Good morning, and welcome to KeyCorp's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Mauney, KeyCorp Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to thank you for joining KeyCorp's fourth quarter 2024 earnings conference call. I'm here with Chris Gorman, our Chairman and Chief Executive Officer; and Clark Khayat, our Chief Financial Officer. As usual, we will reference our earnings presentation slides, which can be found in the Investor Relations section of the key.com website. In the back of the presentation, you will find our statement on forward-looking disclosures and certain financial measures, including non-GAAP measures. This covers our earnings materials as well as remarks made on this morning's call. Actual results may differ materially from forward-looking statements and those statements speak only as of today, January 21, 2025, and will not be updated. With that, I will turn it over to Chris.

Thank you, Brian, and good morning, everyone. Our fourth quarter results marked another significant milestone for Key as we continue our journey to realize our full earnings potential. We reported an EPS loss of $0.28 per share. However, after adjusting for the impact of our second strategic securities repositioning, which we completed in December, EPS was a positive $0.38. In the fourth quarter, we took the opportunity to incur approximately $50 million of elevated expenses that we would not expect to recur. Our revenue momentum is clearly defined and significant. Adjusting for the securities repositioning, revenue was up 11% sequentially and up 16% versus the prior year. Both net interest income and adjusted fees grew double digits. Regarding NII, while loan demand remained soft, we exceeded our fourth quarter exit rate commitment by driving another strong quarter of client deposit growth, up 1.5% sequentially and 4% year-over-year. Concurrently, we continue to execute our disciplined and proactive deposit repricing plan. Deposit betas have been stronger than expected, 40% from the first rate cut. Additionally, I continue to be encouraged by our strong credit performance. Credit migration improved for the fourth consecutive quarter. Criticized loans were down another $500 million and net charge-offs were down $40 million sequentially. Nonperforming assets are peaking, and assuming the macro environment remains constructive for the balance of the year, we expect nonperforming loans to begin to decline by midyear. For the full year, I am proud that we met or exceeded the financial targets on an operating basis that we detailed for you at the beginning of 2024. Net interest income was in the middle of our targeted range, and our exit rate was favorable. Fee growth was stronger than expected, more than offsetting the related expense levels. We achieved meaningful positive operating leverage in the second half of the year. Full year net charge-offs were in line with guidance. Throughout the year, we continued to lay the groundwork that positions Key to continue to deliver outsized growth and operating leverage in 2025. In consumer, we grew relationship households in excess of 3% for the second consecutive year, including growth of 5% to 8% throughout our Western markets. In our Eastern markets, we continue to grow households while continuing to penetrate the substantial wealth opportunity that exists in our scaled, mature markets. As of year-end, our assets under management reached another record of approximately $61.4 billion. Sales production in our mass affluent segment also was record-setting. We enrolled an additional 5,000 clients and added over $500 million to the platform in the fourth quarter. Further, in the last two years, our mass affluent segment has added nearly 40,000 households with over $2 billion of AUM and almost $4.5 billion of total client assets. Concurrently, we have hired over 170 wealth professionals onto our platform, and we plan to hire another 60 or so in 2025. Turning to commercial payments and deposits. Commercial payments revenue grew mid-single digits year-over-year for the fourth quarter, and deposit balances were up 3% year-over-year while being very disciplined on rate management, a testament to our relationship model. Over the last decade, payments have been an area of focus and consistent investment. For example, we were one of the first banks to build embedded banking capabilities. We will continue to develop our differentiated platform with plans to invest in additional software advisors and relationship bankers, enhanced digital and analytics tools, while concurrently continuing to invest in embedded banking. More broadly, in the middle market, we recently expanded our presence in Chicago and Southern California. Our new teams have hit the ground running. New loan volumes improved for the third consecutive quarter, and our pipelines are nearly double those of a year ago. I am confident in our ability to drive commercial loan growth this year. Finally, our investment banking results were outstanding for both the fourth quarter and for the full year. Fourth quarter fees were a robust $221 million, and full year fees were the second strongest in our history. Growth this quarter was broad-based across loan syndications, M&A, DCM, and ECM. In 2024, we raised over $125 billion of capital for our clients, with $54 billion raised in the fourth quarter alone. Importantly, we are off to a strong start in 2025. Our pipelines, most notably M&A, remain at historically elevated levels. We successfully recruited senior bankers last year and plan to hire another 10% in 2025. Subject to the usual market caveats, I remain optimistic with respect to the trajectory of our investment banking business. In addition to the investments I just described, I am also proud of the progress we made on a number of technological fronts last year. We completed two major core modernization projects, our core commercial loan platform, and our derivatives platform. We also made significant progress on our migration to the cloud, including our contact center technology and our consumer online banking portal. We expect to complete our cloud journey this year. At this point, all but two of our major systems and half of our apps have been successfully migrated to a hybrid cloud environment. In 2025, we plan to increase our overall tech spend by about 10% to $900 million, driven by transformational and change-the-bank spend. Our ultimate objective is to make it easier for our clients to bank with Key and easier for our teammates to better serve the needs of our clients. Finally, I want to commend our team for the successful closing of the Scotiabank minority investment prior to year-end. Relatedly, I also want to welcome two new Board members, Jackie Allard and Somesh Khanna. Jackie and Somesh bring broad-based financial services, digital, and technology background that I believe will be additive to our already strong Board of Directors. I'm also pleased to welcome Mo Ramani to Key as our new Chief Risk Officer. Mo brings a wealth of industry experience, most recently serving as Deputy Chief Risk Officer at a large Category 3 bank. As we turn the page to 2025, we celebrate Key's 200th anniversary. This remarkable achievement is only possible because of the hard work of our teammates, both current and former, and their collective commitment to our clients, our communities, and our shareholders. I am grateful for their dedication to our company and proud to be part of their team. We entered 2025 from a position of strength. At year-end, our reported common equity Tier 1 ratio was 12% and our marked CET1 ratio was 9.8%, both in the top quartile of our peer group. We have pronounced tailwinds across both our net interest income and our high-priority fee-based businesses. Our credit profile remains strong. While we plan to make targeted investments in additional capabilities this year, we will remain disciplined with respect to our overall expenses, which we expect to grow in the low to mid-single-digit range. As a result, we will drive both fee-based operating leverage and a 10% or better overall operating leverage in 2025. In short, we are well-positioned for a very strong year in 2025 and an exit rate that will further position Key for outsized growth again in 2026. With that, I will turn the call over to Clark to review the financial results and our 2025 outlook in greater detail.

Thanks, Chris. Starting on Slide 4. We reported a fourth quarter EPS loss of $0.28, or on an adjusted basis, a positive $0.38 per share. Late December, we sold securities with a market value of roughly $3 billion with a weighted average yield of about 1.5% and an average duration of a little over eight years. We fully reinvested the proceeds prior to year-end in primarily three to five-year duration MBS at a yield pickup of about 400 basis points. These new securities will provide liquidity and capital benefits relative to what was previously owned. Consistent with our expectations when we announced the transaction with Scotiabank back in August, we utilized roughly half their capital injection to complete two securities portfolio repositionings, one each in the third and fourth quarter. We sold in total approximately $10 billion in market value of securities or almost 30% of our AFS portfolio and over 50% of the long-dated securities that were yielding less than 2%. Together, these actions added $54 million to 2024 net interest income and will add about another $270 million in 2025 net interest income. Revenue trends were impacted by the losses from the securities sales just described. On an adjusted basis, revenue was up 11% sequentially and up 16% year-over-year, with strength in both NII and fees. Expenses of $1.2 billion were up on an operating basis, reflecting the strong fee quarter and some charges we took to enable us to hit the ground running in 2025. I'll go into these in more detail later. On an adjusted basis, we achieved roughly 400 basis points of positive operating leverage year-over-year. Credit costs of $39 million included $114 million of net charge-offs offset by a $75 million loan loss reserve release. The release was primarily a function of lower loans and a decline in criticized loans, and $25 million specifically allocated to charge-offs we took in the quarter. Our CET1 ratio increased to 12% and tangible book value per share increased roughly 17% year-over-year. Turning to Slide 5. Full year 2024 EPS was impacted by the securities portfolio repositionings. Adjusted for these actions and FDIC special assessment costs, EPS was about $1.16. Net interest income was down about 3.5%, or the middle of the target range we provided last January. Scotiabank investment-related benefits added about 150 basis points to growth, offset by an $8 billion decline in loan balances over the course of 2024 and near-term impact from rate cuts late in the year. Our fourth quarter exit rate NII hit the $1 billion-plus target that we had set at the beginning of the year, even after adjusting for Scotiabank impacts. Adjusted fees were up 7%, meaningfully better than the 5% plus guide we provided at the start of the year as Investment Banking had its second-best year ever. Commercial mortgage servicing, wealth, and commercial payments also posted strong results. Expenses were up almost 3% compared to our original guidance of flat to up 2%, primarily due to the strong fee environment and the additional expenses we noted. Credit costs improved, reflecting allowance releases this year versus builds in 2023 and net charge-offs were 41 basis points, at the high end of our original range of 30 to 40 basis points, due in part to the lower loan denominator. Moving to the balance sheet on Slide 6. Average loans declined 1.4% sequentially and ended the quarter just north of $104 billion. Decline reflects tepid client demand, active capital markets, our disciplined approach as to what we're willing to put on the balance sheet, and the intentional runoff of low-yielding consumer loans as they pay down and mature. As we've mentioned before, our business model provides clients with the best execution capabilities, whether it's on or off our balance sheet. In the quarter, we raised $54 billion of capital for our clients. And as Chris mentioned, had a very strong quarter of investment banking fees. Only 12% of the capital we raised in the quarter went to our balance sheet. On Slide 7. Average deposits increased 1.3% sequentially to nearly $150 billion, reflecting growth across both consumer and commercial deposits. Client deposits were up 4% year-over-year. On a reported basis, noninterest-bearing deposits remained at 19% of total deposits. Similarly, when adjusted for the noninterest-bearing deposits in our hybrid accounts, that percentage remained stable at approximately 23%. Deposit costs declined by 21 basis points, with interest-bearing costs decreasing by 25 basis points during the quarter. Deposit betas have been stronger than expected, reaching 40% through the fourth quarter and closer to 45% through the month of December. Slide 8 provides drivers of net interest income and the NIM this quarter. Taxable equivalent net interest income was up 10%, and the net interest margin increased 24 basis points from the prior quarter. While the increase was driven largely by the Scotiabank investment and related securities repositioning, we were able to mitigate near-term impact from Fed rate cuts and lower loans with continued client deposit growth momentum, higher deposit beta, and other funding optimization initiatives. Overall, interest-bearing liabilities declined by 35 basis points this quarter. Turning to Slide 9. Reported noninterest income was negative due to securities losses. Adjusting for this, noninterest income was up 18% year-over-year. Investment banking and debt placement fees increased $85 million, up over 60% from the prior year. Indications that M&A fees drove most of the increase, while DCM, ECM, and commercial mortgage activity augur nicely as well. Elsewhere, commercial mortgage servicing fees grew over 40% year-on-year, and wealth management fees grew 8%, reflecting strong business momentum in these areas. As of 12/31, we serviced over $700 billion of loans in our commercial mortgage servicing business, and our wealth business assets under management grew to another record level of $61.4 billion. On Slide 10, fourth quarter noninterest expenses were $1.2 billion, up 12%, both sequentially and year-over-year, adjusting for selected items in the year-ago quarter. Versus the year-ago quarter, growth was driven by higher incentive and stock-based compensation, reflecting the strong capital markets activity, a higher level of investment spend this year, and some unusually elevated other expenses this quarter. Sequentially, the increase was driven by higher compensation related to strong fee environment, investment spend, market and employee benefits cost, and some seasonal and miscellaneous other expenses. The bottom right of the page, we provide the primary drivers of the roughly $50 million of unusually elevated expenses in the quarter that Chris referenced earlier. We would not expect those elevated expenses in 2025, and therefore, I would not use the fourth quarter noninterest expense run rate as a guide for the year. I'll cover this in more detail in guidance shortly, but as we've said, we will remain very disciplined on expense management efforts throughout 2025. As shown on Slide 11, credit quality is stable to improving. Net charge-offs were $114 million, down 26% sequentially or an annualized 43 basis points on average loans. Nonperforming assets were up a modest 4% sequentially and remained low at 74 basis points of loans. We believe NPAs are peaking and expect them to decline by mid-2025, assuming no material adverse changes in the macro environment. Criticized loans declined by 7% in 4Q with broad-based improvements across C&I and commercial real estate. Credit migration across the entire portfolio improved for a fourth consecutive quarter and is back to the levels of two years ago. We expect criticized loans will continue to decline from here as tailwinds from recent rate cuts are not yet reflected in clients' financial statements. Turning to Slide 12. Our CET1 ratio reached 12% as of December 31, and our March CET1 ratio, which includes unrealized AFS and pension losses improved to 9.8%, both of which we believe are at or near the top of our peer group. Our tangible common equity ratio also improved to north of 7%. Slide 13 provides our outlook for full year 2025 relative to 2024. Ranges are shown on an operating basis. We expect average loans to be down 2% to 5% with year-end 2025 balances flat to where they ended 2024. Just a reminder that the down 2% to 5% is a measure of full year average loans, not a reduction from the end of 2024. Embedded within this guide, we expect consumer loans to decline by approximately $3 billion over the course of 2025 and offset by growth in commercial loans. Net interest income is expected to be up roughly 20% and for a second straight year to be up north of 10% on a fourth quarter to fourth quarter exit rate basis. We expect NIM to be 2.7% or better by Q4. We expect noninterest income to be up at least 5% with upside if capital markets conditions remain constructive. We expect expenses to be up 3% to 5% of this year's $4.5 billion depending on the fee environment, and we remain committed to achieving fee-based operating leverage this year, meaning on a percentage basis, fee income should grow faster than expenses. We expect the full year net charge-off ratio to be in the 40 to 45 basis point range or stable to fourth quarter levels with NPAs and criticized loans improving over the course of the year. Finally, we expect the tax rate to be 21% to 22% or 23% to 24% on a taxable equivalent basis, reflecting the expected higher level of earnings and some uptick in state tax rates. Finally, on Slide 14, we lay out the drivers behind our 20% growth expectations for net interest income in 2025 and 10% plus growth expectations from fourth quarter to fourth quarter. Our assumptions are conservative relative to this past Friday's forward curve and that we have assumed two rate cuts in 2025, one in May and one in December. You can see over half of the growth comes from the Scotiabank related actions and the amortization from swaps we terminated in late 2023, and another good chunk comes from ongoing fixed rate assets and swaps repricing. Given the structural nature of much of this, we have a high degree of confidence it will materialize. Primary swing factors relate to the degree to which we can drive quality commercial loan growth this year and continue to manage deposit betas as well as the shape of the yield curve. And if our clients continue to view the capital markets as a better option to fund their growth and bank debt, we're fortunate to have strong debt placement capabilities at Key, and we would monetize these relationships through fees, not net interest income this year as we did this past year. With that, I'll now turn the call back to the operator to provide instructions for the Q&A portion of our call.

Our first question today comes from John Pancari with Evercore ISI. John, please go ahead.

Good morning.

Good morning, John.

Could you elaborate on the 20% net interest income outlook? You've maintained this outlook even after completing the acquisition of The Bank of Nova Scotia stake and considering the steeper curve. I appreciate the insights provided, but can you clarify the rationale for keeping the 20%? It seems your assumptions regarding the Fed might be conservative. Is there any additional conservativeness factored in, and where might there be potential upside to this expectation as you look ahead? Thank you.

Sure. Thanks, John. So let me, just for the benefit of everybody, maybe go through the walk one more time, just so we're all on the same page, which would be Slide 14. If you just go kind of bucket by bucket in the waterfall, you have a big chunk that's just the full year incremental pickup from the securities repositioning of Scotiabank investment. Similarly, on the cash flow swaps, we terminated back in October of '23, you get the full year increment there as well. And then in the fixed asset repricing and swap bucket, you have the full year incremental impact of the US treasuries that matured last year. You have about $5 billion plus of cash flows, swaps that will mature this year at about 1.8%. We put some other forward starters on that come in later this year throughout the year at about 3.8%. And then you have the reinvestments on cash flows off the investment portfolio, which you referenced will come in potentially at a higher rate. All of that, we feel like it's not fully baked, but it's pretty well understood with some plus or minus in there. The last two pieces really are the business activity component. So as we mentioned, we'll continue to remix the loan portfolio into quality commercial loans away from consumer fixed-rate loans. We'll continue to grow quality customer deposits and manage those betas and deposit costs. And then we've got some ability to optimize other liability costs as we move through the year. And just as a reminder on that, fourth quarter deposit costs in total, down 21 basis points, interest-bearing deposits down 25, and interest-bearing liabilities in total down 35. So we've continued to pull that lever where we can. And then the last piece there is just the full year impact of the size of the balance sheet on average relative to 2024 and the rate associated with rate impacts with that. So as we noted, really the factors here are going to be around loan growth and the business activity between loans, loan balances, deposit and pricing on deposits. As I've said, we've worked really hard to get our balance sheet to a more resilient place here. We believe today we're fairly neutral to rates, and we can effectively manage through a variety of rate environments. That said, the good question there of why not more than 20. If we go back to September, when we did the first repositioning and through the Q3 call, we have had some things lean to the positive, as you noted, namely fewer cuts or conversely higher reinvestment rates and having closed that second tranche a bit earlier than we planned, meaning we get the second portfolio trade done in '24 and coming into 2025 clean. The counter to that really is starting loan balances. So we're down about $1.5 billion in average loans from Q3. We would have expected that to be close to flat. So that pulls through the full year. As I mentioned, though, I think we're in very good shape to manage through a range of rate scenarios, and we're looking to support client loan demand. If we can grow commercial loans as planned, we will be in good shape relative to that 20%, and our NIM should get close to that 2.8% level by year-end. If we see stronger loan demand, and we can obviously support that, there could be some upside. But the reality is the industry has been waiting for that loan demand to manifest now for several quarters. And if it doesn't, we'll have other levers to pull to make sure we can hit the 20%. Lastly, the environment right now is still a bit uncertain despite improving client optimism, which I'm sure Chris will touch on. And we've got a new administration take seat here in the last 24 hours. That administration appears to be getting to work very quickly. So I think we'll all need a little bit of time to understand the moves and let the market digest them. But I'd say the short story is we're very confident in this guide, and we think we're well situated to take advantage of the market as it evolves.

Thank you, Clark. I appreciate the information. Could you elaborate a bit more on your loan growth assumptions? I believe you mentioned it implies that the end-of-period figures are about flat. Please correct me if I'm mistaken. You're not the first to adopt a more cautious outlook given the uncertain loan demand environment. I'd like to know more about what you're observing regarding commercial borrowing activity and where the opportunities lie. Thank you.

Yeah. So I'll hit a couple of probably numbers here, and then I'll let Chris provide some kind of qualitative client feedback. So, we did see commercial loans stabilize and actually even pick up a bit at the end of the fourth quarter. You're right on an end-of-period loan kind of flattish through the year. Just remember, underneath that, $3 billion of consumer loan runoff and about a 2% to 4% increase in the commercial loan portfolio. So, I think relative to others, that's fairly consistent on the commercial loan side. And again, Chris will touch on this, I'm sure, the pipelines continue to be very robust, and it's really just a question of pull-through at this point.

Sure. Thanks for the question, John. It's interesting that we're consistently engaging with our clients. Recently, we conducted a survey with around 700 of our middle-market clients, and 80% expressed strong confidence in their growth prospects, which is positive. However, we haven't yet observed significant investments in property, plant, and equipment. I believe they are just beginning to consider that now. Typically, there’s an 18-month delay associated with such investments. Clients were likely waiting to understand the tax policies and the political landscape. Another factor that could drive loan growth is that utilization has been relatively flat at about 31%; our normal levels are around 35% to 36%. Each percentage point of utilization corresponds to roughly $700 million in outstanding loans for us. Personally, I feel that the economy is starting to pick up momentum, although inflation doesn't seem completely under control. Additionally, if we anticipate changes in tariff policy, businesses may start buying in advance to bolster their inventory. Our M&A backlog is also at a historic high, and there remains a significant amount of capital not yet deployed. For these reasons, we believe loan growth is on the horizon. Here at Key, we have consistently outpaced the H.8 data on commercial loans, with the notable exception of 2023 when we were actually reducing our risk-weighted assets. Although the opportunity hasn’t fully materialized yet, the increase in client interactions leads me to believe that when the time comes, we will be ready to seize it.

Thanks, Chris. Appreciate the detail.

Our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

Hey, good morning.

Hey, Ebrahim. Good morning.

Good morning. I wanted to follow up with you, Chris, regarding the potential for an increase in M&A activity. We're seeing significant transactions being announced despite ongoing policy uncertainty. Since you have a deep understanding of both businesses, could you provide historical insight on whether M&A can increase without a rise in lending demand, or customers taking on more leverage? Considering this may affect bank balance sheets or capital markets, I'm curious if the strong pipelines you've mentioned suggest that an uptick in M&A would necessarily lead to increased loan demand.

It does, Ebrahim, to some degree. And obviously, there's a lot of stock-for-stock deals. No question about that. But keep in mind, what a huge force the private equity market is and how delayed they are in actually participating with $1 trillion on the sideline. Yes, there'll be less leverage, but there will still be leverage. And so there's no question that a robust M&A market is good for lending because usually, there's large deals and out of those large deals on smaller deals, and so it's very good for the lending ecosystem to have a robust M&A environment.

Got it. And maybe one for you, Clark. Sorry if I missed it, if you gave a specific guidance in terms of deposit growth. Give us a sense of what you're doing on the funding side on deposits? Is there still some remix that we should think about? And how should we think about just the average size of the balance sheet in terms of average earning assets relative to what you reported for fourth quarter? Thank you.

Sure. So, we continue, I think, do a very good job with customers on the deposit side, both balances and pricing. We'd expect as we go through the year for that to be stable to slightly up with continued client deposit growth. So, we'll continue to remix out of brokered where it makes sense, which we've been doing, as you know, now for several quarters. Some of that also will depend on where the loan book goes and just the overall size of the balance sheet. So again, continue to feel really good about our primacy focus and how that's translating to engagement with clients, balances, and again, overall pricing on those deposits.

Got it. If you don't mind clarifying just average earning assets, how we should think about that trending from here?

I'd expect it to be relatively flat throughout the year.

Got it. Thanks for taking my questions.

Yep.

Our next question comes from Bill Carcache with Wolfe Research. Please go ahead, Bill.

Thank you. Good morning, Chris and Clark.

Good morning, Bill.

Chris, you've talked in the past about an operating environment where you envision Key balance sheeting less risk and focusing more on generating fee income in your role as sort of a credit facilitator for your clients. Is that a fair characterization? And maybe if you could just update us on how you're thinking about the impact of a more pro-growth administration, just trying to think high level about how to think about the trajectory of your fee income mix over time given the investments that you're making in payments, wealth management, investment banking, and over time, do those investments sort of affect that sort of, I guess, remixing?

Thanks for the question, Bill. Currently, we have approximately 60% net interest income and 40% noninterest income, which I find to be a favorable mix. My goal is to ensure we grow both areas. Depending on market conditions, we may focus more on one than the other. At this moment, with many markets open, we can better serve our valued clients by raising capital in different ways. When markets become more unpredictable, I believe we'll focus on expanding our balance sheet significantly to support our clients and prospects. From my discussions with customers, there is a positive sentiment regarding the new administration, with expectations of an improved regulatory environment. This could benefit our M&A business, which has faced hurdles in deal approvals. I anticipate a substantial improvement in that area, leading to increased optimism for faster and more effective operations.

That's really helpful, Chris. Thank you. And if I may follow up, Clark, on your comments about the ability to generate greater fee income growth as clients continue to take advantage of tight credit spreads and fund themselves through capital markets. Do you think we'll need to see credit spreads widen, and to what extent do you think that needs to happen before banks broadly, and Key more specifically, experience a notable increase in loan growth, considering, as you mentioned, we've been waiting for a long time for this to happen?

Yeah. So, look, one, maybe just one clarification there, which I know you know, but I think it's just worth stating. Our goal when we serve clients is to find the best landing spot for them, whether it's our balance sheet or the capital markets. When the capital markets get moving like they were in the fourth quarter, where we only put 12% of that capital we raised on the balance sheet, we'll put them into the capital markets, and we're happy to continue to serve them. I think importantly, and this is why you hear us talk about so much deposits and payments, we continue to get that business even if we're not getting the loan. The other thing I would say is, in my time here at Key, which is going on kind of 12, 13 years, the one thing, as Chris noted earlier, that I've seen us do consistently with the noted exception we already raised is to grow quality commercial loans when they're available. So if the bank market is out there, and it's the right thing for clients, I have confidence we will build the loan book. But if in the near term the capital markets are the most advantageous place for clients, that's what our business model is, and that's what we'll continue to do.

And Bill, the only thing I would add, where banks, I believe, always will have an advantage, whether it's the private capital markets or the public debt markets, is banks are a lot more flexible. And when things get choppy and when spreads start to blow out and structures change, that's when I think clients and prospects really go to their banks. And I think that's when we, as an industry, have an opportunity to really serve our customers.

Thanks, Chris and Clark. Very helpful. Appreciate you taking my questions.

Yep.

Our next question comes from Manan Gosalia with Morgan Stanley. Please go ahead. Your line is now open.

Hi, good morning. Can you discuss your ability and willingness to undertake more securities repositioning? Considering that CET1, including AOCI, is nearing 10% and you will be accumulating more capital, with AOCI impacts decreasing and loan growth remaining flat, why not increase efforts in the securities repositioning area?

Hi, it's Chris. So we're constantly looking at what's out there in the marketplace and what we can do around the edges. And we've done a bunch of those things, and we'll probably continue to look at those. But in terms of major securities repositioning, you're not going to see us do something of the order of magnitude that we did either in the third quarter or the fourth quarter.

Got it. Is there a CET1 ratio, including AOCI, that you're targeting that you don't want to go below?

There's not a target yet. The reason I say that is that the capital rules are not finalized. We currently have a strong capital position and we'll continually assess what we believe is the optimal level of capital. However, we will establish new targets once the capital rules are finalized.

Got it. And maybe if I can just follow up on the securities question. I think you mentioned about 50% of long-dated securities are currently yielding. Well, you've already sold about 50% of long-dated securities yielding less than 2%. Is there a large chunk of that remaining 50% that matures in more than two years from here?

Yeah, I don't have the exact percentage in front of me, but there is some component of that that is going to still take some time to work through.

Got it. Thank you.

Sure.

The next question comes from Matthew O'Connor with Deutsche Bank. Matthew, please go ahead.

Good morning. First, just a quick clarification. Clark, I think I heard you mention the NIM could reach 2.8% in the fourth quarter if loan growth tracks what you're expecting. But I think you had put 2.7% in the deck. Maybe I misheard, but just clarify that. Thanks.

I intended to mention that we'll approach 2.8%, which aligns with the 2.7% plus. If we achieve more loan growth than anticipated, we have the potential to get closer to that figure.

Okay. That's helpful. And then just separately, kind of bigger picture. I know a lot of focus on the capital and the loan growth. But just conceptually, Key went from a bank that didn't have as much capital as you wanted, had the RWA diet, had to pull back on lending, and that impacted some of your fee categories. Like, how do you get the company kind of more front-footed like, hey, we've got all this capital. We've got more than peers. Let's kind of restart some of these relationships that maybe have been on pause. How do you just mobilize the people internally? How do you communicate that to customers now that you're so strongly positioned in such a competitive environment? Thanks.

Sure, Matt. So that process is well underway. As you know, even when we were going through our shrinking of RWAs, we were investing heavily in the business, investing heavily in front-end people, focusing on what we called our asset-light businesses, which were deposits and payments, our wealth business, and our investment banking business. The RWAs that we were able to shed some of them actually was just recategorization, so those didn't impact anyone. And the other RWA that we were able to free up actually were non-relationship clients. So, we've been out there for some time, sending the message to the troops. They're out there aggressively in the market. We hired a team in Chicago. We hired a team in Southern California. They're off and running. So, it's a great question, and it's one I've obviously been very focused on because when you make changes like that, you've got to make sure that you communicate them. And we've spent a ton of time out in the field, making sure our team is engaged and out there doing what we're capable of.

Okay. And then just when you put that all together, how do you think about your commercial loan growth versus the H.8? Obviously, it could fluctuate quarter-to-quarter. But as you think out over the next four, six, eight quarters, how would you peg your growth to H.8, best guess?

Certainly. Over the years, as you know, we've consistently outperformed the H.8 in commercial loan growth, with the notable exception of 2023, which was focused on reducing RWAs. We anticipate our team will outperform the H.8 in commercial loans moving forward, and that is something we emphasize to them.

Okay. Thank you very much.

Sure.

The next question comes from Mike Mayo with Wells Fargo. Mike, please go ahead.

Hi, I think I ask this every call. I mean, I get the Fed, you guys don't care if it's your approach to serving clients through capital markets or lending; whatever the client wants is what you'll do. So maybe if net interest income does a little worse and capital markets do better, you're just completely fine with that. Is that a fair statement?

You're absolutely right, Mike. We consider ourselves fortunate to have a platform that allows us to serve our clients in the best way possible, and we are confident that this is our primary focus.

So, what percent of your middle-market client base has access to capital market? And how much do you think that impacts your loan growth?

I don't have that number readily available, but I mentioned the 700 middle-market customers that we surveyed. I can share that our capital markets team contacts all of them since they fall within our industry verticals. The percentage of middle-market companies that actually utilize the capital markets is likely in the range of 20% to 25% in any given year.

Okay. And if you only had one rate cut instead of two, your guide for up 20% in NII would go to what roughly?

Yeah, it's not going to move a ton, Mike, because that second cut was in December. So that's not going to carry a huge impact to the full year.

And, Clark, correct me if I'm wrong, but I think you mentioned on this call that NII is expected to be about 20% higher for 2025, with your guidance indicating a 20% increase. Did I misinterpret that? I understand that there's significant focus on one particular line item, which might show some weakness, whereas investment banking could perform much better, but I just wanted to clarify that.

Yeah. So, lots of confidence in 20% above full year '24. But plus, I think maybe, Mike, you might be confusing came in, we think 10% plus fourth quarter to fourth quarter. So we'd expect 2025 Q4 NII to be in excess of 10% higher than 2024 fourth quarter.

Great. And separately, Chris, on December 30th, the compensation committee awarded a special performance bonus to the executive officers to enhance stock ownership, support retention, and help drive value at Scotiabank. I'm curious why the Board considers you valuable right now, especially since you're the third bank in a short period, along with Goldman Sachs recently and Truist a few months back, implementing what I refer to as the double bonus strategy. What does the Board perceive as the competition and the necessity for Key to retain its talent? What's going on there? Thanks.

Sure. So first of all, just to state the obvious, obviously, I have zero impact on any of my compensation. That's exclusively handled by our C&O committee made up of independent directors in consultation with the rest of the independent directors. So, I would refer you to the 8-K, but what that was mentioned in the 8-K, which I think is important, is this notion of retention, and you touched on it. And I think the Board recognizes that we Key have worked really hard to put ourselves in a position where we've got a great runway in front of us, '25, '26 we talked about it throughout this call. And I think the Board wanted to make sure that the team was on the field so to speak. Having said that, as you know, our proxy will come out in the not-too-distant future. And I'd be happy to have our team walk you through it when it comes out. Thanks for the question.

That’d be great. Thank you.

Thank you. First question is just a clarification question. What, Clark, deposit beta are you assuming in that up 20% NII guide?

Yeah. So, hey, Erika, nice to hear from you. We finished the year, fourth quarter, 40% beta, got closer to 45% at the end of the quarter, and we would expect to see mid-40s to high 40s throughout the year. So, approaching a 50% beta as we go through the year. Got it. And the next question is for Chris. And I guess I'm just going to take a step back. I feel like now you have a 12% CET1, maybe I feel like the questions are a little misdirected. I feel like a larger company won't give you capital just for you guys to fix balance sheet decisions that were made in the past by a previous management team and buy back stock, right? And so the environment is what it is, and the consumer book is doing what it's doing. But I guess I'm just wondering, is there an appetite for more aggressively adding talent? I think in your prepared remarks, you talked about adding wealth managers. But given that you have all this capital and given that there's so much on your balance sheet, that's a natural cure to your net interest income, I'm wondering if there's an appetite, again, I'm not going to ask you the deal question, but if there's an appetite to be more aggressive at adding commercial bankers and using this capital for really like forward thinking on growth?

Thank you for the question. I'm proud that we continued to invest throughout the challenges of 2022 and 2023. We will definitely keep investing. As I mentioned earlier, we hired numerous wealth advisors during that time, and we intend to grow that division further. Additionally, we plan to increase our investment banking platform by 10%. We have also made significant investments in our technology, including a migration to the cloud, and we've replaced two core systems each year, leaving us with only a few remaining. So yes, we will persist in investing in the business, continue to hire more personnel, and actively seek bolt-on acquisitions. Being structured by industry vertical allows us to concentrate on adjacent opportunities, which you will see us pursue as well. Does that answer your question?

It does. Thank you so much.

Our next question comes from Brian Foran with Truist. Brian, please go ahead.

Can you remind us where you see the 2.7% or even 2.8% NIM in terms of a longer-term normalized range? Is that at the bottom of the range? I recall you mentioning up to 3% in the past, so as we look ahead to 2026 and 2027, what do you consider a normalized NIM range?

Yeah. Good question. Look, I think as we get into '26 and beyond, there's no reason why we wouldn't be at 3% or maybe even better as the balance sheet continues to turn over a little bit.

3% or better even in '26?

I believe we should reach a net interest margin of 3% or better sometime in 2026. The exact timing is uncertain and will depend on market conditions, the shape of the yield curve, and other macroeconomic factors. However, all else being equal, as we move through 2025 and into 2026, we should see 3% NIM at some point during that period.

Okay and then just as we model out loan growth, is the runoff of consumer over in '25 or should we think about some more in '26 and beyond?

Yeah. I mean, look, the vast portion of that consumer book is first lien mortgage. There's some student lending in there. It's all rate sensitive. So as rates come down, you can see that refinance. At that point, we'll continue to support clients in refinancing them. But you'd continue to see that, I think, come off structurally in the near term. Now I do think over time, consumer lending is an important element to the balance sheet. We're not at the moment leaning into that, but I would expect that we will do so over time, whether it's other products like personal lending or things like that. But we're continuing to focus on relationship lending particularly in that space; there’s just not much happening at the moment.

Okay. Thank you so much.

Sure.

Next question comes from Gerard Cassidy with RBC. Please go ahead.

Hi, good morning, everyone. This is Thomas Leddy standing in for Gerard. Key had a reserve release in '24 and 2025 guidance for NCOs just 40 to 45 bps or relatively flat from current levels. With this in mind, should we expect to see further releasing in 2025?

Hey, Thomas, it’s Clark. Yeah look, I think we expect this to be the peak on some of the credit metrics we'd expect, again, given a constructive macro economy to see improvement throughout the year. I don't think I'd expect to see massive reserve releases. But I think as we go through the year, you could certainly see kind of plus or minus some things based on, again, how the portfolio shapes out. But everything we're looking at now makes us feel like the book is stable to improving throughout '25.

Okay. That's helpful. And then just quickly on C&I loans. It looks like period-end loans ended this quarter a little bit higher than last. Can you give us some color on what you're seeing in the C&I book?

Yeah. As I said, we did see a little bit of stabilization and a slight pickup through the end of the year. I mean, the tough part, Thomas, is we are seeing great pipelines. We are having great conversations with clients. That has been true now for a couple of quarters. So, we just need to see that activity hit. And as Chris mentioned, we continue to see things like utilization sort of sit at relatively historic low levels. So, everything we're hearing and seeing would tell us to expect it to grow, but until it really starts to happen consistently, it's hard to call.

Understood. Okay. Thank you. That's helpful. And thank you for taking my questions.

Yep.

Those are all the questions we have for today. So, I'll turn the call back to CEO Chris Gorman for closing remarks.

Well, thank you, Emily, and thank you all for participating in our conference call. If anyone has any follow-up questions, please feel free to reach out to our IR team. Thank you so much. Have a good day all. Goodbye.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.