The Long and Short

Still comfortable with KEY and MTB despite challenges

Dan Bruzzo, CFA | January 19, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Both KeyCorp (KEY: Baa2/BBB/BBB+) and M&T Bank (MTB: Baa1/BBB+/A) reported fourth-quarter earnings and provided 2024 guidance that reflects the headwinds confronting mid-sized regional lenders. Despite these ongoing challenges, investors still appear properly compensated for risk in both names as spreads continue to offer compelling valuation relative to the peer group, as well as broader investment grade corporate debt.

The more generous spreads available within each respective debt capital structure appear to be the intermediate subordinated bank notes issued out of KeyBank (rated Baa2/BBB/BBB), as well as the senior holding company debt issued out of M&T (Exhibit 2). The KEY sub notes are trading in-line with low-BBB rated consumer lender Ally Financial (ALLY: Baa3/BBB-/BBB-), while the MTB seniors trade in a comparable range to card lenders Capital One (COF: Baa1/BBB/A-) and Discover (DFS: Baa2/BBB-/BBB+), as well as the financial services platform of Synchrony (SYF: BBB-/BBB-). The risk profiles of the traditional, regional lenders offer more stability than these similarly valued peers. Furthermore, both names are still trading at meaningful discounts to the larger, super-regional names that will be under more pressure to issue debt due to regulatory requirements throughout 2024.

Exhibit 1: IG intermediate regional bank paper

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications

Exhibit 2: KeyCorp and M&T Bank debt issues outstanding

Source: Santander US Capital Markets LLC, Bloomberg/TRACE pricing indications only

KEY fourth-quarter EPS from continuing operations fell 92% to $0.03 versus a consensus estimate of $0.22, while top-line revenue of $1.54 billion met with expectations. As other peers have been reporting, KEY was forced to take a $190 million charge to help replenish the FDIC’s bailout capabilities following the intervention provided to Silicon Valley last year. On an adjusted basis, KEY reported EPS of $0.25, which actually topped the $0.22 estimate.

The item that appeared to gain the most focus from investors was management’s forecast for net interest income to be down between -2% and -5% for full-year 2024, which compared with a consensus estimate closer to +1%. Higher deposit costs coupled with weaker loan demand have characterized the fallout for regional lenders of the Fed’s attempt to combat inflation over the past year. KEY’s average loans were down 3% on both a year-over-year and sequential basis, while average deposits were flat but increased 3% on a period-end basis.

Net interest margin (NIM) closed out the year at 2.07%, which remains weak relative to peers. The bank improved its Tier 1 Common equity ratio to 10.0% from 9.8% in the prior quarter and 9.1% the year before. This appears to reflect a degree of active management of risk-weighted assets on the part of management. The provision for credit losses at $102 million was in-line with expectations and reflective of a stable credit environment for lenders. KEY also provided an update on their CRE exposure, highlighting that office comprises just 0.7% of total loans (versus peer median >3%) and extremely low delinquencies across those at-risk categories.

MTB provided a more stable outlook than KEY, which is reflective of the bank’s overall lower-risk profile. Guidance for net interest income was in the $6.7 to 6.8 billion range, which was a little closer to expectations than KEY. Management also sees net interest margins remaining in the ~3.5% range as well, which is a considerable step up. Fourth-quarter EPS fell 37% to $2.74 or $482 million, as operating EPS of $2.81 fell short of the $3.54 estimate with special fees to the FDIC totaling a comparable $197 million. Adjusted EPS was $3.62 topping the consensus forecast. Net interest income of $1.72 billion met expectations.

Average deposits grew $2 billion or 1% sequentially to $164.7 billion and were up modestly from the year ago period. Meanwhile, average loans were relatively flat sequentially at $132.8 billion in the fourth quarter, though C&I and consumer loans grew while CRE contracted. Management’s expectations for 2024 are for both to remain in a very similar range throughout the year, with a focus on growing customer deposits and reducing brokered. Given MTB’s superior geographic footprint and overall posture, it is easy to see why KEY continues to trade at a significant discount, but again both continue to compensate investors for the risk commensurate with each credit, respectively.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.