KeyCorp KEY has announced the completion of The Bank of Nova Scotia’s (also known as Scotiabank) BNS 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 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.
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