We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
KeyCorp-Scotiabank Deal Closes, to Support KEY's NII Expansion in 2025
Read MoreHide Full Article
KeyCorp (KEY - Free Report) has announced the completion of The Bank of Nova Scotia’s (also known as Scotiabank) (BNS - Free Report) remaining 10% investment in its equity for $2 billion. The companies received approval from the Federal Reserve for the deal on Dec. 12.
Now, BNS owns almost a 14.9% equity stake in KeyCorp. This completes Scotiabank’s strategic minority investment in KEY, announced on Aug. 8, 2024.
For Scotiabank, the step marks a massive advancement as it tries to expand operations in North America. It will be able to appoint two directors to KEY's board. As part of the agreement, both companies intend to explore potential future partnerships to serve their respective clients better.
On Aug. 30, KeyCorp announced that BNS completed the first tranche of strategic minority investment. With an investment of 0.8 billion, Scotiabank held approximately 4.9% stake in KeyCorp.
Financial Gains for KeyCorp
During the initial announcement of the transaction, it was noted that a total $2.8 billion investment is expected to boost KeyCorp’s CET1 capital ratio by 195 basis points to 12.4% and tangible book value per share by 10% as of June 30, 2024.
Following the completion of the capital raise, KEY plans to evaluate repositioning its available-for-sale (AFS) securities portfolio by divesting low-yielding, longer-duration AFS securities and investing the proceeds in higher-yielding, more liquid securities. Though the divestiture of lower-yielding AFS securities will result in a one-time after-tax loss of almost half of the capital raised, it will lead to nearly $400 million in additional net interest income (NII) in 2025 and 2026. For 2024, KeyCorp estimates NII to decline 2-5% because of higher funding costs and weak loan demand.
As such, in September, the company sold its low-yielding AFS investment securities portfolio worth almost $7 billion and incurred an after-tax loss of $737 million in the third quarter. With the completion of the final tranche, KeyCorp is likely to sell more low-yielding AFS. These efforts are expected to be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
This is similar to the steps taken by Truist Financial (TFC - Free Report) in May 2024 to bolster its balance sheet. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add almost $710 million to TFC’s 2024 NII.
Our Take on KEY’s Strategic Initiative
With the central bank expected to keep lowering interest rates in 2025, KeyCorp’s NII and net interest margin (NIM) are likely to get much-needed support. Aggressive interest rate hikes by the Fed have weakened the bank’s top-line performance due to sluggish loan demand and rising funding/deposit costs. In 2023, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
Hence, once KeyCorp invests the proceeds in higher-yielding, liquid securities, its NII and NIM are likely to benefit. Hence, the minority equity investment by BNS, interest rate cuts and the company’s efforts to strengthen fee income sources will support top-line growth.
Image: Bigstock
KeyCorp-Scotiabank Deal Closes, to Support KEY's NII Expansion in 2025
KeyCorp (KEY - Free Report) has announced the completion of The Bank of Nova Scotia’s (also known as Scotiabank) (BNS - Free Report) remaining 10% investment in its equity for $2 billion. The companies received approval from the Federal Reserve for the deal on Dec. 12.
Now, BNS owns almost a 14.9% equity stake in KeyCorp. This completes Scotiabank’s strategic minority investment in KEY, announced on Aug. 8, 2024.
For Scotiabank, the step marks a massive advancement as it tries to expand operations in North America. It will be able to appoint two directors to KEY's board. As part of the agreement, both companies intend to explore potential future partnerships to serve their respective clients better.
On Aug. 30, KeyCorp announced that BNS completed the first tranche of strategic minority investment. With an investment of 0.8 billion, Scotiabank held approximately 4.9% stake in KeyCorp.
Financial Gains for KeyCorp
During the initial announcement of the transaction, it was noted that a total $2.8 billion investment is expected to boost KeyCorp’s CET1 capital ratio by 195 basis points to 12.4% and tangible book value per share by 10% as of June 30, 2024.
Following the completion of the capital raise, KEY plans to evaluate repositioning its available-for-sale (AFS) securities portfolio by divesting low-yielding, longer-duration AFS securities and investing the proceeds in higher-yielding, more liquid securities. Though the divestiture of lower-yielding AFS securities will result in a one-time after-tax loss of almost half of the capital raised, it will lead to nearly $400 million in additional net interest income (NII) in 2025 and 2026. For 2024, KeyCorp estimates NII to decline 2-5% because of higher funding costs and weak loan demand.
As such, in September, the company sold its low-yielding AFS investment securities portfolio worth almost $7 billion and incurred an after-tax loss of $737 million in the third quarter. With the completion of the final tranche, KeyCorp is likely to sell more low-yielding AFS. These efforts are expected to be low single-digit accretive to KeyCorp’s 2025 earnings and slightly accretive to its 2026 earnings.
This is similar to the steps taken by Truist Financial (TFC - Free Report) in May 2024 to bolster its balance sheet. The company completed the sale of its remaining stake in its insurance subsidiary – Truist Insurance Holdings – and used the proceeds to reposition its balance sheet and invest in shorter-duration investment securities. These initiatives will add almost $710 million to TFC’s 2024 NII.
Our Take on KEY’s Strategic Initiative
With the central bank expected to keep lowering interest rates in 2025, KeyCorp’s NII and net interest margin (NIM) are likely to get much-needed support. Aggressive interest rate hikes by the Fed have weakened the bank’s top-line performance due to sluggish loan demand and rising funding/deposit costs. In 2023, the company’s NII declined 13.6% and NIM contracted 46 basis points to $3.91 billion and 2.17%, respectively.
Hence, once KeyCorp invests the proceeds in higher-yielding, liquid securities, its NII and NIM are likely to benefit. Hence, the minority equity investment by BNS, interest rate cuts and the company’s efforts to strengthen fee income sources will support top-line growth.
So far this year, shares of this Zacks Rank #3 (Hold) company have rallied 19.4%, underperforming the industry’s growth of 23.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Image Source: Zacks Investment Research