KeyCorp Experiences Significant First-Quarter Profit Drop Amid Rising Deposit Costs
In the ever-turbulent financial sphere, KeyCorp has reported a striking 33.5% drop in first-quarter profit, underscoring the challenges U.S. banks face amidst increasing funding costs and a cautious borrowing climate. The primary culprits eroding the bank's profit margins include higher deposit costs and a persistently elevated interest rate environment that has notably dampened borrower enthusiasm.
The banking sector has been navigating a tightrope walk as it contends with escalating funding costs. The current high-interest rate milieu has incentivized customers to shift their assets towards higher-yielding safe-havens, such as money-market funds, aiming for more attractive returns. This scenario has placed banks in a precarious position, trying to balance net interest income amidst these shifts.
KeyCorp's net interest income—a critical metric that gauges the difference between earnings from loans and payouts on deposits—saw a notable 20% decline, amounting to $886 million in the quarter. The bank's net interest margin also felt the heat, contracting to 2.02% compared to 2.47% in the corresponding period last year.
Despite the downturn, KeyCorp has reaffirmed its forecast, anticipating a decline in net interest income of between 2% and 5% in 2024. Analysts are aligning with these projections, presently expecting an approximate 3.4% decrease.
Adding to the bank's challenges are the headwinds faced by loan growth, which has receded as potential borrowers remain cautious amid higher benchmark lending rates. The anticipation of interest rate adjustments has also been recalibrated by analysts, who, in light of robust economic indicators, are now pushing back expectations of rate cuts within the year.
KeyCorp's portfolio of average loans and leases reflects the broader market's reticence, with a reduction of $2.6 billion, or 6.1%, compared to the previous year. The institution maintains its projection, forecasting a decline in average loans of between 5% and 7% for the current year.
Financials further reveal that KeyCorp's net income plummeted to $183 million, or 20 cents per share, during the quarter ending March 31, a sharp decrease from $275 million, or 30 cents per share, in the prior year. This performance paints a vivid picture of the economic pressures weighing on the banking industry, notably marked by rising deposit costs and an unfavorable interest rate landscape that continues to challenge borrower engagement and overall bank profitability.
Analyst comment
The news is negative. KeyCorp’s first-quarter profit dropped significantly due to rising deposit costs and the challenging interest rate environment, leading to a decline in net interest income and net interest margin. Analysts expect a further decrease in net interest income and a decline in average loans. The bank’s net income also decreased sharply. The market is expected to face continued challenges and declining profitability.
