BANCANALYSTS ASSOCIATION OF BOSTON’S ANNUAL BANK CONFERENCE - KEYCORP

Thank you, gentlemen, for joining us for the 45th BAB Conference. I know you've been here before, so again, thank you. Everybody knows Key Corp, headquartered in Cleveland, with almost $200 billion in total assets. It has a very strong commercial banking franchise where they have interwoven over the years the capital markets business into that franchise, which really sets them apart from many of the other regional banks that they compete with with us today to my the far my far right your far left is their CFO Clark Hyatt Hyatt I always mispronounce your last name so I apologize so I apologized it was my Catholic school upbringing and didn't get good phonics. Anyway, Clark is obviously also, in addition to being the CFO, is a member of the Key Executive Leadership Team, Executive Council, and oversees all of the finance operations. And to my immediate right is the president of Key Institutional Bank, Randy Payne. Randy Paye has been with Key for a number of years. I think you joined back in 1993. Is that correct? And so he's been through many years of growth with Key, and with that, why don't we kick it off with some questions, and then we'll open it up to the floor for some questions as well. So Randy, maybe we'll start with you, and can you remind the audience, what is the institutional bank? Sure. So we have three businesses at Key, really. It's our retail and wealth business, our commercial banking and commercial payments business, and then the institutional banks. The institutional bank includes our equipment finance business, as well as our entire real estate franchise, which I think is really one of the differentiating aspects of Key, one of those areas where we have a targeted scale, which you hear us talk about, and the corporate investment bank. We have eight industry verticals, one being real estate, the other seven being within the corporate and investment bank, obviously we also do that within real estate. You know, I really think that our size is an advantage. We are big enough to have a really broad suite of capabilities, but small enough to deliver them in a really unique way to our targeted clients. That would be financial sponsors and certainly corporates, but really a focus on the middle market where we can lead transactions. And I think the success that we've built, you can see it in the numbers. We monetize our lending at very, very high rates. That's a function of us delivering the institution in a very seamless way, a very client-focused way, and obviously right in tune with our relationship strategy. Very good. But you've also, in addition to the relationship strategies that you've had over the years, Key has done bolt-on acquisitions. And you announced one just this week, Atlantic Pacific Capital. Correct. And maybe you could share with us, what does the acquisition do for you? And possibly, should we expect more boutique investment types of acquisitions? So this is the fourth one that we've done during my tenure leading KeyBank Capital Markets. first being Pacific Crest Securities about, what, 13 years ago, and then Kane Brothers earlier this year, and I'm sure we'll talk about it, Clearwater UK. But this week we announced that we're going to be acquiring Atlantic Pacific Capital. Atlantic Pacific has a 31-year history, a private capital advisor. Most of that history was raising new private equity funds. That would be private equity, venture, some real assets. And what we've seen, and we've been looking for this type of addition to our capability set for a number of years, as we've seeing private equity firms exit their holdings, certainly continuing to do that through traditional sell-side transactions, but also through what are being called and what are characterized as continuation vehicles. And it's now close to 10% of private equity exits. And so as we've looked at these businesses and really felt like we could bring that capability to private equity firms that we serve, about 40% of our investment banking fees are from private equity-owned companies. We just needed to find the right one, and we really believe Atlantic Pacific is the right one. They want to do more in the continuation vehicle side as well, and they need our deep industry expertise to further differentiate. We also believe that beyond private equity, that you're going to see a broader proliferation of these types of exits, certainly within the private credit space and as you all know hopefully we've got a big business but within the institutional bank called specialty finance lending where we provide warehouse lines as well as ABS execution and we think that we can leverage APC's capabilities with that client set and then in our real estate business which is you know is obviously full of institutional real estate investors and the types of funds that might want to utilize these services. So we see a lot of opportunity for, I always talk about, Gerard, one plus one equaling more than two with these transactions. And it has to be not only for us as a buyer, but it has to be also for the new teammates that we're going to bring on through these transactions. You want them to see the opportunity and really, you know, be excited about it and I can tell you they are I was with the entire APC team Tuesday night the day that we announced the transaction and there was there's a lot of talk about new business being being being batted around it's very good and you touched on a Clearwater was another bolt-on acquisition right you guys completed earlier in the year how is the integration going relative to your expectations? And where are the biggest opportunities for Clearwater with you folks? Sure. So Clearwater is a little bit bigger firm. APC, about 35 employees. Clearwater approaching 150 across four offices in the UK. We closed on that transaction at the beginning of August. The integration is just right on track. We're very pleased with how it's progressing. I think we guided that Clearwater would add $20 to $25 million in investment banking fees to Key here in 2026, captured about $10 million of that through the two months that we owned the business in the third quarter, and we're right on track as it relates to the fourth quarter. More importantly, our middle market customers, they operate globally, And our ability to access buyers, access acquisition targets, you know, we needed to fill that hole. So that transaction is right in keeping with our focus from a middle market and industry standpoint. Clearwater has great overlap with us from an industry standpoint, so we are quite confident that in that case, one plus one will equal more than two as well. We saw it literally the week that we closed the transaction where we were invited into opportunities to pitch that we wouldn't have been without Clearwater being owned by Key. And just two weeks ago, we won a large transaction in the metal space that I don't think we would have pitched even though we had a historical collaboration agreement because our teams just weren't tight enough to kind of find, this is a metals recycling business, it's pretty niche-y. And through the integration efforts, they found out that we really are quite knowledgeable and have quite a transaction pedigree in that space. And as a result, Clearwater was able to pitch it. We did it, obviously, with our team jointly. We won the mandate. Great. And as we've said, you've done a handful of these deals in the past. Are there any on the horizon or spaces that you might want to fill in on the horizon in this investment boutique area? Let me just, I'll give you a list, like details. But, you know, two is a lot for us. We've done literally two in the previous 13 years. It's not our only growth lever, though. Obviously, we've talked a lot about adding bankers, and we've done that quite successfully, certainly the last few years. We've added teams to broaden our capabilities. That would be Renewable Energy M&A, ABS team, tax equity syndication for our affordable housing, as well as our renewable energy business. That's just a few examples. So this is just really one of multiple levers that we use to build out capabilities, grow, propel growth in the future. And we will continue to look for these good tuck-in acquisitions. There have been quite a few opportunities over the last 24 months. I'm sure there'll be more, given the environment that we're in. But what we're focused most on is, does it enhance what we can provide our targeted client set? And will that business fit with us culturally? and we when we find that we'll we'll try and get something done get it I just say we're not to Randy's point we've been doing this now for 14 years or so we're not four for four we've probably seen almost any deal in this space because people know we're interested and you know Randy's filter is quite narrow and you know when when one hits it it's probably a winner but candidly most of them just don't hit the hurdle we look we look at a lot yeah no that's good to know Clark if you look at the priority of your fee based businesses if you step back for a minute in the third quarter they grew 12% year-over-year the fee based business how are you thinking about these businesses for key going forward I mean we talked a lot about sort of monetizing our lending or having differentiated set of fee platforms this is sort of what makes it work so if you think about our lending book it's not maybe as standard as every other regionals we tend to be more investment grade we tend be a little bit more focused on people who have capital markets activities or international capabilities or more sophisticated operations so we can serve them with the capital markets teams Randy's built the payments capabilities Ken's built we're making sure we get deposits every time we we lend or certainly as many times as we can so that really makes the lending work because on a standalone basis is you know if chris gorman were sitting here you'd say on a stand-alone basis you know no loan uh earns its cost of capital you have to do this business to make that work and for us this is where you know being a relationship bank shows up so we have the capabilities we find the clients that need them and we make sure that the team shows up and delivers it one proof point to that if you look at our commercial loan-to-deposit ratio it skews very well these are vr peers we've got about 80 billion in commercial loans and 60 billion in deposits but even at the institutional level it's quite good so we have 60 billion of that 80 loan 80 billion loans and 40 billion in deposit in the institutional banks. So it's not just about the capital markets, that's really important, but it's also about the payment side. Very good. Key was an early entrant into the capital and markets businesses with the acquisition of McDonald's securities way back. I remember it well. Okay, in the 90s. And we've seen a lot of attention within your peers on the capital market's business. So how can Key keep and build this competitive advantage in this area? Yeah, I mean, it's in some ways very nice to see that. And, you know, we certainly have watched it. But I, not surprisingly, think that we're doing it quite differently. When we put together KeyBank Capital Markets in 2002, two, so over two decades ago, we took the large corporate lending business at Key and the investment banking business at McDonald, which I was a part of, Chris Gorman was a part of. And we literally brought them together. So our industry groups are full P&Ls, payments, lending, everything that we would do. So the 3.4 billion of revenue that we'll do in the institutional bank, it goes into these industry groups. Our peers, while they have brought these capabilities, in some cases, not broadly, and certainly not as broadly as we have, and some industry expertise, they're still largely going to market geographically, and it just is a different approach. I think ours is more effective, it is a better client experience, it enables us to take any the friction away. Just think if you're geographically oriented, you've got a budget for loans, you don't want to bring in an M&A partner. So there are just conflicts that we did away with literally decades ago. And so I think that's a real differentiator for us. But also, we're not standing still. We, multiple years ago, built out a Unitron's lending capability, a $2 billion fund. We've built ABS capabilities. We built tax equity syndication capabilities. Uh, we just added private capital advising capabilities. So we're constantly, um, you know, adapting to the environment, watching obviously where there's opportunity. Uh, and, uh, you Know, that too is, uh something that, you will continue to do obviously. Very good. I'd like to talk a little bit about talent and bank productivity. And Clark, this is for you as much as Randy. It's never enough, I can tell you that. There you go. Never enough on the productivity. You continue to invest in frontline talent, of course. And how are those investments progressing within the institutional bank? And how should we think about the productivity increases of the new bankers once they come on board? And does that suggest maybe some better market share numbers for you guys as the new banks get up and running? Yeah, I'll speak to the institutional bank and certainly let Clark give you his thoughts. But we watch productivity very closely, as you would expect. and really generally would say it's a 12- to 18-month ramp for bankers as we bring them onto the platform. Some ramp more quickly than that, hopefully more than that don't. But we watch it literally every quarter. We'll sit down with Chris and the leadership team and certainly Clark and the finance team, and we're going through those metrics and focusing on our existing teammates, teammates that we promote into banker roles, and obviously legacy teammates. So we have a rigorous process around it, Gerard. I've been really pleased that our productivity has actually gone up a bit as we've been hiring bankers and adding bankers across our commercial franchise. and I think that that that next wave of growth that you're talking about in terms of productivity increases that's coming at us because you know these hires that you know we really started you know within the last few years they are getting into that maturity phase and so I'm very optimistic about it and you know we've got we've a lot of eyes on it. One follow-up on the hiring of the investment bankers do you find you have more success hiring from the bigger bulge bracket firms or other regional banks and bringing the investment bankers in it really I can't say it's one or the other you know we do hire bankers from from you know much bigger institutions that frankly oftentimes say hey I'm focused on the middle market and I just can't get the product support or the credit support you name it you know to go after that that client set that's that's a great tell but we also have a lot of very productive talent that we we bring in from boutiques that you know generally either provide M&A advice or take companies public and if you really want to serve your clients you know we can we can help you do it in a much broader way so we really have had success both ways I would say though what's not talked about as much but something we're very focused on is that internal development you know we'll have an analyst class of 80 analysts this year we have had our classes growing continuously you know I've been leading key bank capital markets since 2010. And I can remember actually in those early days, because it was on the heels of the financial crisis, we took a couple years where we didn't have a class. And it hurt us for many, many years after that. And we have not done that through any of the recent chop in the market. We've continued with our campus programs, and we will continue to as long as I have a decision or say in that decision, because you've got to be, you know, I think we need to have a destination platform for talent. That's what my vision is. That is, I know what all of our vision is, and that is not only the ability to attract external talent, but it's also for junior talent to have career opportunities and opportunities to grow over the life of their time at Key. We need to do both those things well. Clark, any color outside the institutional bank? I think Randy's point on thought process and inspection is right. So we're looking at kind of vintages of hires, how are they performing versus expectation versus prior years. I think we watch that pretty closely. And I think maybe the most, and by the way, we don't get it all right. So in some cases, we lean into areas where we're having success and pull back on others to figure out why it's not working as well. But I would say pretty consistently, the average productivity has been flat to up, including new bankers. And so to keep that stable while you're adding people who effectively aren't very productive in the first six or 12 months means everybody else is doing their job. Yep. Very good. We'll open it up to questions very shortly. But first, you guys talked about this billion dollars in revenues in the investment banking fees and direct placement fees, and I know Clearwater will help, obviously you already said that in 26 and 7, but as we go forward, what kind of environment do you think we need for you guys to reach those levels? Yeah, I would characterize the current environment, certainly for the middle market and from an M&A standpoint, is not very good. Announced middle market M&a activity is down 11% in 2026, and it was down the last two years. So it's still not picked up, and I would have not expected that if I was here two or three years ago. But we've been fortunate. Our M&As fees are up 15% year to date that we've been able to offset a little bit of that headwind, pull some other levers that, you know, I think are so important, add some new capabilities. But as we think about that target, and it's a target, it's not a destination. You know, we've got tons of headroom across all of our product areas, industry groups. And so, but it's, it're, it, it it's it's goal that we put out internally. certainly long before we announced it externally. But I have no worries that we won't achieve it, even in the kind of environment that we're in right now. If the M&A market picks up or the public equity market picks up for what I'll call regular way, non-SpaceX types of transactions, that would be upside for us. Yep. Why don't we open it up to some, I saw a couple of, let the gentleman come with the microphone. Why don'T we go right here to Mike on your immediate right. Let's assume the stock market today is right and that the AI trade is going to be much slower and longer and costly than you thought two days ago. how would KeyCorp be impacted directly and indirectly? And use your imagination. In other words, justify the supply to the stock based on what could happen. Yeah, appreciate the question, Mike. I haven't been following the markets real closely. I've seen a lot of red on my screen. But in terms of directly, how would it impact us? Very little, because we have very little direct data center exposure. it's less than 1% of our loans. But there's no doubt that our client base is seeing a lot of activity. So the second, third derivative, we absolutely are seeing that. And we obviously have a big power business, which is providing the capital to create the electrons to serve that build-out and certainly the other needs of the country. I'm more in the camp that you know maybe we don't get to six trillion of spend on new data centers between 2025 and 2030 and the math I've seen that was only about 25 percent of that was going to be spent in 25 and 26 and we've seen what that has done to the economy and and it's created some some pretty robust growth if it gets extended I think that's good I think it's gonna be better for our clients I think it's going to create less of a risk of a big bubble. I think its going to less price pressure. And so I'm fine with it. I don't know what it's gonna do to the stock market today or tomorrow. But I don' think that we're not going to need that capacity. The way we look at it, data center capacity is at 99% plus. The stuff that's being built is, you know, by and large, fully contracted. And, you know, if you look at data center lease rates since 2020, they've been growing at 9% per year, and they are expected to grow at 9 percent through 2030. So I think there's a lot of demand out there, but if it gets slowed down and extended, I'm fine with that. Another question up here. I guess a question on Bank of Productivity, and maybe this is a question for both of you. Clark also given your role as head of technology. How is AI helping Bank of productivity, and what actions are you taking there? Yeah, I would say our approach to AI is you've got what I'll characterize as bottoms up, no regrets use cases and then we've got some big initiatives maybe I'll let Clark speak to those but within the institutional bank we have literally 35 AI use cases that we're either you know and we're exploring we're you know we're putting through our tech team so I mean it's it's everywhere. We haven't seen what I characterize as any major uplift in productivity yet. Do I think that we will see some? Yes. Can I size it for you sitting here today? No, but I can tell you there is broad scale usage and that some of the use cases are quite encouraging. So, you know, I'm optimistic that we will see productivity lift. But I also don't think that what we do is going to be, you know, take the human element out of it and the trust that needs to be built through, you know, humans working together. So, I am realistic about that as well. I think out back there's a question you know you wanna you wanna have to go I'm sorry go ahead Clark yeah so look I think the the way we're thinking about productivity is right we have lots of people creating whatever it is 2% on the margin productivity which is hard to aggregate and we're gonna let people continue to do that I think to Randy's point about some bigger areas what we're trying to do is create sort of flywheel client and banker experiences that take advantage of this technology in a way that isn't pick up the phone and call your client and ask them for this document while you're doing underwriting for example right that is just sort of manual back-and-forth process that still happens today if we can do that you free up the banker to not be in that process you free-up the team to onboard that client faster you realize revenue faster you move on to the next client faster so it starts to compound in a really meaningful way and so we're thinking about that in onboarding and servicing and underwriting you know these kind of big broad platforms that are about creating great you know streamlined client experiences making it easy for the banker so the banker's not caught up in the gears and then making everything move more quickly and we think those you know we don't know yet exactly what that looks like but we think that those could be pretty meaningful meaningful and watch for value i'll back and then martinez sandler um you mentioned the m a environment is being not very good and we've seen a lot of large strategic deals but sponsor-backed activity i'm curious what your what your take on that is are you optimistic that that changes and we see more monetization than liquidity return to lps and how does the political environment affect that in your view? Is there a window now to do stuff before 28 elections, or is that the wrong way to think about it? Yeah, so I probably wouldn't think about it in the context for the middle market, the election. But I do think more stability from a tariff standpoint, from a rate standpoint, from an inflation standpoint, would be would would certainly be I don't know if I unlock is too strong a word but would certainly help the one thing to keep in mind and you know we we we've been talking about private equity you know monetizing these investments for quite some time they have they have a there's a limit to the life of these funds that these investments are in and so at some point they have to be sold. And so we will get to that point. And I do think the combination of that, along with some more just what I'll call calm waters, will produce more activity. But on our side, we're looking for not any huge pickup in that activity to hit the numbers we're talking about. I think there's upside if we, you know, if we get normalization there. I think at this point we're sort of assuming it kind of keeps going at it current course and speed scott thanks scott c for std con so i guess you know one of the um i guess advantages of your guys business model has always been the optionality right like you can either do traditional investment banking or you can put stuff on the balance sheet i'd imagine in kind of choppier waters like we've got now that optionality kind of kicks in so you know is that the kind of stuff you're are you having different conversations now than, say, 90 or 180 days ago. And from your standpoint internally, how does your risk appetite change when relatively more stuff than you might have anticipated does go on the balance sheet or could? You know, how do the discussions overall end up changing? Yeah. Thanks for the question, Scott. I would say nothing has changed, you know, materially. We certainly saw rates move up, not immaterially, at the end of the third quarter and beginning of this quarter, but they've come down quite rapidly. I do think we'll see a little bit less commercial mortgage banking fee revenue in the fourth quarter, which will probably result in some loans staying on our balance sheet a littlebit longer, but it's not meaningful given the magnitude of those changes and the overall context of the environment. To the extent that we got into a meaningful rate escalation environment, absolutely, we'd see things. And just as we performed in the last big rate move, You know, we feel really good about the quality of the underlying real estate, about the sponsors, about how those deals have been structured. You'll have to do some work around the edges, and that's why we work with sponsors that, you know, we know have liquidity, but, you know, feel really really good about how we've underwritten that portfolio, but that's where I'd look first. Yeah, and I think, I mean, the comment I'd make from my seat is that business model, I think has been very enduring for us, right? We're trying to do the right thing for the client in the moment and not hit a capital markets number or hit a lending number. We just want to do the right things. And I think because of that, a lot of that capital markets revenue is repeat client business. A lot of lending is repeat business and most of it is connected. So we can talk about a path to a billion dollars in capital markets, but the reality is that's a huge number of revenue with the client base that's doing those capital markets deals because it's all bigger relationship and if i look at range's business today about just just north of a third of his revenue is credit revenue so when i think about the return profile of that we're lending money using the balance sheet using capital but we're getting paid two-thirds in fees as a follow-up question on commercial real estate you folks are in a unique position because there's is such a large mortgage servicer. Yep. And you can see, and then with the special servicing, you can say into the pipeline, what are you guys seeing there in terms of special servcing? Is the product shifting from commercial office to multifamily or another product line? Yeah. What's the color? Yeah, so we're the second largest commercial mortgage servicer, We're a bank-owned commercial mortgage servicer in the U.S. We've got about $750 billion of AUM. Great business for us. Counter-cyclical, drives about $10 billion of low-cost deposits. And of that $750, we're probably $270 billion of special servicing within that portfolio. it's been pretty stable this certainly this year and so and it's kind of to my earlier comments to Scott the chop that we saw from a rate standpoint again if that were to continue its counter cyclical we'd see that those numbers spike up our active special servicing is just right about 10 billion would that too has also been stable and the hot spots are you know continue to be urban BNC office you know there are there are pockets of multi-family that are are are a bit troubled areas that were overbuilt but you know very manageable it's it's a it's pretty much the same story you've been hearing yep and when you see properties come into the special servicing is it because there's very large vacancy rates and the owners just can't afford to pay the mortgage, or is it a refinancing problem where they got in at much lower rates five years ago? Yeah, the trip would be a default. Okay. Okay, so it would be a payment default, maturity default. You can also have a trip as a result of the maintenance of the property. There are requirements, as you might imagine, that the lenders have if they step out of line. Got it. Maybe we could touch on, when you look at private credit, it's grown quite dramatically. How competitive is it for your middle markets business, and can you partner with any of these private credit guys? Yeah, I mean, we have a lot of, we're frenemies with private credit. As you heard me say earlier, we've got a big business that, you know, private credit is our client. We compete with private crédit in the syndicated loan market, certainly with sponsor M&A activity. We have seen a pullback in private credit, not surprisingly, which is good for our on-balance sheet and syndicated lending businesses. we also have a very unique view into private credit because when we lend in those warehouse facilities it's an asset-based loan and the collateral are the underlying loans and we get reporting on the performance of those borrowers that have taken out those loans and what I can tell you is that we really did not see and haven't seen you know, any kind of credit issues. It really has been a redemption issue for the industry. But, you know that's, that's the nice thing about our model. We were, we're, we were able to pivot. And so we're we're but, but I don't see any credit cracks at this point. Great. We're running out of time. So maybe as we wrap up here for both you and Clark, What do you think investors underappreciate the most about the institutional bank and its ability to contribute to Key's growth and returns over the years? Oh, gosh. Aside from the top talent, of course. I don't know if that's underappreciated. No, you know, I think that people really, I don't think that they, investors value our fee revenue stream the way that I think that they should. We, I've been leading key bank capital markets since 2010, and our investment banking fees have compounded at 7 plus percent over those 16 years. I think most investors would take that revenue stream. And so I think that would be the most underappreciated. And when you put the payment side to it, remember $40 billion of deposits in the institutional bank, up against our $60 billion in loans. That's a pretty powerful combination. Clark, something from your opinion? Look, I think, that's right. I think the consistency of the relationship proposition in particular, I mean, the businesses that we've had since I've been at Key that were indirect, we're not in anymore. We really have basically doubled down on we're going to do business with clients that we pick that value what we have to offer. And when we do that, I think we do it extremely well. We're just trying to make that the sort of everyday activity. And I think that's starting to show up in the performance. Got it. And with that, we've run out of time. and please join me in a round of applause for thanking Clark and Randy. And we'll see you over at...