KeyCorp (KEY) 2019 Q1 法說會逐字稿

Good morning, and welcome to KeyCorp's First Quarter 2019 Earnings Conference Call.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Chairman and CEO, Beth Mooney.

Please go ahead.

Thank you, operator.

Good morning, and welcome to KeyCorp's First Quarter 2019 Earnings Conference Call.

In the room with me is Don Kimble, our Chief Financial Officer; Chris Gorman, President of Banking; and Mark Midkiff, our Chief Risk Officer.

Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures.

It covers our presentation materials and comments as well as the question and answer segment of our call.

Now I am moving to Slide 3. This morning, we reported earnings per common share of $0.38, which included $0.02 of efficiency related charges.

Adjusting for notable items related to the efficiency charges, our results were $0.40 per share, up 5% from the year ago period and down as expected relative to our seasonally strong fourth quarter results.

Our results this quarter benefited from continued growth in our balance sheet, driven by both loans and deposits.

The primary driver of loan growth was commercial and industrial loans with average balances up 8% versus the year ago period.

Average deposits from both commercial and consumer clients grew 5% over the same period.

Our growth reflects the success of our business model, competitive positioning in the market and investments we continue to make across the franchise.

Noninterest income was below our expectations for the quarter, driven by our capital markets revenue.

In addition to the expected seasonality in a number of fee income categories, including investment banking and debt placement fees, our investment banking business was also impacted by disruption from the government shutdown and the delayed closing of certain transactions.

It is important to note that we remain positive about the outlook for this business based on new client growth, high client engagement and strong pipeline, including a record pipeline for M&A advisory fees.

We believe this positions us well for the remainder of the year.

We also expect growth across our other fee-based businesses and as Don will walk through shortly, we are affirming our outlook for noninterest income for the year.

Expense management continues to be a positive story with costs down 7% from the same period a year ago, adjusted for notable items.

This reflects achieving nearly half of our $200 million in continuous improvement target by the end of the quarter.

And even more importantly, substantially all of the targeted expense saves should be achieved by the end of the second quarter.

We remain committed to reaching our 54% to 56% cash efficiency ratio target in the second half of the year.

The final two sections on this slide highlights our strong position in terms of both risk management and capital.

Credit quality remains a strength with net charge-offs of 29 basis points, still well below our targeted range.

And all of our credit metrics were stable this quarter.

We remain committed to disciplined underwriting and maintaining our moderate risk profile.

Our approach to capital has remained consistent and focused on maintaining our strong capital position, while returning a large portion of our earnings to our shareholders through dividends and share repurchases.

This morning, we announced our capital plans for the third quarter 2019 to second quarter 2020, which includes a 9% increase in our common stock dividend to $0.185 per share in the third quarter, subject to approval of our Board of Directors.

We also plan to repurchase up to $1 billion in common shares over the same period.

Our strong capital position supports both our organic growth as well as our planned capital actions.

Also noteworthy is the closing of our Laurel Road acquisition earlier this month.

Laurel Road's platform bolsters our digital capabilities and aligns well with our relationship strategy to build broad-based relationships with targeted clients and prospects.

We are excited to have found a firm that so clearly matches our business and a cultural approach to serving clients.

Importantly, during the quarter, we continued to add and grow relationships across our franchise, which drove growth in both loans and deposits.

Client sentiment is constructive and our pipelines are strong, driving continued core business momentum, which supports our revenue outlook for the year.

We are delivering on our cost savings and remain on a path to reach our targeted efficiency ratio in the second half of this year.

And we are maintaining our moderate risk profile, and strong credit underwriting remains a priority.

And the capital actions we announce today are consistent with our disciplined approach and commitment to return capital to our shareholders.

Finally, as Don will walk through shortly, we are reaffirming our outlook for the year, and we remain confident in reaching our long-term goals.

With that, I will close and turn the call over to Don.

Thank you, Beth, and I'm now on Slide 5. As Beth mentioned earlier, we reported first quarter net income from continuing operations of $0.38 per common share.

Adjusting for notable items, earnings per share was $0.40.

Our adjusted results compare to $0.38 per share in the year ago period and $0.48 in the fourth quarter of 2018.

Notable items for the quarter totaled $26 million including $20 million of personnel, largely severance, as well as $6 million of real estate expenses, both related to our efficiency initiatives.

As Beth mentioned, we continue to make progress toward our $200 million cost saving target with approximately half already realized and the rest expected to be in place by midyear.

Importantly, we remain committed to reaching our 54% to 56% cash efficiency ratio target in the second half of this year.

I will cover many of the remaining items on this slide in the rest of my presentation, so I'm now turning to Slide 6.

Our business model continues to position us well to grow relationships and loan balances.

Total average loans were $90 billion, up 3% from the first quarter of last year, driven by growth in commercial and industrial loans, which were up 8%.

Linked quarter growth and average balances was also driven primarily by commercial and industrial loans.

Our growth continues to be broad-based across our footprint as well as through our targeted industry verticals.

Our growth this quarter was partially offset by seasonal declines in commercial real estate balances following a strong fourth quarter.

We expect to continue to grow loan balances consistent with our 2019 full year guidance as we support our relationship clients.

This year will also benefit from the loan originations coming from our Laurel Road acquisition.

The tone and sentiment from -- with our clients remains positive and our pipelines are solid.

That said, we remain committed to our moderate risk profile, and we will continue to walk away from business that does not meet our risk parameters.

Continuing on to Slide 7. Average deposits totaled $108 billion for the first quarter of 2019, up $5 billion or 5% compared to the year ago period and down 0.3% from the prior quarter.

Growth from the prior year was driven by both retail and commercial clients.

On a linked quarter basis, the slight decline in deposit balances was primarily the result of expected outflows from short-term and seasonal deposits.

Core retail deposit growth remained strong this quarter.

We continue to see a migration into higher-yielding deposit accounts as we experience a decline in noninterest bearing deposits with growth in NOW and money market accounts as well as CD balances.

Importantly, we are not acquiring new rate-sensitive, deposit-only business.

The cost of our total deposits was up 12 basis points from the fourth quarter, reflecting the deposit rate increase as well as the continued migration of our portfolio into higher-yielding products.

As expected, our incremental deposit beta was relatively consistent with what we experienced in the fourth quarter.

The incremental beta in the first quarter was 56%, bringing our cumulative beta to 35%.

We continue to have a strong, stable core deposit base, consumer deposits accounting for 66% of our total deposit mix.

Turn to Slide 8. Taxable equivalent net interest income was $985 million for the first quarter of 2019 and net interest margin was 3.13%.

These results compare to taxable equivalent net interest income of $952 million and a net interest margin of 3.15% in the first quarter of 2018, and just over $1 billion or 3.16% in the fourth quarter.

Most of the $33 million increase from the first quarter of 2018 was driven by earning asset growth and the benefit from higher rates.

Offsetting this benefit was an $11 million of lower purchase accounting accretion, lower loan fees and the impact from interest rates swaps.

Net interest income decreased $23 million or 2% from the prior quarter, driven by 2 fewer days in the quarter and a decline in loan fees, partially offset by the benefit from higher interest rates.

We expect our net interest margin to remain relatively stable and net interest income to grow consistent with our guidance we have provided.

Moving to Slide 9. As Beth said, noninterest income was below our expectation this quarter.

Key's first quarter of 2019 noninterest income was $536 million compared to 6-0-1-- $601 million for the year ago quarter and $645 million from the prior period.

Compared to the prior quarter, seasonality impacted several areas including investment banking and debt placement fees, cards and payments and corporate-owned life insurance, which all typically hit their lowest point in the first quarter.

Market conditions put additional pressure on our investment banking and debt placement fees, where we saw some disruption from the government shutdown.

This especially impacted our commercial mortgage and loan syndication segments.

We also had a number of deals that were delayed this quarter.

As Beth mentioned, our pipelines are strong and we expect these areas to show significant improvement throughout the rest of this year.

One other item that impacted the current quarter's performance was $7 million of losses from our principal investing area for the current quarter.

This compared to $8 million of gains from principal investing last quarter.

The comparison from the year ago quarter also reflects the sale of our insurance business in the second quarter of 2018, resulting in a $15 million reduction from the prior year and a $6 million impact from revenue classification changes mid-2018 on our deposit service charges.

Later, we will review our outlook for 2019, which has not changed from January.

This includes our outlook for noninterest revenues to be $2.5 billion to $2.6 billion for the year.

This reflects our expectation for a double-digit increase in our noninterest income in the second quarter from the first quarter level.

Turning to Slide 10.

Expense management has remained an area of focus for us and our results this quarter reflect the progress that we made against our expense savings target.

First quarter noninterest expense was $963 million or $937 million excluding the $26 million of efficiency related expenses.

This compared to just over $1 billion in the first quarter of 2018 and $1.012 billion in the prior quarter, which included $41 million of notable items.

The table on the bottom left side of the slide breaks out the notable items incurred in both the current period and the prior quarter.

Compared to the year ago quarter, noninterest expense declined $69 million, excluding the notable items.

Our lower expense level reflects Key's efficiency initiative efforts across the franchise, both in personnel and nonpersonnel costs, reflecting lower FTE and significant progress on our $200 million cost saving target.

Compared to the prior quarter, noninterest expense declined by $34 million, excluding notable items.

This quarter's results were impacted by 3 areas.

Normal seasonality impacts a number of line items in reflecting the day count, and we also see increase in benefit costs in the first quarter.

The second area is variable nature of our expenses, as the lower capital markets revenues resulted in a decrease to incentive compensation expense.

And finally, we're realizing the benefits from our continuous improvement efforts faster than originally expected.

As Beth mentioned earlier, we have executed on half of our plans to reach our annual run rate target of $200 million in cost savings this year.

And we expect the remaining savings to be [in-flight] by midyear.

This will result in reducing reported expenses by a low single-digit range from the full year 2018 level, and we continue to expect to reach our cash efficiency ratio target of 54% to 56% in the second half of the year.

Our continuous improvement efforts included the following items completed in the first quarter: we announced closure of over 60 branches; structured the organization to better align with the customer resulting in significant savings; optimized many of the support functions; implemented vendor related savings throughout the organization; and rightsized the middle and back office functions.

Moving on to slide 11.

Our credit quality remains strong, and we continue to be consistent and disciplined in our underwriting.

Net charge-offs were $64 million or 29 basis points of average total loans in the first quarter, which continues to be below our over the cycle range of 40 to 60 basis points.

The provision for credit losses was $62 million for the quarter.

Nonperforming loans were $548 million this quarter and represent 61 basis points of period end loans consistent with the prior quarter.

Turning to Slide 12.

Capital also remains a strength for our company, with an estimated Common Equity Tier 1 ratio at the end of the first quarter at 9.84%.

As Beth mentioned earlier, we remained true to our capital priorities, including returning a significant amount to our shareholders.

In the first quarter, we declared a common dividend per share of $0.17, and we also continue to repurchase common shares of -- with $199 million repurchased this quarter.

We also announced our 2019 Capital Plan today for the period of the third quarter of 2019 to the second quarter of 2020.

This plan includes a 9% increase in our common stock dividend to $0.185 in the third quarter, which is subject to approval of our Board of Directors.

We also plan to repurchase up to $1 billion in common shares over the same period.

Our strong capital position supports all of our capital actions along with organic growth.

On Slide 13, we have provided our outlook for 2019, which, again, is unchanged from the outlook we provided in January.

This builds on our performance and reflects our expectation for another year of strong positive operating leverage and continued momentum across our company.

We continue to expect average loan balances to be in the $90 billion to $91 billion range, once again, driven by commercial businesses.

Average deposits should continue to grow, reaching $108 billion to $109 billion average balance range.

Net interest income should be in the range of $4.0 billion to $4.1 billion in the -- our outlook assumes no interest rate changes in 2019.

We expect noninterest income will be up in the range of $2.5 billion to $2.6 billion with growth in most of our core fee-based businesses.

This outlook is up significantly from our first quarter run rate reflecting strong pipelines, investments in our fee-based businesses and a return to seasonally higher levels of fee income.

As noted earlier, we expect noninterest income to increase by double digits in the second quarter compared to the first quarter.

Additionally, we expect noninterest expense to be down low single digits from the reported 2018 level in the range of $3.85 billion to $3.95 billion.

This range includes the realization of $200 million in run rate cost savings and an increase from Laurel Road of approximately $20 million per quarter.

All combined, we still expect to reach our targeted cash efficiency ratio range of 54% to 56% in the second half of the year.

We see nothing on the horizon that changes our expectations on credit quality, with net charge-offs and provision expense remaining below our range of 40 to 60 basis points.

Our loan loss provision should slightly exceed our level of net charge-offs to provide for loan growth.

And our GAAP tax rate should increase slightly to the range of 18% to 19%.

We continue to expect 2019 to be another good year for Key, building on our own momentum and strong expense management, a clear focus on risk and strong returns.

On the bottom of the slide are our long-term targets.

We expect to reach our efficiency ratio target in the second half of the year.

That said, we have significant upside remaining to improve our returns and deliver value to our shareholders.

I remain confident in our ability to continue to move toward the top tier of our peer group and believe over time, the market will recognize our progress and improved results.

I will now turn the call back over to the operator for instructions on our Q&A portion of the call.

Operator?

(Operator Instructions) And first from the line of Scott Siefers with Sandler O'Neill.

Don, maybe just a little more thought to flesh out the NII guide and how you got there.

Sounds like the margin on a reported basis is expected to be pretty flat, which suggests that it's going to be mostly volume that gets you there, but I guess just any more color given that, I think, you're going to have to average somewhere like $40 million a quarter higher if you wanted to get to the midpoint of the range.

So just, I guess any additional color you could provide, please.

Sure.

A couple of things or 3 things actually will impact that.

One is day count, the first quarter is always the lowest day count.

It's about $7 million a day as far as the impact for fewer days and so that cost us about $14 million this quarter.

Second area that was weak for us this quarter compared to our expectations was loan fees, and we expect that to return to more normal levels in the second through fourth quarter.

And that cost us about $6 million this quarter compared to where we would have expected it.

And the last piece is just what you talked about, which is balance sheet growth, and our outlook for both loans and deposits would imply about $900 million of growth from where our average was in the first quarter to what we see for the average for the full year.

And that should help drive the growth so that we get back into that range for NII.

Okay.

That's perfect and helpful.

And then if I can jump to fees for a second.

And I know you noted, hopefully double digits increase in fees in the 2Q relative to the first quarter performance.

But is there any way to discuss just how quickly some of these capital markets fees could come back?

I guess I only ask because double digit could mean 10 but then the sky is the limit as well.

And I think to get to the guide, you'll have to average much, much higher than like a, what a 10% increase would suggest.

So how much of the shortfall in the first quarter was indeed like deal timing that could come back immediately in the 2Q, and how much will it progress over the course of the year?

We would expect a meaningful step up in investment banking debt placement fees for the second quarter.

Maybe just to hit the broader question would be as far as our noninterest income outlook for the full year.

And we acknowledge that the first quarter's noninterest income of $536 million is well below the run rate for us to get to our $2.5 billion to $2.6 billion target for the full year.

It would require an increase of about $120 million a quarter in fee income.

And so as I would look at this, just a few things to keep in mind as far as the investment banking debt placement fees by just returning to the same reported levels we had in second quarter of '18 through fourth quarter of '18 that would add $60 million to our quarterly run rate as far as IB&D fees.

What we've talked about is, our pipelines are very strong, we did have deals push out of the first quarter into subsequent periods, and so we do believe that is on track.

And so we do believe that our pipeline support, a continuation of building on our model from where we were last year.

Another component of seasonality, first quarter is also low on fee income categories outside of IB&D and that should add about $25 million a quarter for seasonality.

Included in our other income line item was principal investing losses and typically we'd see a couple million dollars a quarter in fee income from that.

We saw about a $7-plus million dollar loss there and so that would add about $10 million a quarter.

And so just to get to the low end of our growth or our target, we'd have to have $25 million a quarter of additional fee income growth.

And so we would see that coming from a number of different areas and those that we've talked about consistently have been investment banking and debt placement fees, our cards and payments related revenue and mortgage is also on a very good trajectory for us as well, that if we look at our application volumes, we're up over 50% from both the year-ago levels and also from the fourth quarter levels.

And so we are on a path to start seeing mortgage drive some increases in fee income as well.

And so that's kind of how I would answer your question, so hopefully that's helpful.

Next, we'll go to Ken Zerbe with Morgan Stanley.

Could we just talk about your capital plans, just for a little bit?

The -- let's call it the 2019 CCAR year number, the $1 billion.

It was a little bit lower than last year's, I think it was $1.2 billion plus.

Could you just talk about kind of how you went about formulating the $1 billion, why that's the right number and was there any negative -- potentially negative surprises in your next year forecast that would lead to the lower buyback amount?

There really aren't any negative surprises as far as our outlook, I would say that last year we had a strong capital substitution with a preferred stock issuance replacing common equity.

But the common dividend and the share buybacks combined really are able -- enable us to get toward the top end of some of our guidance ranges as far as capital for next year.

And more importantly, it keeps us just inside what the Fed templates would allow us to do without going through a formal approval process.

For us to step up our capital actions from what's included in today's announcement would require us to submit a full Capital Plan with the Fed.

Okay.

No, I guess that helps.

And then in terms of the efficiency initiative expenses, is that something that we could see going forward from here, or is 1Q the end of it?

We'll see some again in the second quarter.

It should be at a lower total level than what we had in the first quarter but that should be the end of it.

In 2Q, understood.

Okay, great.

And then just one final question.

In terms of your average CRE balances looks like they were down a few percentage or a couple of percentage points, which is a bit more negative than some of the banks have also reported this quarter.

Can you just talk about what you're seeing in terms of CRE, I mean is it just elevated paydowns or is there something specific about your markets or customers?

Well, a couple things in commercial real estate balances for us.

One is that we do have a commercial mortgage business, and we do see a lot of sales of those assets in the fourth quarter and so that puts our balances a little bit lower starting point for the first quarter.

But second, this is an area where we continue to focus on our risk profile.

And we're not seeing the opportunities there for growth that we're seeing in C&I and some of the other categories, and so we're probably a little more cautious there than some of our peers might be.

Next, we'll go to Erika Najarian with Bank of America Merrill Lynch.

I just wanted to follow up on Scott's line of questioning.

And Chris, if you could weigh in on some color, too.

Don, you mentioned that just getting back to the previous level for investment banking gets you to a starting point range of about $155 million for the second quarter.

And I'm wondering if you could give us any more color on -- you also mentioned, Beth, in your prepared remarks about a record pipeline for M&A advisory fees.

So try and think through, how much of the timing difference could really boost sort of the second quarter run rate?

Erika, it's Chris.

Well, first of all, let me acknowledge that clearly the first quarter was not the first quarter we expected from a perspective of investment banking and debt placement fees.

As it relates to the timing, as we look forward, none of the deals that were pushed out have been lost.

So then it's a question of when are they actually captured?

And we're off to a very good start here in the beginning of the second quarter.

So we feel good about the trajectory and what really gives us, and I think both Beth and Don mentioned this, what gives us really the most comfort is kind of across the boards we have pipelines that our elevated from this time last year.

And specifically, Erika, with respect to our advisory pipeline, our M&A business, it's a record.

So those are kind of some of the things that give us confidence as we go forward.

Erika, we feel much more comfortable and confident in our full year outlook as opposed to giving a quarterly guidance on that specific line item.

And as we saw this quarter, we were surprised by some of the transactions being pushed out of the first quarter into subsequent quarters.

And so we know that the core business is there, the activity is there to support the kind of growth that we want to see going forward and so that's why we're very focused on that $2.5 billion to $2.6 billion fee income line item.

Understood.

And then a follow up on capital return.

I know that banks in your category were sort of restricted by the Fed template, which carries over sort of the tougher CCAR of 2018.

And I'm wondering what the decision tree was in terms of having to go through the full CCAR in theory?

I think some -- most banks had said that the parameters at this year would be easier versus sort of just doing the template.

Well, one, it was helpful for us and that with these capital actions, it really doesn't make progress and move us toward our targets.

Both from a common dividend payout ratio, it gets us closer to that 40% range and also the share buybacks I think are very important for us.

And we actually tilted a little bit more towards the share buybacks this time than what we would have before.

And with this level, it does start to bring us down toward that 9% to 9.5%, targeted range.

And so one, it's helpful that even with the template, it approaches that level, what we have is a possibility if we feel that we need to step up capital actions.

We have the ability to resubmit a Capital Plan at any point in time and don't have to do it just now.

So that will be something we can consider in the future if we feel a need to step up beyond where our current plan would include.

Got it.

So just I understand the process for the banks in your category.

Let's say that the stock value, market valuation continues to provide a window of opportunity to buy back shares.

You could submit, I think, is it -- up to 1% of RWA without having go through any sort of formal approval process?

There is a de minimis approval.

I don't think it's a full 1% of RWA, but I don't know what that level is off the top of my head, but there is the ability to get a de minimis adjustment.

And next, we go to Matt O'Connor with Deutsche Bank.

Just a follow-up on the capital side.

Obviously, getting a lot of attention because I think you're the first bank out there to kind of give the plan in your size.

But it does feel like it'd be pretty compelling to go through the hassle of the paperwork and it offers a little more flexibility.

I mean you've been pretty clear about not being interested in bank deals.

You've got a small deal closing here.

I don't know if the acquisition appetite has changed but it does seem pretty compelling to go back and ask for more if the acquisition strategy hasn't changed, especially in light of the flatter yield curve, not robust loan growth.

Well, Matt, I can say definitively our acquisition strategy has not changed, so that is not a priority for us, and so we are very focused on executing against our strategic plan and generating organic growth.

And to your point, we could have some additional flexibility as far as increasing our capital actions and we'll just have to assess that over the next couple of quarters as to whether that limits us in the current environment or whether we want to file a full Capital Plan and adjust to that request.

Okay.

And then just separately, the expense management this quarter was very good to help offset some of the weaker fees, and you clearly sound confident that the fees will come back strongly the rest of the year.

If for some reason the revenue is a little bit weaker than you hoped for, are some of these cost adjustments or cost savings sustainable?

Yes.

Well, the cost savings are sustainable.

And I would also argue or suggest that as we saw this quarter, many of our revenues also have a highly correlated expense number with that so that the expenses are variable to those revenues that are being generated.

In this case, those capital market revenues are highly correlated, and we've said that in the past it's been about a 30% correlation and so there is that opportunity to adjust that.

We've talked a lot about making sure that we hit our efficiency targets and make sure that we deliver on our commitments to the street.

And part of that is making sure that we continue to focus on expense control in order to help manage to achieve our targets even if the revenues are weaker.

So I think you'll see ongoing efforts for us to continue to manage that down and would expect our efficiency ratio to continue to decline each quarter from here on out this year.

And so that will allow us to achieve that targeted level.

And we'll go to David Long with Raymond James.

With the rate curve flattening inter-quarter, how has that changed your investment decisions in your securities portfolio?

I would say as far as our investment decisions, it hasn't changed a lot.

Now what you did see from us this quarter was about a $1 billion increase in our investment portfolio and that was because our liquidity levels continued to be above where we wanted to be and so we moved that out of short term and into our portfolio.

The nature of the investments is very similar that we tend to look at agency CMOs and those have been very predictable for us as far as cash flows, and we don't like a lot of the mortgage pass-through security so we don't have the variability associated with that.

One thing we did do is this quarter we started to enter into more interest rate swaps and floors again and so we added over $4 billion of those to really shift our asset sensitivity to be more neutral and to make sure that we're not only more balanced but also have greater protection in case the rates do start to go down at some point in time.

Got it.

And then in your -- in the quarter, what yields were you investing in?

What type of yields were you getting on new purchases?

First quarter, the average yield for the new purchase was [3.35%], and the roll-off rate for the portfolio was at [2.29%].

So we picked up over 105 basis points on those reinvestments, I'd say that in today's marketplace, it's a little tighter than that, probably about 30 basis points tighter because of the flatness of the curve.

Next question's from Gerard Cassidy with RBC.

Don, can you share with us any color on CECL?

I know we won't need the official number until probably later this year but some of the banks have come out with the Day 1 increase in reserves and in fact Wells Fargo surprised I think people by saying that their Day 1 reserve will not increase but decrease.

Any color on how yours are shaping up?

Yes.

One, Gerard, if you could tell me what the economic outlook is on the first quarter of 2020 we might be able to predict what that is because CECL is going to be more variable based on what the economy would show.

I would say more generally though that for CECL, we think that there should be very little impact and maybe even some slight decreases in some of the commercial categories.

And if you look at the reserves maintained by Key and other banks that tend to be with an assumed loss recognition period of about 3 years, which is also about the average life of loans.

And so we don't believe that there should be much of an increase there and potentially, again, maybe even on a slight decrease.

And on the consumer front, we do believe that there will be increases on the CECL reserves that most banks will have about 1.5 years worth of charge-offs for consumer products.

Many of the consumer loans have an average life of well north of the 1.5 years if you look at home equity and mortgage, you might even assume a 7-year kind of life.

So we think that the reserve requirements under CECL will increase those.

Now for Key, that's actually a good relative position because about 75% of our loan portfolio is commercial and then 25% is consumer.

And so we think that the impact to us should be less than what we're seeing from many of our peers.

Great.

And following up, I know you guys have been pretty definitive on your views on M&A.

But maybe Beth, there's some speculation I think in the market, linking your recent proxy proposal to increase the number of authorized shares with maybe potential M&A.

Can you give us any color on what -- why it was increased?

Yes.

I'd be glad to, Gerard.

And on the proxy proposal, it really was an administrative action and it's actually something that we knew that our level of share authorization would need to be addressed.

And if you look at our 2019 equity compensation plan, the additional shares are now necessary.

It's actually been over 20 years since our last authorization.

So in determining the requested amount, we basically evaluated ISS' published voting guidelines, and our increased authorization is actually at the lower end of the ISS guidelines.

So our thinking was to avoid requiring frequent proposals.

It was our intent to request an amount of authorized shares that would suffice for a long period of time.

So it was purely administrative and not linked to any strategic actions or plans.

Our next question's from John Pancari with Evercore ISI.

On the -- back to the capital markets revenue, the IB and debt placement revenue.

I got all your color on how you're thinking about that and the seasonality and the pickup and pipeline.

So I guess to think about it for the year, if we look at full year '19 versus '18, given your expectation of a bit of a rebound here, is it fair to assume that we could see growth in full year '19 revenue and IB and debt placement versus over the FY '18 level?

Yes.

That -- I would just say that we're focused on our guidance range for fee income overall, and we talked about the $2.5 billion, $2.6 billion and for us to get in that range, it does require us to show increases in investment banking debt placement fees to more normal levels and show growth beyond that for the rest of the year.

And I prefer not to go into much more detail, specifically about those line items and just the group in total.

Okay.

All right.

And then separately, back to capital deployment, I know that you had indicated that your deployment level, even though it came in below some of our expectations, it does get you in -- you said approaching the top end of your targeted range.

So why not more towards the mid-to-lower end of that range?

How are you thinking about that range here at this point, just trying to get some color on why wouldn't it be further into it?

We do and plan to over time manage into that range.

I would say that part of the constraint this year is the template does limit the amount of share buybacks that we can do to stay within the guidelines from the Fed.

Beyond that, just as we talked about our common equity, or excuse me, our common dividend payout ratio be in the 40%, 50% range.

We will get there over time as opposed to in one fell swoop.

And so our expectation would continue to manage that over the next several years.

Okay.

And then related to that, the 9%, the 9.5% targeted range.

Is that -- you're still comfortable with that?

Or do you think there's potential that that could move lower over time?

We do believe over time, we could see that come down and what would drive that is continued improvement in our operating results that is as we continue to build out our earnings performance that should provide additional support for our capital and therefore, could lower that target over time.

Okay.

And then one more and sorry if I missed this, but I know you had reiterated no real interest in bank M&A.

On the nonbank side, is there interest in potential further deals similar to the Laurel Road transaction?

I would say that we are always looking at areas where we can add additional people, products and capabilities to align with our overall strategies.

Most of the transactions we've done have been much smaller than what either Laurel Road or Cain Brothers were.

And so we'll continue to look at that fill-ins there.

But we do believe that the transactions we've done have been additive and will continue to generate value and help accelerate our efforts to our strategic goals.

Next question's from Steven Alexopoulos with JPMorgan.

I wanted to first start on capital.

So what were the thoughts on going out now with the 2019 Capital Plan versus waiting to get a potentially much stronger 2Q under your belt?

I would say as far as our announcement of our capital plan that -- we knew this would be a topic of conversation from our investors.

And so we felt that we'd go ahead and announce it now and then as far as the levels, we really believe that it was in line with our initial expectation and also put us at the high end as far as what the Fed template would provide.

And so we felt that it was appropriate to go ahead and announce the plans based on those criteria.

And now given the CET1 is now at 9.8%, if you did not have this template constraint, would you be looking to buy back much more than the $1 billion?

Or is the reality just that you don't have as much excess capital as you had in the past?

Well, keep in mind that our Common Equity Tier 1 has only moved down by about 30 basis points from a year ago.

And so there isn't a huge gap as far as the change from where we were then.

I would say that last year we did have a significant preferred stock issuance, which allowed us to buy back additional common shares and so that had an impact on last year's capital actions.

And it's something that we're continuing to evaluate.

And as we've said is we do believe that we have the opportunity, if we believe appropriate, to submit a capital plan to increase our capital actions beyond this.

We also knew that would take some time for us to be able to achieve that, and so we felt it was appropriate to go ahead and get these actions in place and start making those share repurchases occur and also to increase the common dividend.

Maybe just a final one for Chris.

I wanted to follow up on the expectation for double-digit increase in fee income in 2Q.

So if we look at loans held for sale, which historically was a good leading indicator of the IB pipeline.

Why is the size of held for sale not indicating a larger pickup coming?

It's pretty light actually, this quarter.

So Steve, first of all, so as you know, we have a bunch of line items that impact our investment banking and debt placement fees.

It isn't always a particularly perfect correlation between what we have in terms of held for sale and what's coming out of the pipeline.

When we're talking about 10% increase quarter-over-quarter in noninterest income, I think the big line items where you're going to see changes are trust and investment services.

We talked about the fact we had insurance there before.

Investment banking, you also see -- you also will see pickup in corporate services income, which is derivatives and FX, which is tied to transactions.

The other thing to mention is obviously M&A never makes its way into the line item that you referenced.

Next, we'll go to Ken Usdin with Jefferies.

Don, can you elaborate on the Laurel Road income statement impacts?

You mentioned in the guidance that it continues to be in the interest expense but how does -- how do you expect that now to traject as far as now bringing in balances onto the balance sheet?

Is that included in your loan, obviously, and interest income outlook and just maybe, you can just size both the revenue and the expense impacts for the year, that'd be helpful.

Sure.

As we talked about it from the expense side, the transaction closed a little quicker than what we initially had and so we now are saying about $20 million a quarter.

So roughly about $60 million of expense as far as the impact.

The loan outlook has, since Day 1, included the impact of Laurel Road.

And so we do expect that to have a boost to our consumer lending this year and that's also very helpful.

We should also see some lift in fee income because some of their production, it is the type of production that we would be selling like mortgages and maybe some of the consolidation loans as well.

And so we should see some drive there.

The guidance we provided before about having about a negative $0.02 impact this year, is probably about the same general range.

So it's not much higher or lower even though it's been in place for one month more.

Okay.

Got it.

And one more on capital.

So with the letter math, Don, I guess, is there a way you can help us describe when you thought through it, like what your limiting ratio is?

Last year, you were Tier 1, I believe limited in CCAR.

Did the letter math change what you find to be your binding constraint, without going through the formal CCAR process, and has that changed in terms of how you think about managing capital going forward at all?

You're right.

The template still shows Tier 1 as being our limiting factor there and would give us the opportunity to issue some preferred stock to help with that as well.

So that's a part of the consideration going forward.

Okay.

So that wasn't a change and one of the reasons why you limited.

It would just seem that the letter math would have been better than a -- more than a $1 billion.

Our math is within $12 million of what that template shows, for the $1 billion.

Just put it in perspective.

Next, we'll go to Mike Mayo with Wells Fargo Securities.

I just wanted to follow up more on the investment banking but just to clarify, if you were to give a little more specific guidance for second quarter, second quarter fee growth should be somewhere between 10% and 99.9%.

So you want to give a little more guidance for that range?

I guess Scott asked that question earlier.

Yes.

I would say that up double digits and Mike, just to put it in perspective, I think earlier someone mentioned that fee income was up in IB&D fees.

I think number was $155 million for the second quarter.

I think that those general ranges are consistent with kind of a double-digit increase from where we are in the first quarter.

Okay.

My question really relates to investment banking.

If you look at organic investment banking growth for the last few years, it's not where it was before that.

And I just -- some of this is timing, which you said and deals are delayed not dead, but that's also true for your peers, which performed better whether similar size or the largest.

Some of this [they backlogged].

That's not huge in the scheme of things.

So I guess, in terms of management, since, Chris Gorman, since you kind of rose further up and maybe a little further away from that business, does it have the same intensity that it had in the past?

I know you created that but most importantly, it's the competition.

Goldman Sachs this week said that they're hiring 100 new coverage bankers to cover 1,000 new companies, which I think are middle-market companies.

So I think Goldman Sachs is pretty much saying they're going after your customers in the investment banks.

So what role does, whether it's the mix or management or the competition, have on investment banking revenues, which have decelerated over the last several years on a core basis, stripping out Pacific Crest and Cain Brothers?

Thanks for your question, Mike.

I mean if you go back, and it's still very true today for people to compete with us, they have to be focused on companies that are in the middle market, companies that need the full breadth of an integrated model and that are within our industry groups.

And there's always competition, and we have great respect for our competition but the reality is in terms of on any given opportunity, the team showing up and being able to check all those boxes, we very much like our chances when we're out there competing.

So one, we continue to grow the business, you know we've successfully integrated both Pacific Crest Securities and now Cain Brothers, which is kind of tricky when you successfully integrate boutiques.

No question there's competition, but we really like where we're positioned in the market and as we said, we expect to continue to grow that business.

The other thing that we mentioned at our Investor Day that I think is really important is the nature of the repeat revenues.

So we've been able to build a business where 50% of our customers do something strategic every 3 years or so.

And I think that's really important and, Mike, what's going on right now with frankly the slowing growth in general in the economy but really healthy balance sheets is we're having a lot of strategic discussions, both with our clients and with our prospects.

I mean, so what do you think -- I mean, also you have JPMorgan fit into the middle-market banks so even if that's what you're seeing today, how do you -- what do you say to your team over the next 3 years when you see headlines like the Goldman Sachs this week or JPMorgan at their Investor Day?

Everyone seems to all of a sudden love the middle market for investment banking.

So are you just keep doing what you're doing and hope it stays the same?

Or what can you do?

So we will keep growing our business in a very targeted way.

We talked about focus scale that day in October.

We will continue to go about the business of doing that.

The real secret to serving these middle-market companies is really the coordination of all the pieces and parts, whether it's the balance sheet, the advisory, the hedging, the operating accounts and that's not easy to replicate.

I'm not saying it can't be replicated but the reality is that's a tough business model to replicate as it relates to the broader middle market.

Our next question is from Saul Martinez with UBS.

A couple questions.

First, I guess following up on the last question from Mike.

Don, your -- the guidance for full year assumes that -- I guess the bridge to get to the guidance assumes that you get back to the 2Q '18 to 4Q '18 run rate for IBCs, And I get that the pipeline's strong, 2Q, you may have some visibility but is it -- how reasonable is that assumption because you did -- especially in the back half, you did have a strong year, you mentioned slowing growth, competition was mentioned.

You had a lot of paydowns last year.

Is that -- how confident are you that that run rate is the right one to use going forward?

One, the walk forward that I provided just said that's a component getting back to that level, we also believe there is growth for the business and growth for other areas in the business.

But as far as our confidence, as Beth said in her comments the pipelines are all very strong.

And we do have record levels of pipelines in M&A and some of those M&A transactions were part of those that were delayed out of first quarter.

And so we have good insight or sight line into the near term there.

But more importantly, if you look over the last 30 to 40 days, our activity levels, our calling efforts, they've all stepped up and so that's setting the table nicely for not just the current period but that longer-term type of growth and opportunities for us in this category.

Okay.

If -- I know you're -- you express confidence you can hit your target.

If you do come up a little bit short on the fees side, is there more room on the expense side to manage expenses even lower than what you're guiding to right now?

How much flexibility do you have in terms of discretionary expense?

Our expense range is based on the assumption that we are inside our revenue targets as far as both fee income and net interest income.

And if we see weakness in those categories, we do expect to see our expenses come down appropriately.

And as we've mentioned, many of the fee categories that have some variability to them are more capital markets related.

And there's a high variability -- the expense associated with that as well.

So even if you're a little short on revenues, do you feel confident you can get to the 54% to 56% in the back end of the year?

That's our plan, yes.

Final thing for me.

Laurel Road, you mentioned some of the impacts but can you just give us a sense how much it could add to your consumer and direct loan book and at what yields that it would be put on?

Yes.

I would say that last year Laurel Road originated about $1.2 billion in production.

And so we do believe that they can continue to grow their core, and we would just continue to operate their business.

We also think there are synergies like combining with Key, and we have a number of customers that really overlap well with that medical professional field.

And so we think there is additional products that we can distribute through that platform as well.

Keep in mind too, that some of those loans are going to be balance sheet and some could be sold in the markets like the mortgage production.

And so we'll see it come through in both the loans and the fee income, but I'd say the $1.2 billion in production is a good starting point.

I think in the past, you mentioned that the yields are similar to what you have in the other parts of your consumer book.

So remind us that's what like 5.5%, 6%, is that...

Yes.

That 5.5% range is a good range for further production, yes.

Next, we'll go to Marty Mosby with Vining Sparks.

I've got kind of a sequence of questions I wanted to ask.

One is, if you look at investment banking, it's down from fourth quarter to first quarter, the last 5 years I think has been a trend.

I was expecting rates maybe to kind of kick in and maybe accelerate some of the deals, maybe they're just getting a little bit more pushed out but the seasonal trend looks to be pretty solid with what you've seen in the past.

If we look at the actual variance in the sense of what we're looking at in the sense of EPS, there's probably $0.02 or $0.03 related to what the compression was just in this one fee income line.

So I'll just -- I'm trying to take the expenses that were associated with the less revenues and kind of net that out, but I'm thinking $0.02 or $0.03 was probably the impact for this particular quarter, given the compression you saw from fourth quarter into the first quarter for this fee and line item.

Marty, the math I guess, is in line.

If you just take a look at what our investment banking and debt placement fee line item was versus a year ago.

That's a $33 million decline.

You also take in consideration the other capital markets revenues were impacted whether it was corporate services income or the market's impact as far as those principal investing losses.

And so those are all meaningful as far as the impact and constraints on our revenues.

On the expense side, to your point, capital markets revenues, there tends to be about a 30% correlation to the expense.

And so for that $33 million and reduced IB&D fees that would be about a $10 million incentive attached to it.

So if you work through all of the math, it probably -- for those 3 areas, it probably would be in that $0.02 to $0.03 range compared to what we would have generally expected in more normal market environments.

And then that is such a key to see that come back next quarter, so we've been through that discussion a lot.

It has at least shown that trend to come back in the second quarter anyway and especially if there were some delays, you might be able to see that.

But if you kind of now connect that and the need to make sure that you're hitting these targets, there is still an opportunity, you've been doing a great job moving your investment portfolio yields higher.

And with what you saw with the template, in a sense of what you could give back in dividends and share repurchase, you could actually take that difference, so let's say we rebought, repurchased $1.2 billion last year, this year, we're going to repurchase around $1 billion.

Take that $200 million, actually invest it in accelerating the pickup that 50 to 75 basis point difference between what's going to mature in the next couple of years and where the market is to actually pick up a significant amount of earnings.

So you have excess capital, this is capital you would actually re-earn over the next couple of years.

And it would have to -- actually give you a little bit of a backdrop to help soften some of this reliance just on this one thing coming back.

So just wanted to see what kind of potential you might have given the excess capital you have that might not go through the template, but could be used in a different area.

Our objective is to have capital to support our organic growth.

And so we do expect that we're -- we've got a lot of business activity that would result in growth for us.

Just on the commercial side, we continue to see nice growth in commercial lending activities over the last 5 or 6 years and so that's been a source of strength for us.

We also believe that Laurel Road should add additional volumes to our balance sheet.

And so we want to make sure we have the capital there to support that and that's our priority.

To your point as well on the investment portfolio that we would expect to see that stay relatively stable.

And so we think that our loan growth will be funded by our deposit growth but maintain that and more the same level and so we think that it should translate to core earnings growth for us with those types of assumptions.

[And we're not asking about] -- talking about increasing the portfolio as much as just getting the existing size up to the current market rate.

So you could take that and you could even be smaller in size if you want to fund more loans and still get that benefit from the point of liquidity.

But getting that portfolio rate that still [bleats] 2.5% up towards where market rates are today, like you said that front book that you can accelerate that.

And that acceleration would help you kind of step into some of this weakness and offset the need to see such a stepwise leg up.

And then Beth, what I wanted to kind of get you to respond to was, when we talk to investors, I mean the biggest issue that comes back was the valuation for KeyCorp just kind of stands out amongst the large cap banks, is really about management and how people can kind of rely on, its -- and even had some of the questions with the guidance you've given is, can we really believe this?

This next step up is going to be critical for you to be able to accomplish given I think that suspicion or doubt, that's still lingering from whatever people felt because of the acquisition announcement a couple of years ago.

So I think addressing that and kind of talking about where you believe and how you feel, confident in how you're going to be able to accomplish these year-end goals, because year-end goals really haven't changed very much.

So we're really being asked to believe in the back half of the year offsetting the weakness that we're seeing in this particular quarter.

So just wanted to see if you could address some of those concerns that we hear consistently.

Yes.

Marty, I would say that first and foremost, we did acknowledge that on noninterest income front, we were light this quarter.

And we mentioned specifically investment banking and debt placement fees and then some of the market impacts that you even saw, such as in our principal investing portfolio and so forth.

Reiterated our guidance, Don, I think early in the call kind of outlined in trying to make sure people could brainstorm this first quarter to how we looked at reiterating basically our revenue guidance for the year as well to try and help make sure that you understood where our confidence came in reiterating both noninterest income as well as our revenue guidance for net interest income.

We've obviously started the year with a very strong start on expenses.

So again, we have a trajectory here that gives us confidence to meet the commitments we made around our efficiency ratio and our full year plans in that regard.

And we're engaged in a number of efforts that will drive shareholder value.

In addition to our continuous improvement initiatives, we've got the Laurel Road acquisition, we have other investments we've made in our business.

And we believe we have the full complement and capabilities to effect our plans, deliver on our commitments.

And we are very much focused, and our priorities are clear.

And what we wanted you to hear today is, while we have a low base in the first quarter off of noninterest income, specifically in investment banking.

We have a clear path and we have a clear plan to realize our commitments.

Very good.

And that step forward on revenues, Don, was very helpful.

And we'll go to Peter Winter with Wedbush Securities.

On the net interest margin, Don, you mentioned that the outlook is to be relatively stable going forward.

Can you just give some of the puts and takes?

Sure.

That -- as far as the stability, one, we would expect loan fees to pick up again to more normal levels and that cost us again 2 basis points this quarter and so that should be an add.

We also think that the reinvestment of our bond portfolio that this past quarter we had about $900 million in cash flow off that.

We think that cash flow will continue.

And we should have 70 basis points or thereabouts improvement from the reinvestment there, which will be helpful.

The third piece that will be helpful for us, too, is you might recall that we had some swaps that were terminated last year.

And those swaps are those that matured through 2019.

In the first quarter that had a negative impact as far as the amortization of the impact of that of about $14 million.

And that will go away throughout the rest of the year and so from the first quarter to the second quarter, you'll see that amount drop from $14 million to roughly $6 million, so an $8 million pick up there.

Now offsetting that, we would expect to see deposit rates continue to drift up a little bit and probably mid-single digits here in the second quarter but probably low single digits after that.

And that's really the result of our customers continuing to migrate into more interest-bearing type of product as from where they've been historically.

So you've seen the consumer opt for more time deposits and seen more shifts out of the noninterest-bearing DDA into interest-bearing DDA and things like that.

And so we think all those combined allow us to keep that margin relatively stable going forward.

And Ms. Mooney, no further questions.

I'll turn it back to you for any closing comments.

Again, we thank you for participating in our call today.

If you have any follow-up questions, you can direct them to our Investor Relations team at 216-689-4221 and that concludes our remarks today.

Thank you.

Ladies and Gentleman, that does conclude the conference.

We thank you for your participation.

You may now disconnect.