KeyCorp Q4 2023 Earnings Call Transcript

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January 18, 2024

Key Takeaways

  • Q4 earnings were $0.03 per share, down $0.26 sequentially and $0.35 year-over-year, including $209 M of after-tax charges from an FDIC special assessment, efficiency actions and a pension settlement.
  • Balance sheet optimization in 2023 included a $7 B reduction in loans and a $3 B increase in deposits, growing relationship client households and reducing reliance on wholesale funding.
  • Capital strength improved as CET1 ratio rose 90 bps to 10% (above the 9–9.5% target) and AOCI gains of over $1.4 B boosted resilience against proposed capital rule changes.
  • Credit quality remains solid with fourth-quarter net charge-offs at 26 bps (21 bps for the full year), NPAs well below historical averages, and limited exposure to riskier CRE and leveraged lending segments.
  • For 2024, Key forecasts average loans down 5–7%, deposits flat to down 2%, net interest income down 2–5% (but up low single digits versus Q4 exit), noninterest income up 5%+, and NIM expanding to 2.40–2.50% by year-end.
AI Generated. May Contain Errors.
Earnings Conference Call
KeyCorp Q4 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to turn the conference over to Chris Gorman, KeyCorp's Chairman and CEO. Please go ahead.

Speaker 1

Well, thank you for joining us for KeyCorp's Q4 2023 earnings conference call. Joining me on the call today are Clark Caiatt, our Chief Financial forward looking disclosures and certain financial measures, including non GAAP measures. These statements cover our presentation materials and comments As well as the question and answer segment of our call. I am now moving to Slide 3. This morning, we reported earnings of $30,000,000 or $3 per share.

Speaker 1

Our results included $209,000,000 of after tax expenses or $0.22 per share from 3 items that Clark will describe in more detail later. For the year, we reported EPS of $0.88 including $0.27 impact from similar types of expenses. 4th quarter closes out a challenging year for the industry and for Key. While our business fundamentals remain solid throughout the year, we acknowledge that our balance sheet coming into the year was not well positioned for the rapid rise interest rates that transpired. We took a number of necessary steps as we move through the year to enhance our balance sheet liquidity and capital position In preparation for potential changes in capital rules, positioning ourselves to be a simpler, Smaller, more profitable bank.

Speaker 1

These actions also had some near term financial impacts. As a result, we missed our own expectations And yours. However, as we turn the page to 2024, I think it is really important to step back and recognize Zakia accomplished a number of positive things last year and as a result, I am confident we have laid the groundwork as we move forward. 1st and most importantly, throughout the year, the tremendous work and dedication of our teammates allowed us to continue to serve and support executing on our strategic priorities and steadfastly serving our clients. Our focus on relationship ships continue to guide our balance sheet optimization efforts.

Speaker 1

In 2023, we reduced loans by $7,000,000,000 as we De emphasize credit only and other non relationship business. Despite this meaningful reduction in lending, we Grew the number of relationship clients and households we serve across both our consumer and commercial businesses And grew deposits by $3,000,000,000 In consumer, we grew relationship households by 3% With about 2 thirds of new relationships coming from younger demographics, relationship deposits grew by 1%. Commercial clients grew 4% and commercial balances grew 5% as a result of our continued focus on primacy. About 96% of our commercial deposits were from clients that had an operating account with Key as of December. As a result of our ability to raise relationship deposits, while reducing loans, we were able to meaningfully reduce our reliance on wholesale funding as the year progressed.

Speaker 1

We also continued to raise significant capital for the benefit of our clients, Over $80,000,000,000 in 2023 leveraging our unique distribution capabilities. This proven and mature underwrite to distribute model is a key differentiator for us. On expenses, We made significant headway in simplifying and streamlining our businesses. We exited certain intensive and non relationship businesses such as vendor finance as we have previously done with indirect auto. In November, we announced a number of organizational changes, including the reorganization and consolidation of our banking and payments businesses.

Speaker 1

We also realigned our real estate capital business with those of our institutional bank. By aligning Product based teams to the client facing businesses they serve, we are reducing overhead and complexity and creating a better Altogether, these actions we took in 'twenty three impacted 6% of our teammates. Additionally, we continue to rationalize our non branch, non operation center real estate footprint, which has declined by 34% over the past 3 years. We do not take these decisions lightly, But the reality is we need to make the difficult decisions today to earn the right to invest in the opportunities of tomorrow. Last year's actions freed up over $400,000,000 on an annualized basis that we will redeploy to deliver value for our $1,000,000,000 from the beginning of the year, exceeding our full year optimization goal of $10,000,000,000 Concurrently, We also increased our common equity Tier 1 numerator through net capital generation.

Speaker 1

As a result, Our CET1 ratio increased by 90 basis points to 10% at year end, well above our Targeted capital range of 9% to 9.5%. Our capital metrics, including AOCI, also improved As lower interest rates and the continued pull to par over time of the unrealized losses in our investment portfolio drove over 1 $1,000,000,000 of improvement in our AOCI over the past year. Tangible book value and tangible common equity ratios Both improved meaningfully. Overall, our capital position remains strong. We are well positioned relative to our capital priorities and the currently proposed future capital requirements.

Speaker 1

In fact, we think we're advantaged relative to other Category 4 banks Given our underwrite to distribute model and the asset and capital light businesses that we have, Including a scaled wealth business with $55,000,000,000 of assets under management. Also, I want to comment on credit quality, which I believe is the most important determinant of return on tangible common equity and shareholder value over time. Credit quality remains a clear strength of Key. Our credit measures reflect Net charge offs were 26 basis points in the 4th quarter and 21 basis points for the full year. Our NPAs, which we firmly believe have very low loss content, remain well below our historical averages.

Speaker 1

The quality of our loan portfolio continues to serve us well. With over half of our C and I loans rated as investment grade or the equivalent, Our consumer clients have a weighted average FICO score of approximately 768 at origination. As a reminder, we have limited exposure to leverage lending, office loans and other high risk categories. Two thirds of our commercial real estate exposure is multifamily, of which approximately 40% is in affordable housing, which continues income opportunity moving forward as our short term swaps and treasuries reprice, particularly in the second half of the year. Importantly, we believe this can be achieved across a range of interest rate scenarios as a result of the significant work The team has done over the past year to improve our balance sheet resiliency.

Speaker 1

We began to see some of that work pay off this Margin bottom out in the Q3 of 2023. Secondly, we have leading positions and meaningful growth opportunities across Capital Markets, Payments and Wealth Management. We have consistently invested through the cycle in these fee businesses where we have targeted scale. We continue to see good client engagement and our pipelines remain strong. Any normalization in the capital markets represents an upside opportunity for Key, not only for fees, but from the balance management perspective that I spoke about earlier.

Speaker 1

Thirdly, while the macroeconomic outlook remains Highly uncertain. Based on our current assumptions, we anticipate we will generate moderate positive operating leverage for the full year 2024. Finally, we continue to expect that we will outperform the industry this cycle with respect to credit. Credit quality remains one of our most significant strengths. Over the next several quarters, we continue to expect to operate below our through the cycle net charge off range of 40 to 60 basis points.

Speaker 1

In summary, We acknowledge 2023 was a challenging year, difficult, but necessary decisions were made and actions were taken. But at this point, we are nearly finished with that process. Our balance sheet is now appropriately sized for the environment in which we are operating. We are better positioned for changes in interest rates up or down. Our demonstrated ability to manage and grow our opportunistic as we turn the page to 2024.

Speaker 1

Before I turn it over to Clark, I want to take a moment to acknowledge last week, We announced Vern Patterson's retirement from Key. As Head of IR, Vern has led Key through 112 earnings releases countless meetings with investors and other stakeholders. I am so grateful, Vern, to have worked alongside you. I have tremendous appreciation, Vern, for the great relationships you have throughout our industry and within our company. So Thank you again, Vern.

Speaker 1

At the same time, I am pleased to welcome Brian Monti as our new Director of Investor Relations. With more than 25 years of experience in our industry, Brian brings a depth and variety of experience and capabilities to the role. While he has big shoes to fill, I'm very pleased that Brian has joined the team. With that, I will turn it over to Clark to provide more details on the results for the quarter. Clark?

Speaker 2

Thanks, Chris. I would echo your comments on Vern and a warm welcome to Brian as well. I am now on Slide 5. For the Q4, net income from continuing operations was $0.03 per common share, down $0.26 from the prior quarter and down $0.35 from last year. Our results this quarter were impacted by 3 items totaling $0.22 per share.

Speaker 2

First, dollars 190,000,000 from an FDIC special assessment 2nd, $67,000,000 from an efficiency related expense and third, dollars 18,000,000 from a pension settlement charge For a total of $275,000,000 pre tax or $209,000,000 after tax. A breakdown of these items can be found in the last page of our slide presentation. Our 4th quarter results were generally consistent with the guidance we provided last month. As expected, we saw stability in the net interest income this quarter and our net interest margin increased by 6 basis points relative to the 3rd quarter as we began to see some early benefits from our swap and treasury portfolios. These declined 5% sequentially on the better end of the range we provided last month.

Speaker 2

Expense growth was primarily attributable The 3 items I mentioned, without these items expenses would have been relatively stable compared to the 3rd quarter. Net charge offs as a percent of loans remained low at 26 basis points and we added $26,000,000 to our allowance for credit losses to reflect some modest migration of the portfolio, Primarily in real estate and the still uncertain macro outlook. Additionally, as Chris highlighted in his remarks, our results reflect our focus on primacy and building relationships, Our improved capital position and our strong risk discipline. Turning to Slide 6. Average loans for the quarter were $114,000,000,000 Down 3% from both the year ago period and prior quarter.

Speaker 2

The decline in average loans was primarily driven by a reduction in C and I balances, which were down 4% from the prior quarter. The reduction reflects our planned balance sheet optimization efforts, which prioritize full relationships and deemphasize credit only and non relationship business. We reduced risk weighted assets by $4,000,000,000 in the 4th quarter and as Chris mentioned by approximately $14,000,000,000 in 2023. The majority of the decline in risk weighted assets this quarter was from lower loan balances with some reduction in unused commitments also contributing. We would expect modest RWA reductions in the first half of twenty twenty four.

Speaker 2

Turning to Slide 7. Key's long standing commitment to Primacy continues to deliver a stable, diverse base of core deposits for funding. Despite a year of market volatility, we grew period end deposits Year over year by $3,000,000,000 and average deposits were relatively stable compared to the year ago period and prior quarter. On a sequential basis, commercial deposits grew 4%, which we attribute primarily to seasonal build and consumer deposits grew 1%. The increase in commercial and consumer deposits was mostly offset by a $2,000,000,000 decline in broker deposits on average As we continue to improve the quality of our funding mix by growing core relationship balances and reducing reliance on wholesale funding and broker deposits.

Speaker 2

Since the end of the Q1, we generated almost $13,000,000,000 of liquidity by reducing loans and growing relationship deposits and reduced wholesale borrowings by $12,000,000,000 Our total cost of deposits was 206 basis points in the 4th quarter and our cumulative deposit beta, which includes all interest bearing deposits, was 49% since the Fed began raising interest rates, in line with our prior guidance of approaching 50% by year end 2023. The higher rate environment continued to impact our deposit mix as our non interest bearing deposits declined by 1% sequentially to 22%. Pressure on deposit pricing appears to be abating across the franchise, though we expect some mix shift to continue as long as rates remain high. Turning to Slide 8. Taxable equivalent net interest income was $928,000,000 for the 4th quarter, down 24% from the year ago period and up slightly from the prior quarter.

Speaker 2

Our net interest margin was 2.07% for the 4th quarter Compared to 2.73% for the same period last year and 2.01% for the 4th quarter the prior quarter. Year over year, net interest income and the net interest margin reflect the impact of higher interest rates as increased cost of interest bearing deposits and borrowings outpaced the benefit higher year earning asset yields. Additionally, the balance sheet experienced a shift in funding mix from non interest bearing deposits to higher cost interest bearing deposits. Relative to the Q3, the increase in net interest income and net interest margin were driven by actions taken to manage key interest rate risk, Elevated levels of liquidity and improved funding mix. The increase was partly offset by higher interest bearing deposit costs, which exceeded the benefit from higher earning asset yields.

Speaker 2

While the planned reduction in loan balances adversely impacted net interest income sequentially, it benefited Key's net interest margin. Our net interest margin and net interest income continue to reflect the headwind from our short dated treasuries and swaps, which together reduced net interest income by 3 As previously discussed during our Q3 earnings call, in October, we terminated $7,500,000,000 of receipt fixed cash flow swaps, which were scheduled to mature throughout 2024. Last quarter, we said that net interest margin would bottom and it did. Throughout 2024, we would expect continued benefit from the maturities of our short term swaps and treasuries, especially as more mature in the back half of the year. Moving to Slide 9.

Speaker 2

Non interest income was $610,000,000 for the Q4 of 2023, down $61,000,000 from the year ago period and down $33,000,000 from the Q3. The decrease in non interest income from a year ago reflects a $36,000,000 decline in investment banking and debt placement fees, Driven by lower syndication fees and M and A advisory. Additionally, corporate services income declined $22,000,000 driven by lower customer derivatives trading revenue. The decrease in non interest income from the 3rd quarter reflects a $13,000,000 decrease in other income, primarily driven by a gain on a loan sale in the prior quarter. I'm now on Slide 10.

Speaker 2

Total non interest expense for the quarter was $1,400,000,000 up $216,000,000 from the year ago period And up $262,000,000 from last quarter. As mentioned, 4th quarter results reflect $275,000,000 of impact from FDIC assessment, Efficiency related expenses and pension settlement charge. Efficiency related expenses included $39,000,000 related to severance And $24,000,000 of corporate real estate rationalization and other contract termination or renegotiation costs. Excluding these items, expenses were relatively stable in the quarter and down compared to the year ago period. We continue to proactively manage our Moving to Slide 11.

Speaker 2

Overall credit quality and our related outlook remains solid. For the 4th quarter, net charge offs were $76,000,000 or 20 And criticized loans continue to move up off their historical lows. We believe Key is well positioned in terms of potential loss content. Over half of our NPLs are still current. Our provision for credit losses was $102,000,000 for the 4th quarter, including $26,000,000 of reserve build and our allowance for credit losses to period end loans increased Turning to Slide 12.

Speaker 2

We significantly increased our capital position throughout 2023. We ended the 4th quarter with common equity Tier 1 ratio of 10%, up 20 basis points from the prior quarter and up 90 basis points from the year ago period. We remain focused on building capital in advance of newly proposed capital rules, while continuing to support relationship client activity and the return of capital. As such, we expect to stay above our current targeted range of 9% to 9.5% and do not expect to be buying back our stock Our AOCI position improved by $1,400,000,000 this quarter. The The right side of this slide shows Key's go forward expected reduction in our AOCR mark based on two scenarios.

Speaker 2

The forward curve is December 31, which assumes 6 FOMC rate cuts in 2024 and another scenario where rates remain at their current levels. In the forward curve scenario, the AOCI mark is expected to decline by approximately 24% by the end of 2024 And 34% by the end of 2025, which would provide approximately $1,800,000,000 of capital built through that timeframe. In the flat rate scenario, we still achieve 90% of that benefit between now year end 2025. If differently, we still accrete $1,600,000,000 of capital rates remain flat to current levels, driven by maturities, cash flow and time. Slide 13 provides our outlook for 2024 relative to 2023.

Speaker 2

Given uncertainty regarding eventual timing and extent of Fed interest rate cuts In 2024, our guidance reflects outputs from a few potential scenarios ranging from the December 31st forward curve, Which assumes 6 25 basis point cuts over the course of 2024, starting with an initial cut in March to a scenario more closely aligned With the Fed's stop loss, which currently assumes 3 rate cuts. We expect average loans to be down 5% to 7%, mostly reflecting the actions we have already taken over the course of 2023. In other words, the vast majority of the decline in average loans is a function of our reductions in 3, with some decline in the first half of the year offset by growth expected in the second half of twenty twenty four. We expect average deposits to be flat to down 2 Net interest income is expected to be down 2% to 5%, mostly reflecting the lower 4th quarter exit rate relative the first half of twenty twenty three. This equates to net interest income in 2024 that is up low single digits relative to our annualized 4th quarter exit rate.

Speaker 2

I'll provide more color on our net interest income outlook shortly. We expect non interest income to be up 5% or better with upside if capital market activity normalizes We will continue to tightly manage our cost base, including executing on additional opportunities to At the same time, we will continue to protect and invest in our franchise, including most importantly, our people. As Chris mentioned, our guidance suggests moderate positive operating leverage in 2024 driven by meaningful expansion in the second half of the year outpacing tough comparisons in For the year, we expect credit quality to remain strong and net charge offs to continue to modestly increase to the 30 to 40 basis point range, Still well below our over the cycle range of 40 to 60 basis points. Our guidance for our GAAP tax rate is approximately 20%. Turning to Slide 14.

Speaker 2

Given heightened investor focus on this topic, we wanted to provide a little more granularity than we have in the past about the pacing of our net interest income opportunity as we move through 2024. Hopefully, by now you're familiar with our well defined net interest income tailwind The impact of our short term swaps roll off and treasuries mature, especially in the back half of twenty twenty four. The ultimate opportunity remains largely unchanged at approximately $900,000,000 As a reminder, the benefit increases each quarter as more of the swaps roll off and treasuries mature, Culminating in the full amount in the Q1 of 2025. So this all builds quarter by quarter since the initial set of swaps came off the books in We're now through 3 full quarters, we're sharing a 3 part view. First, on the left in light gray are the 3 quarters of benefit we've already realized.

Speaker 2

In total for 2023, that was approximately $85,000,000 of additional income. The next four bars show the through 2024. As you see, the value builds from each quarter's tranche and accrues in the following quarter. Each bar represents the value for the quarter. In other words, in 1Q 'twenty four, we expect to realize $78,000,000 of additional net interest income versus 1Q 'twenty three from these positions.

Speaker 2

For 2024, we estimate the benefit to be approximately $500,000,000 in total, which is the sum of the 4 quarterly bars. This would represent an increase of more than $400,000,000 over the benefit received in 2023, Which is previously mentioned was approximately $85,000,000 The final bar to the far right, which has been the main focus of this discussion over the last year or so, is the Q1 2025 number. This shows the benefit currently estimated for the quarter at approximately $220,000,000 Essentially, the entire swap and short term treasury portfolios rolling off. Again, this is incremental to 1Q 'twenty three And represents an annualized value of approximately $900,000,000 We believe the reinvestment of these fixed rate assets and swaps represents an outsized opportunity for Key relative to our peers, but it's also important to remember that this is just one component that drives our net interest income outlook. On Slide 15, we provide other key inputs and assumptions driving our NII outlook, deposit betas, balances and mix, loan growth, as well as seasonal factors.

Speaker 2

Putting this all together, we expect our Q1 NII to be down 3% to 5% from the 4th quarter. From there, we expect to grow and start to accelerate in second half of the year as the pace of swaps and U. S. Treasury maturities pick up meaningfully at nearly $5,000,000,000 in aggregate per quarter. From the Q4 of 2023 to the Q4 of 2024, we expect our quarterly net interest income to grow 10% plus and exit the year north of $1,000,000,000 We would also expect the net interest margin to improve meaningfully to the 2.40% to 2.50% range by the end of 2024.

Speaker 2

This will put us on a strong trajectory as we enter 2025. With that, I will now turn the call back to the operator for instructions for the Q and A portion of our call. Operator?

Operator

Mr. Winter, I apologize here. Go ahead, Mr. Winter.

Speaker 2

All

Speaker 3

right. Great. Thank you. Good morning, Peter. Good morning.

Speaker 3

Clark, a lot of good color on the net interest income with those slides. But can you just go into a little bit more detail about the moving parts to the net interest income opportunity And maybe some other factors that impact your outlook. And then secondly, if you could talk about the quarterly NII progression. You gave us the Q1 down 3%, but clearly, it's going to be a pretty meaningful impact uptick in the second half of the year.

Speaker 2

Sure. Thanks, Peter and appreciate the question. I know this is a point of interest. So, let me provide a little bit of context to the guide and the trajectory and Hopefully, it will be helpful. I think first, maybe just start with the puts and takes, which I think is the nature of your question there.

Speaker 2

And I'm going to just categorize Short of the big movers, I think, 1, loan balances, which again, we guided kind of down 5% to 7% for the year. Asset yields, I'm going to separate those from the swaps and treasuries because I just want to identify those separately. Deposit balances, deposit pricing and funding costs and then the swaps and treasury portfolio. So if you think about those as kind of 5 Key levers on the guide. If I go full year 'twenty three to full year 'twenty four, which we've said, Down 2% to 5%.

Speaker 2

The headwinds there are going to be the loan book, so down 5% to 7%. Obviously, that's Going to impact NII. Deposits flat to down, is a little bit of drag. Earning asset yields will drop year over year as rates get cut. And then deposit and funding costs will be up for the year as that Q4 kind of annualized number rolls through.

Speaker 2

So those are the headwinds. What we have coming our way is the swaps in the treasury portfolio as they mature throughout the year And then a better funding mix as we move through and become more and more reliant on deposits as we have this year. So that sort of You know dimensionalizes what that year over year look shakes out to be. If you take the Q4 of 'twenty three annualized And you compare that to the full year 2024, we're guiding up low single digits there. The biggest difference being that, that funding cost, that really is pretty flat from Q4 through 2024, which It was not the case if you did the year over year comparison and you still get the benefits of swaps and treasuries coming in during the year and a better funding mix.

Speaker 2

So You start to see that down 2 to 5, flip to up low single digits. We talked a little bit about the Q1 being down, but let me just go Q4 to Yields down a bit going from Q4 of 'twenty three to Q4 of 'twenty four, but you get a nice pickup in the quarterly swap and treasury portfolio, our overall funding cost should be down in that quarter as rates have been cut throughout the year. And then again, you still have some benefits of funding mix. All that together, we think is 10% plus quarter to quarter NII growth. So we think that's a nice Pickup kind of end of year to end of year.

Speaker 2

And then as you roll into 2025, you have that last $5,000,000,000 tranche of treasuries And swaps maturing in the Q4 that accrues to the Q1 of 'twenty five. So we start to hit the ground running really nicely With a very steep trajectory as we enter 2025. So I'll stop there. There was a lot of stuff, but just trying to give you the components that are moving around.

Speaker 3

And just what are you expecting or assuming in terms of the forward curve and the timing of the rate cuts?

Speaker 2

Yes. So, our guide of 2 to 5 kind of incorporates a couple of different views, Kind of the range being the current forward down 6 with the 1st cut in March, incorporating the lesser cuts on the 3 Fed dot plots. I think our general view is more aligned to 4 cuts with the first one middle of the year, We're trying to provide guidance that I think incorporates all of that. And as you know, when those cuts occur and the magnitude of that We'll roll through to how we manage our deposit pricing obviously.

Speaker 3

Got it. Thanks. And then, Vern, congratulations on the announcement. It's just been a pure pleasure working with you and the investment community We'll be missing you.

Speaker 1

Thank you, Peter.

Operator

Next, we go to the line of Scott Siefers with Piper Sandler. Please go ahead.

Speaker 3

Good morning, everybody. Thanks for all the

Speaker 4

moving pieces in the NII color. I Yes, Clark, you've discussed the 3% sort of normalized margin. I know we get sort of one final uplift between Q4 of next year and 1st part of Of 2025. So the I think the way you've guided to Q4 of next year gets you a lot of the way there, but certainly still some room left over. Is the 3% Normalized margin kind of still where you're bogeying and what has to happen to get us Do that sort of range.

Speaker 2

Yes. Thanks, Scott. So if you just go back and we've talked a little bit about this and it's Overly simplistic to be clear. But if we took second, third, Q4 of 2023 And put the impact of swaps and treasuries back in the margin, we'd be 281 to 284 In those quarters, which we think is pretty reflective of what we've got right now and that's with this sort of oddly Long standing downward yield sloping downward sloping yield curve. So I think that range as we get into 25 feels like Achievable and I think getting to that longer term 3 probably needs us to have a more traditional upward sloping yield curve just That tends to accrue a little bit to all of our benefit on NIM.

Speaker 2

But I do think that $2.80 plus is pretty reflective of the Underlying core ability of the business as it stands today.

Speaker 4

Perfect. Thank you. And then either Clark or Chris, just the fee guidance feels like you're approaching with an abundance of conservatism regarding the Capital Markets outlook. Just curious if you could maybe put a finer point on what sort of recovery you are, presuming what kind of upward leverage there might be if things do normalize?

Speaker 1

Sure, Scott. Happy to address that. So if you take what we just reported of 130 $6,000,000 specifically on the line you asked about, Investment Banking and debt placement fees. That would annualize at about 5.44 Conversely, if you took sort of the business and removed 2021 and said that's an outlier, The traditional run rate is at least kind of $650,000,000 So I think we have been conservative, and that's why we When we gave guidance, we said noninterest income up 5% plus and then we put the qualifier upside of capital markets activity normalizes. We don't see it really normalizing until the back half of the year.

Speaker 1

However, it's an interesting phenomenon. When the 10 year went Above 5% and then came back down. As you can imagine, people started to transact. And so We're seeing the beginning of it now. But yes, it's a conservative number.

Speaker 1

The other thing that's in that fee number is You saw that we had a step down with respect to our derivatives and hedging income. A lot of that is tied to the balance sheet. And as we Go through 2024 and we get back to growing the balance sheet after going through our exercise on RWAs, you'll see that come back as well.

Speaker 4

Okay, perfect.

Speaker 5

Thank you

Speaker 2

very much

Speaker 3

for that.

Speaker 4

And then finally, Vern, best wishes. Thank you so much for everything.

Operator

Next, we go to John Pancari with Evercore. Please go ahead.

Speaker 3

Good morning.

Speaker 1

Good morning. Good morning, John.

Speaker 6

First, congratulations, Verne. Best of luck. You're a legend. And Brian, welcome. Looking forward to working with you again.

Speaker 6

Question on the A little bit more on the NII dynamics. I wanted to get your thoughts on, if we do see the cuts materialize As you had baked in your expectations, what type of deposit beta you expect is achievable on the initial cuts? And how would you think about accumulative on the way down? And what is factored into your net interest income outlook in terms of that beta? Thanks.

Speaker 1

Yes, John. So I'll just I'll start with that, then I'm going to flip it over to Clark. A couple of things to keep in mind. We have a big commercial franchise. And so 40% of our deposits, dollars 145,000,000,000 are commercial.

Speaker 1

And of those, about twothree are either indexed or index like. Now on the other side of the equation, we've been pretty conservative in assuming that as the first cuts, particularly if they aren't steep cuts, that we'll continue to get drift up On the consumer side, also, we've also forecasted just a bit of continued transition from interest bearing to noninterest But we think we sort of bottomed out there. Clark, what would you add to that?

Speaker 2

Yes. So maybe broadly, John, on the NII guide, we would expect Some drift up, particularly in the Q1 on deposit pricing just as rates stay high. As Chris said, when the cuts come, I think a good way to think about that commercial book, as we've talked about the index nature of it, as Chris just referenced, is sort of Kind of an almost automatic mid teens beta on a cut because of that how that index pulls through. So the Question really is going to be what happens to the consumer book and how quickly can we move that. I think a 25 basis point cut with a Kind of long waiting period.

Speaker 2

Does it provide a lot of opportunity to reduce if we start to see bigger cuts Or cut sooner or more rapid cuts that allows us to deploy those price reductions into the book. So, right now, as I said, we're really looking at kind of our view It's more like the forecast starting in the middle of the year. We think we'll probably have some stabilization, maybe a little A bit of consumer drift through that time period and then we'll start to proactively move rates down. But given the Time frame in 2024, hard to say exactly what the beta will be on the way down For the year, but it's really going to pick up in 'twenty five. We'll see some benefit in 'twenty four, but on the consumer book, it's Just going to lag a little bit.

Speaker 2

And candidly, that's just going to be as much a competitive function of competitive environment as anything else. But We are taking some actions in the consumer book today to prepare for cuts. We're not cutting rates, but Preparing our franchise to be ready for that. And I think we'll be very proactive when that opportunity shows up.

Speaker 1

And frankly, all markets are not the same. We're out there experimenting with a few things as we speak.

Speaker 6

Got it. Okay. Thanks for that. And then separately on the credit front, can you give us a little bit more color on the 25% increase in Non performers in the quarter and maybe a little more color on the criticized asset increase. And I know your Commercial Real Estate NPL ratio now is 6.9%.

Speaker 6

What was that last quarter? Was that the biggest increase Non performers. Thanks.

Speaker 2

Yes. I'll come back to you on the increase from Q3. I don't have that right in front of me. But on your other points, the NPA Uptick really is a small list of identified credits, Most of which we feel very good about the loss content. So it is a pickup in the ratio, but we don't think that's a loss driver.

Speaker 2

On criticized, look, that is a function of continued higher rates putting some stress On what I'd call kind of the first order rating variable around debt service coverage. So that does drive rating migration in our book. That rating migration does pull through to criticize and classified. But when you get underneath that metric and you look at things like Clients' willingness to build the interest reserve and the value of the collateral given we tend to underwrite at 60% For lower CLTVs out of the gate, we just don't see a lot of lost content there.

Speaker 6

And just one clarification. So it was primarily C and I related in terms of the NPA increase or CRE?

Speaker 1

There were 3 specific credits, one of which was real estate.

Operator

Next, we go to the line of Manan Ghasalia with Morgan Stanley. Please go ahead.

Speaker 5

Hi, good morning. I wanted to extend my best And then on my question, I think you said you still expect some modest RWA reduction in the first half of twenty twenty four. Is that all coming from the loan book? And as we think about the long end of the curve Staying here or even moving lower, you should have a lot more clarity on accreting that AOCI back over time. So What would you need to start leaning into loan growth a little or deploying capital elsewhere?

Speaker 1

Sure. So we are About where we need to be in terms of going through our whole portfolio. As we went through and We're looking and focused on RWAs. Really, it was sort of in 3 buckets, and we actually went account by account. And I've often said That on a risk adjusted basis, stand alone credit properly graded can't return its cost of capital.

Speaker 1

And so we were extremely prescriptive across the entire firm of going through that. On top of that, we exited some businesses like Vendor Finance, that by the way, is a credit only business. And then on top of that, there were certain areas where we were conservative in terms of our capital treatment, Where we could actually reduce RWAs without, in fact, having any impact on NII. That process is really over. When I say the process is over, we will continue, obviously, to look through our portfolio.

Speaker 1

But in terms of really seeing the step down in RWAs, as you saw last year, dollars 14,000,000,000 that's behind us. And so as we look forward, Clark talked about sort of the lag from the starting point on loan growth. But as you know, we have the ability to generate loan growth here at Key. We've got a long history of that. We'll be back Kind of focused on serving our clients.

Speaker 1

Now having said that, I personally have a view everyone is sort of coalesced around the soft landing. I think inflation is still pretty sticky. I think there's a bunch of drivers out there. We're managing the business For a short recession in 2024. And obviously, that goes into our thinking because if you think about working capital in the context of a shrinking economy, That shrinks some loan demand.

Speaker 1

The other thing that we have to grow through, and this is by design, is we're going to have $3,000,000,000 of runoff in our consumer business. I hope that helps kind of on the puts and takes. When there's business to be done from a loan I'm confident that we can get it.

Speaker 2

The only other thing I'd add, Manan, is just to reground everybody in the Average to average move, so $118,000,000,000 of average in $23,000,000 ending point 112 point So most of that decline in loans happened last year. We're pulling that through. There may be a little bit more as we said in the 1st quarter, maybe into the Q2 as some of that non relationship business continues to move out, but we'll see the build back Through the course of the year and expect the ending of 'twenty four to be relatively stable with where we exit 'twenty three. So we'll see a rebound. And to Chris' point, if there's less softness in the economy and more opportunity, then we'll lean into that opportunity.

Speaker 5

That's very helpful. And then for my follow-up, as we look out into 2025, There's a lot of puts and takes here on the NII side. But what's the most optimal rate environment for Key? Is it 6 rate cuts and then an upward sloping yield curve, is that the most optimal environment or would you rather see a higher short end rate And is that a yield

Speaker 2

curve? I think look, I think an upward sloping yield curve benefits The business broadly, I'm not as concerned at the moment about 4 cuts or 6 cuts. As we move through the year, while reliability Today as we move through the year and swaps and treasury portfolios burn off, we're going to slightly Become more asset sensitive naturally. So we really want to be neutral and able to operate In any of those environments, but if I had my choice broadly, I think upward sloping yield curve is always a valuable place for us to be in this business.

Speaker 5

Great. Thank

Speaker 1

you. Thank you.

Operator

And our next question is from Erika Najarian with UBS. Please go ahead.

Speaker 7

Hi, good morning. So I apologize, one more question on net interest income. I think the stock is a little bit soft today because Consensus was expecting quarterly positive progression on the net interest margin given the fixed rate opportunity. And I'm just wondering in context of the modest RWA reductions, Clark, that you're Forecasting where you're telling us is happening for the first half of the year, how much of that is impacting the NII trajectory? And are those RWAs being reduced through credit linked notes that could impact the net interest income?

Speaker 7

And then as a follow-up to that, as we think past the first half of the year, do you feel like we've moved going back to what Chris has said, the process is over. Is that a cleaner way to think about where your balance sheet is or has to be relative to where you think the capital could be in the second half of the year. In other words, there won't be any more wholesale actions that can impact this NII and NIM trajectory?

Speaker 2

Yes. So thank you, Erica. Good question as always. So the Decline in the first half again is the continuation of some actions we took to manage RWAs last year. So again, non relationship and credit only clients coming down.

Speaker 2

We do We don't have anything factored in at the moment around RWA management related to credit linked notes. As you and I have talked about before, we're doing our homework to understand those opportunities, but it's not part of the guidance at the moment. Really, it would be That loan reduction and that will put a little bit of pressure on Q1 as well the fact that rates remain high in the Q1 under almost any Cutting scenario and we'll have a little bit of beta drift. So that's really the Q1 pressure, but I think your point about Kind of a clean balance sheet entering the second half is the right one. And I think, again, we're suggesting kind of a tepid recession kind of mid to late year.

Speaker 2

If that doesn't come through and we see a more constructive economic environment, I think there's some opportunity To grow loans, but I do think, as we progress through the year, you'll see NIM expand, you'll see NII grow nicely And you'll see the balance sheet, I think, on the right trajectory.

Speaker 7

Got it. And my second question is a bit of a Carter, as I'm trying to squeeze it in. 1, Clark, I think when I first met you, I was very impressed by how You were so good at understanding where you're funding needs and funding sources. So My question for you is, are these 2 thirds of your commercial deposits in commercial, are they truly indexed on the way down, Right. There's a few regional banks have warned us that they're indexed on the way up and perhaps more negotiated on the way down.

Speaker 7

And I guess The other question is that, is it possible to break down on Slide 14 on your maturity schedule, What would the treasury's component be and the swap component only because obviously there's a lot of debate on whether or not the cuts in the curve will Happened, which clearly impacts some of the math behind the swaps.

Speaker 2

Yes. So the second one, Eric, is easy. We've I think we've provided that breakout We'll deliver it. That's not a problem at all. On the first, I think, look, it's a fair point because not all of those Commercial deposits are contractually indexed.

Speaker 2

So I think that's the right question. There's always a little bit of it's It's easy to negotiate with the client when you're giving them rate and it's a little bit harder when you're taking it away. But I would say, Our view is, while it may not perfectly pull through, we have spent a lot of time with these clients. We've been in front of them Probably more than we would care to admit over the last year, but in a way that I think we have a good understanding of how those Dynamics would work and we expect that the components of what we think are indexed We'll come through. And just as a reminder, when we say index, it's not all 100% index.

Speaker 2

So there's a range of that. So bringing a client down who's indexed kind of 50%, doesn't feel as challenging to negotiate than somebody who's coming down at 100% cliff. And so the book is pretty broadly distributed across 20% to 100%. And we're going to actively Engage those clients to make sure we can manage the book appropriately.

Speaker 7

Got it. Thank you. And yay, Vern.

Speaker 1

Thanks, Erica.

Operator

Next, we move to the line of Matt O'Connor with Deutsche Bank. Please go ahead.

Speaker 1

Hi. Just a quick clarification, the fee guidance of 5%, you walked through a lot of details on Investment Banking. Does that assume the 4Q Q annualized level, the kind of up $100,000,000 more normal level or somewhere in between? Thank you.

Speaker 2

It's a little bit in between, Matt, probably a little more leaning towards the higher number, but we do think if markets kind of fully normalized, we'd see a little bit of upside. So it's better than the annualized 4th quarter, not quite all the way to what we would think is normal Operation.

Speaker 1

Okay. Thank you.

Operator

Next, we move on to the line of Gerard Cassidy with

Speaker 8

Chris, one of the interesting developments over the last 12 Maybe 36 months has been the increased competition from the private credit lenders into the commercial space. Can you share with us, obviously, you guys are strong, big regional lender in the C and I space. What are you guys seeing from competition from those Non depository lenders. And second, if any of them are your customers, how do you balance their needs with at the same time competing against them for lending?

Speaker 1

Sure. It's a great question and it's developing quickly. So principally, they are customers Varza, let me explain what I mean by that. As you well know, we distribute 80% of the capital we raise. So we are distributing all the time A lot of paper to these private debt funds, and it's an important part of our underwrite to distribute model.

Speaker 1

As we've said many times, for banks, a standalone properly graded credit Can't return its cost of capital. That is not the situation for the private debt funds. They have the benefit of leverage on leverage. We have to be a relationship bank. We have to be able to provide all of the payments capabilities, all of the capital markets capabilities.

Speaker 1

And that's actually an opportunity for us because I think what you'll see is as these private debt funds continue to grow, They'll need to partner with banks and they'll want to partner with banks that have sophisticated capabilities around things like payments and capital markets, But don't necessarily want to hold on a risk adjusted basis paper that doesn't return that doesn't hurdle. So I look at it frankly as an opportunity for us. I think we're well positioned for that.

Speaker 8

Very good. And then coming back to credit, you mentioned, obviously, you have minimal or very low exposure to Office space, which is great in this environment. And then you have the multifamily exposure, but 40%, I think you said was In low cost housing, can you share with us what are you guys seeing in some of the markets where there's been rapid buildup of not Necessarily low cost housing or subsidized housing, but normal housing in the multifamily. Are you seeing issues in that subsegment of the multifamily market? Or do you not have much exposure to those markets that are growing rapidly?

Speaker 1

Well, we don't have a lot of exposure because you'll remember, Gerard, we exited a lot of these, what we call, gateway cities Probably 5 years ago, based on affordability, based on cap rates. But we do have a fair amount of and that we have this 3rd party commercial loan servicing business, and we are the named special servicer on Over $200,000,000,000 of loans. And in that area, 44% of what's in active special servicing, Which is really what's in workout is office, but the fastest growing segment over the last quarter was in fact Multifamily in some of these gateway cities. So we're not seeing it in our portfolio because it's not an area of focus, but we are picking it up through the For the reconnaissance we get through our 3rd party commercial loan servicing business. Just one little add on to that that I think the group might find interesting that I did when I was talking to the leaders there.

Speaker 1

Actually, what is in special servicing is down. We had a record year in 20 3 as you can imagine. What is in active special servicing actually ticked down, which I think is just an interesting data point for all of us that kind of follow the market.

Speaker 8

Great, Chris. Thank you. And Vern, really good luck on your retirement. And I do want to point out that I have on my credenza, the investor book from September of 'ninety five when we had the infamous Elvis impersonator entertain us at night. So thank you.

Speaker 8

Those are great memories, Vern. Thank you.

Speaker 1

Well, fortunately, I wasn't around for that, but I'm sure Vern will be happy to sign it for you, Gerard.

Speaker 9

Great. Thank you.

Operator

Next, we go to the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Speaker 10

Hi. Hey, Mike. Well, Chris, one of your competitor CEOs said scale has never been more important and that competitor is larger than you are. And so Pulling back the lens, how do you think about scale and how it's changed over the past year? And 2 Specific questions, before you give that broader answer.

Speaker 10

What percent of the value of commercial relationship It's from the deposits, that's a specific number. And then what percent of the revenues that you get from your typical commercial relationship It's fee based versus lending based because I think that gets to the larger value proposition of Key.

Speaker 1

For sure. Well, let me start with the larger question first, and then we'll talk a bit about the mix of Spread income to fee income, which I do think, by the way, let me just start there. I think that's a great barometer. As you know, throughout Key, we're 40% fee income, which for a Category 4 bank is at the high end of the spectrum. As we look at businesses like our on the business because some businesses are more capital intensive than others.

Speaker 1

But that is one of the metrics we look at to see what kind of penetration we're getting. As it relates to scale, and I think it's a really good and important question. On one hand, there's no question that if you have to carry more capital and capital more expensive that would put more of a premium on scale than before. And the same would go for things like cyber. So on the margin, Yes, scale would be probably more important today than it was 12 months ago.

Speaker 1

Having said that, I do not think scale is the answer And I say that because when you have competitors that are 20 times as big as you are, the question really is What is scale? And as you know, what we've decided to do is focus on targeted scale to be really, really relevant to the customers that we try to be relevant to. We're certainly not trying to compete in the same manner that the largest banks They have a nice business model. It works for them, but that's not a business model, Mike, that we're executing at all. Does that answer your question?

Speaker 10

Yes. I mean, I think this kind of goes to the stickiness of corporate deposits And how that's changed over the past year? And you answered the question of fees. How much of the value of your commercial relationship is Deposit driven and you have the cash and treasury management and other services that you provide corporate treasurers. Is that Bill, sticky and is that like 20%, 30%, 50% of the value as some have said?

Speaker 10

And then just another follow-up is just what does all your thinking mean about acquisitions if and when generalized securities losses go down for you and Are you looking to be in that game or not?

Speaker 1

Well, on the acquisition front, as you know, we've had a lot of success buying Niche businesses and successfully integrating them, which I don't think a lot of large companies, forget about banking, have had a lot of success doing. We are Still, because of our targeted scale focus, we are still interested in doing that. We're always building these pods of people and actually looking For small organizations. In terms of looking, Mike, at depositories, that's not something we're spending any time doing. I think when you kind of look at sort of the landscape, one, I think the regulatoryapproval process, I think there's a lot of questions around that.

Speaker 1

Obviously, the pull to par, Any unrealized losses become realized losses in the event of an acquisition. And then secondly, there's just so much uncertainty in the marketplace. I think one would have a lot of questions about what is actually in the book of the company That you're acquiring. So that's not something I'm spending a lot of time on. Getting back to your question, there's no question that the VAT is a significant value In the deposits.

Speaker 1

And for example, that's one of the reasons we're really focused this year on building out our business banking Business because that's a business that's very deposit centric. And as you think about going forward, there's a lot of value in there. I don't have off the top of my head what percentage is the contribution. I think it's a we'll circle back to you. I think it's about 30% of the value Is in the payments and deposits, but we will circle back to you and confirm that.

Speaker 10

Okay. Thank you.

Speaker 2

Thank you, Mike.

Operator

Next, we go to Steven Alexopoulos with JPMorgan. Please go ahead.

Speaker 9

Hey, good morning, everybody.

Speaker 1

Good morning, Steve.

Speaker 9

And honestly, I'd have Vern, like everybody else said, almost everybody on the call, congratulations. You're really one And on where NIM could go, you said 280 to 3, like in

Speaker 6

a more normal environment, whatever

Speaker 9

the hell that is, right? We haven't seen that in 20 years. But you guys used to do $3,000,000 to $3,200,000 Is there something it's really a 2 part question. What is there something structural maybe the way you're using swaps Today that there's a lower ceiling on NIM like 3,320 is gone, maybe 3 is like upper end. And then secondly, Assuming this benefit accrues through 2024, that's up for a good 2025.

Speaker 9

Now, And maybe for Chris, how do you think about this, like NIMs expanding pretty nicely in 2025, so we have a more normal curve. Is that the time you now Step up the pace of investment. We've been cutting our expenses forever. Is that the time where you step up or do you let that benefit fall to the bottom line? Yes.

Speaker 2

So a couple of questions in there and thank you for acknowledging no normal environment has existed. But The structural piece, I would say, Steve, relative to key over the last 20 years, but Particularly going into the crisis would be, I think, the loan book profile is quite a bit So if you think about the quality of the borrowers, the 55% of C and I being investment grade, The structural differences in our CRE portfolio, the largely residential real estate collateralized

Speaker 1

Clark, I would add card

Speaker 2

as well. I mean, yes, card, which we have, but it's highly transactional Transactor based versus balance based. Now given that, you would expect credit losses to be better and We think they will be certainly better than us historically, but you would expect better on a relative basis. And your other question would be, okay, how do you monetize Those clients to make sure that you're getting the right returns and getting business on it. We think we do that really well in the commercial business.

Speaker 2

We think we're doing that better and better As you go down market and commercial with things like payments, and we think we're getting much better on wealth and building the wealth business in the consumer space. So We think we're building those capabilities and have the opportunity to do that. But I do think if you look back over time, There's probably a base structural nature of NII that's a little bit lower given the quality of the portfolio and that's very intentional. You've heard Chris talk about that We have been tight on expenses. We've been doing that largely to maintain our ability to invest.

Speaker 2

And the short answer is Hard to predict exactly what we do. I think it's a function of how much expansion do we see, how much investment capacity does that create and frankly how much high quality investments are there in front of us. Our first investments are always going to be Good clients and our people. And then in this world, you got to continue to invest in technology. I actually think on an infrastructure basis, we've done a really good job over that On that over the last decade and we'll continue to do that.

Speaker 2

But we're going to Continue to make sure that we can invest and build the franchise the way we need to be competitive.

Speaker 1

And from an Organic growth perspective, Steve, we obviously weren't doing our typical level of investment last year, but where you'll see us lean in, You'll see us lean into our unique integrated corporate and investment bank where we've got a lot of success recruiting people. I mentioned earlier our $55,000,000,000 of AUM. We think that platform is eminently leverageable. We'll be investing in that. I mentioned also payments.

Speaker 1

And then lastly, I also mentioned business banking. Those are the areas where you'll see us leaning in from an investment perspective.

Speaker 3

Got it. Okay. If I

Speaker 9

can ask one other question. So Chris, it's interesting to hear you're so bullish on credit. I say that because if you listen to every other person they have on CNBC, all they point to is all this pressure coming on commercial real estate to a regional bank like you guys. Can you just say to the investors that are on the line right now, what's happening? I mean, you had commercial real estate loans come up for renewal in the 4th quarter.

Speaker 9

I know you have a large office portfolio, but I'm sure some of them came up for renewal. What's happening? Are you able to renew because the LTV, like you said, was 60%, You put a higher cap rate, they're getting renewed. There's a perception that it's nothing more than extend and pretend and you're just the banks are just kicking the can down the road. So I'd love to hear Your view on what's now happening as these loans are coming up for renewal?

Speaker 9

Thanks.

Speaker 1

Sure. Well, you got to look Backwards a bit. And first of all, we had outsized losses in real estate during the financial crisis, and we said we'd never do that again. And we literally Ripped the business down to the studs and rebuilt it and rebuilt it around an underwrite to distribute model. So Fannie, Freddie, FHA, the life companies, the CMBS market.

Speaker 1

We also said we're only going to finance the best real estate people in the right sectors, in the right geographies. And so we've been very, very prescriptive. So we distributed a bunch. 13% of our total loan book Is in real estate. What's happening on the ground is because of the people that we're financing.

Speaker 1

When we go through the math And because of the rise in interest rates, because they qualify then as a criticized loan, we go to them and we ask them for an interest reserve So what is going on the ground with us, I'm not sure it's representative of the whole market, But it's been it's the work that we did starting 10 years ago that really has put us in the position that we're in now.

Speaker 9

Got it. So maybe unique, but still nonetheless, not the overhang that maybe some are being led to believe. Okay. Indeed. Thanks for taking my questions.

Speaker 1

Sure, Steve. Thanks, Steve.

Operator

Next, we go to Ken Usdin with Jefferies. Please go ahead.

Speaker 11

Thanks. Sorry for the late question here. Congrats to both Verna and Brian. Just one on expenses and efficiency. You guys did a great job last year taking the actions continue to head towards stable ish expenses.

Speaker 11

I'm just wondering how much more flex you have in there in terms of things you can continue to do To offset the expected investments that you continue to talk about and need to make and can you keep that

Speaker 1

So thanks for the question, Ken. Whenever I'm Talking to our team, I tell everybody, we're all risk managers. We're all responsible for revenue and we're all responsible for managing expenses. We're Spending, as I mentioned, about $1,100,000,000 a quarter. There are always things that we can do better to create the raw material to continue to invest.

Speaker 1

And In our business, unfortunately, the real cost is people. And if you look point to point, we have 1369 less people on the team today than we did a year ago. And obviously, that will pull through. There's also you get a big pickup when you exit businesses like we did in vendor finance where you can take out front, middle and back office. So we did a lot of the heavy lifting, Ken, last year.

Speaker 1

I don't see that level of heavy lifting continuing, but it's something that we just have to stay after every single day. Thanks for the question.

Operator

And next we go to a question from Bill Carcache. Please go ahead.

Speaker 12

Thank you. Good morning, Chris and Clark.

Speaker 6

Good morning, Hugo.

Speaker 12

I was hoping you could give some color on the sentiment You're hearing from your clients. For the soft landing scenario to play out, it seems like we would need to see the disinflation trends not just continue From here, but there would also need to be a reacceleration in loan growth. And I guess maybe first, do you agree with that? And if so, how likely do you think we are to see loan growth Reacceleration from here based on what you're seeing and hearing from your clients?

Speaker 1

Well, I think it goes back to inflation. And is inflation Really under control. And if it isn't, what actions will the Fed be required to take or not take given what the forwards are saying Interesting data point and one of the reasons I think inflation is going to be stickier than people think. Our non Interest bearing customers today have 33% more dollars in their account than they did pre pandemic. So I just feel like so I think that's a risk.

Speaker 1

And so if we get a soft landing, I think There'll be opportunities for loan growth. We've in our planning, we're assuming a short recession in 2024 for all the reasons I just described.

Speaker 12

Understood. Very good. Thank you for taking my question. That's very helpful. And let me also add my congratulations Veron, all the best Looking forward to working with you as well, Brian.

Speaker 12

Thank you.

Operator

And ladies and gentlemen, we'll now be turning the conference back to Chris Gorman for closing remarks.

Speaker 1

Again, we thank you for participating in our call today. If you have any follow-up questions, you can direct them to our Investor Relations team, 2,166,89,42,21. This concludes our remarks. Have a good day all.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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