Despite slowing fees, KeyCorp remains bullish on investment banking

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Just over six months ago, KeyCorp’s investment banking revenue hit a record high as the Cleveland-based company reaped the rewards of booming capital markets activity.

But what went up came down. Investment banking and debt placement fees in the second quarter fell 31.3% from the year-ago period to $149 million. It was the second consecutive quarterly decline, and the second-quarter total was less than half of the fourth-quarter record of $323 million.

Still, the slowdown doesn’t change KeyCorp’s long-term capital markets strategy, Chairman and Chief Executive Chris Gorman told analysts on the company’s quarterly earnings call Thursday. As the pipelines remain strong and the outlook for this business remains positive, the company will continue to invest, primarily by adding more bankers to the team.

“We’re playing the long game, and it’s a cyclical business,” Gorman said in a post-earnings phone interview. “We will continue to invest in it. We are not concerned with one quarter or another.

KeyCorp, the parent company of KeyBank with $187 billion in assets, did not disclose how many new bankers it plans to hire for its investment banking segment. Last year, it increased its list of institutional and commercial bankers by 10%, and at an Investor Day in March, executives shared their plans to increase the number of such bankers by 25% over the next three coming years.

The bank plans to provide a hiring update after the end of the third quarter, Gorman said.

Commission income was overall a nice place for Key so far this year, peaking at $909 million in the fourth quarter. But market conditions, including inflation, rising interest rates and the risk of a recession, created growing uncertainty that dampened non-interest income.

At Key, this category fell 8% year-over-year to $688 million. The main driver was slowing investment banking revenue, but other contributors included a reduction in corporate card and payment fees and lower consumer mortgage revenue.

Compared to the prior year period, Cards and Payments revenue of $85 million fell nearly 25%, primarily due to Key’s decision to stop providing prepaid cards to unemployment benefit recipients in Illinois. Meanwhile, consumer mortgage income fell 46% year-over-year to $14 million due to better balance sheet retention and lower profit margins on sale.

Overall, full-year fee income is now expected to be down 10-12% from 2021, KeyCorp executives said Thursday. Previously, the bank had predicted a 4% to 6% year-on-year decline.

For the quarter, Key reported net income of $504 million, down 27.8% from a year earlier, in part due to additional provisions for credit losses. Its provision in the second quarter was $45 million, down from a release of $222 million a year earlier.

Earnings per share totaled 54 cents, beating the average estimate of analysts polled by FactSet Research Systems by 3 cents.

During the quarter, Key opened Laurel Road for Doctors, its digital bank for doctors and dentists, to the country’s four million nurses. He didn’t say how many nurses he’s brought to the platform, but he’s “talking to big hospitals” about what Laurel Road offers, Gorman said.

“Although early, we are very encouraged by the response to our expanded offering,” he said on the call. “Nurses represent an important demographic seeking differentiated and personalized financial products and services, and Laurel Road has a unique opportunity to meet these needs.”

Key intends to eventually offer Laurel Road to other segments of healthcare workers, and one day to professionals in other targeted industries, Gorman said in the interview.

“I want to be really, really good at health before I go into other areas,” Gorman said. “But once we have the blueprint for health care, we will look at other industries.”

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