $0.7 billion after-tax loss, it is expected to contribute significantly to the projected 20% NII growth in 2025.

In a show of confidence in its financial position, KeyCorp has announced plans for a $1 billion share repurchase program set to commence in the second half of 2025. This initiative signals management’s positive outlook on the company’s future performance and commitment to returning value to shareholders.

Market Position and Competitive Landscape

KeyCorp’s strong capital position, evidenced by a 9.8% proforma CET1 ratio, positions the company favorably among its peers. The bank maintains an impressive 54-year track record of consecutive dividend payments, currently offering a 4.44% yield. The limited exposure to consumer and commercial real estate credit risks has been viewed positively by analysts, who consider KeyCorp a potential safe haven amid macroeconomic uncertainties. According to InvestingPro’s Fair Value analysis, the stock is currently trading at fair value levels.

The company’s ability to generate record investment banking fees in Q1 2025 demonstrates its competitive strength in capital markets activities, despite expectations of some decline in this area for the broader industry.

Risk Factors and Challenges

Despite the overall positive outlook, KeyCorp faces several challenges:

1. Credit Quality: While net charge-offs (NCOs) have remained stable, there has been an increase in non-performing assets (NPAs), which could pressure future provisions for credit losses.

2. Interest Rate Sensitivity: The company’s net interest income has shown sensitivity to interest rate changes, with a 200 basis point reduction leading to a 0.39% decrease in NII, although this impact has moderated recently.

3. Economic Uncertainty: The broader economic environment remains uncertain, which could affect loan demand and credit performance across the banking sector.

4. Competitive Pressures: As a large-cap bank, KeyCorp operates in a highly competitive market, which could impact its ability to grow market share and maintain margins.

Future Growth Prospects

KeyCorp’s future growth prospects appear promising, supported by several factors:

1. Strong NII Growth: The projected 20% NII growth for 2025 suggests robust core earnings potential.

2. Fee Income Expansion: With fee income growth expected to exceed 5%, KeyCorp is diversifying its revenue streams.

3. Efficiency Initiatives: The company’s ability to contain expense growth between 2-3% indicates a focus on operational efficiency.

4. Capital Deployment: The announced share repurchase program and potential for future capital returns could drive shareholder value.

5. Investment Banking Strength: Record fees in Q1 2025 highlight KeyCorp’s capabilities in this high-margin business segment.

Bear Case

How might rising NPAs impact KeyCorp’s profitability?

The increase in non-performing assets (NPAs) observed in recent quarters could pose a significant challenge to KeyCorp’s profitability. Rising NPAs typically require higher provisions for credit losses, which directly impact the bottom line. If this trend continues, it could erode the benefits gained from NII growth and fee income expansion.

Moreover, managing a larger portfolio of troubled assets consumes management attention and resources, potentially diverting focus from growth initiatives. The cost of carrying these non-performing assets, including legal expenses and asset maintenance, could further pressure margins.

What risks does KeyCorp face from potential economic downturns?

Economic downturns present substantial risks to KeyCorp’s business model. In a recessionary environment, loan demand typically decreases, impacting the company’s ability to grow its loan book and generate interest income. Additionally, credit quality tends to deteriorate during economic contractions, potentially leading to higher loan loss provisions and charge-offs.

KeyCorp’s commercial lending focus could be particularly vulnerable if businesses struggle during an economic slowdown. Furthermore, capital markets activities, which have been a strong point for KeyCorp, often see reduced activity during economic uncertainty, potentially impacting fee income from investment banking and trading.

Bull Case

How could KeyCorp’s strong capital position benefit shareholders?

KeyCorp’s robust capital position, exemplified by its 9.8% proforma CET1 ratio, provides several potential benefits to shareholders:

1. Dividend Stability: A strong capital base allows KeyCorp to maintain or potentially increase its dividend payments, even in challenging economic conditions.

2. Share Repurchases: The announced $1 billion share repurchase program is a direct result of the company’s capital strength, which can enhance shareholder value by reducing share count and potentially boosting earnings per share.

3. Strategic Flexibility: Excess capital provides KeyCorp with the flexibility to pursue strategic acquisitions or investments in growth initiatives, which could drive long-term value creation.

4. Regulatory Compliance: A strong capital position ensures KeyCorp remains well above regulatory requirements, reducing compliance risks and associated costs.

What potential upside exists from the company’s fee income growth?

KeyCorp’s projected fee income growth of over 5% presents significant upside potential:

1. Revenue Diversification: Increased fee income reduces reliance on net interest income, making KeyCorp more resilient to interest rate fluctuations.

2. High-Margin Business: Many fee-based services, such as investment banking and wealth management, typically carry higher margins than traditional lending activities, potentially boosting overall profitability.

3. Cross-Selling Opportunities: Growth in fee-based services often indicates deeper client relationships, which can lead to additional cross-selling opportunities across KeyCorp’s product lines.

4. Market Share Gains: Strong fee income growth could signal market share gains in key business segments, positioning KeyCorp favorably against competitors.

SWOT Analysis

Strengths:

• Strong capital position with 9.8% proforma CET1 ratio
• Projected 20% NII growth for 2025
• Record investment banking fees in Q1 2025
• Effective expense management

Weaknesses:

• Increase in non-performing assets (NPAs)
• Sensitivity to interest rate fluctuations
• Lower-than-consensus NII guidance for 2025

Opportunities:

• $1 billion share repurchase program
• Potential for NIM expansion
• Growth in fee-based services
• Strategic investments and acquisitions

Threats:

• Economic uncertainty and potential downturns
• Competitive pressures in the banking industry
• Regulatory changes affecting capital requirements or business practices
• Potential deterioration in credit quality

Analysts Targets

• Barclays (LON:BARC): $20.00 (June 26th, 2025)
• Barclays: $20.00 (May 8th, 2025)
• Piper Sandler: $16.00 (April 21st, 2025)
• Barclays: $20.00 (April 21st, 2025)
• Barclays: $21.00 (April 3rd, 2025)
• Citi Research: $20.00 (March 10th, 2025)
• Barclays: $21.00 (February 24th, 2025)
• Barclays: $21.00 (January 22nd, 2025)
• Barclays: $21.00 (January 14th, 2025)

KeyCorp’s stock outlook reflects a complex interplay of strong growth projections, strategic investments, and ongoing market challenges. While the company’s robust capital position and projected NII growth present significant opportunities, rising NPAs and economic uncertainties pose potential risks. Investors and analysts will be closely monitoring KeyCorp’s ability to execute its growth strategy while navigating the evolving financial landscape.

This analysis is based on information available up to June 26, 2025.

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