BANCANALYSTS ASSOCIATION OF BOSTON’S ANNUAL BANK CONFERENCE - KEYCORP

Explicit Guidance:

• Clearwater Acquisition Financial Impact: Anticipated to add $20–$25 million in investment banking fees to Key in 2026 ($10 million captured in Q3 2024).
• Long-Term Fee Target: Internal goal to reach $1 billion in combined investment banking and direct placement fees (target set prior to external announcement, viewed as a long-term horizon rather than near-term destination).
• Revenue Growth Rate: Investment banking fees have compounded at >7% annually over the past 16 years.

Business-Segment Outlook:

• Institutional Bank & Middle Market: Expected to drive growth through "1+1=3" synergies from acquisitions (Clearwater, Atlantic Pacific Capital), leveraging middle-market clients for global M&A access and transaction execution.
• Private Capital & Real Estate: Projecting increased opportunity in continuation vehicles, estimated to be ~10% of private equity exits, and leveraging private credit warehouse lines/ABS execution.
• Commercial Real Estate (CRE): Special servicing (approx. $270 billion of AUM) and active special servicing (~$10 billion) expected to remain stable in the near term; revenue is counter-cyclical, meaning potential spikes if commercial mortgage rates continue to rise or extend.
• Fee Business Mix: Anticipated shift toward a model where 2/3 of revenue in institutional banking comes from fees (capital markets) and 1/3 from credit (balance sheet lending), driven by the ability to monetize lending relationships.
• Productivity: New bankers are expected to ramp over 12–18 months; overall productivity is projected to increase as new hires from the last few years enter their maturity phase.

Market and Competitive Outlook:

• M&A Environment: Current middle-market M&A activity is down 11% in 2026 (and down for the last two years); however, Key expects offsetting gains from other levers (e.g., continuation vehicles) without requiring a massive market pickup to hit fee targets.
• Private Credit: Anticipating a pullback in private credit activity (good for on-balance sheet lending), with no immediate signs of credit cracks, though redemption issues persist.
• AI Adoption: Key expects productivity uplift from AI but remains realistic that it will not remove the human element; broad-scale usage of 35+ use cases is active, with "flywheel" effects expected in underwriting and onboarding to free up banker time.
• Data Center/Power Demand: Data center lease rates expected to grow at 9% annually through 2030; even if AI spend slows/extends, demand for power capacity remains high (capacity at 99%+) and fully contracted, viewed as lower risk of bubble formation.

Macro / Industry Outlook:

• Economic Sensitivity: Key Corp has <1% direct exposure to data center loans; the business benefits from "second/third derivative" demand in power and infrastructure regardless of the pace of AI capex.
• Interest Rates: Management views a slower, more extended AI build-out as positive for clients, reducing price pressure and bubble risk; potential for less commercial mortgage banking fee revenue in Q4 if rates remain elevated, leading to longer hold periods on balance sheet.
• Regulatory/Political: Belief that stability in tariffs, rates, and inflation (post-election or otherwise) would foster more private equity monetization activity; does not view the election cycle as a specific immediate catalyst for middle-market deals.

Strategic Initiatives:

• M&A (Bolt-on): Completed acquisition of Clearwater (UK, ~150 employees) in August 2024; acquired Atlantic Pacific Capital (~35 employees) in Q4 2024 (4th deal in 13 years).
• Organic Growth: Continued hiring of bankers and expansion of internal capabilities in Renewable Energy M&A, ABS, and tax equity syndication (affordable housing/renewables).
• Talent Pipeline: Maintaining an analyst class of ~80 and expanding internal development programs to ensure career ladders, avoiding gaps seen post-2008.
• Capability Additions: Integration of private capital advising (via Atlantic Pacific) and continuation vehicle execution capabilities to serve PE firms exiting holdings.

Risks and Headwinds to Outlook:

• Market Volatility: A potential "meaningful rate escalation" could impact fee revenues and extend loan hold periods, though the underlying portfolio quality (sponsors/underwriting) is viewed as robust.
• Deal Flow Timing: M&A and private equity exit activity may not normalize as quickly as historical averages; the business assumes activity continues at the current course and speed.
• AI Productivity Lag: While AI use cases are active, the magnitude of productivity lift is unquantified at this time and may not materialize immediately.
• Commercial Real Estate Concentration: Urban BNC office and specific overbuilt multifamily pockets remain "hot spots" for special servicing, though currently viewed as manageable.

Management Tone on the Future:

• Confidence Level: High confidence in achieving the $1B fee target and maintaining ~7% CAGR despite a "not very good" M&A environment.
• Strategic Philosophy: Emphasis on "no regrets" and "client-first" approach, with a focus on relationship banking and repeat business rather than hitting short-term capital markets numbers.
• Caveats: Management explicitly notes they do not expect a "huge pickup" in M&A to hit targets and are "optimistic" but realistic about the 12–18 month banker ramp-up and AI productivity realization.

Miscellaneous:

• Client Base Focus: Heavy focus on Financial Sponsors and Middle Market Corporates (approx. 40% of IB fees from PE-owned companies).
• Deposit Generation: Institutional Bank holds $60B in loans against $40B in deposits, with CRE servicing driving ~$10B in low-cost deposits.
• Competitive Moat: Differentiation derived from industry-vertical P&Ls (integrated lending/IB/payments) versus peer geographic models, reducing internal friction.