KeyCorp (KEY) Q2 2026 earnings review
Margin Expansion Continues, But Credit Quality Reverses
KeyCorp delivered a solid quarter defined by core margin expansion and strong capital returns, with taxable-equivalent Revenue rising 6.7% YoY to $1.96B. The deliberate strategy of running off low-yielding consumer loans and redeploying capital into commercial lending is working, driving Net Interest Margin (NIM) up to 2.89%. However, the bottom line tells a more complex story. While EPS of $0.44 was up 25.7% YoY, a sudden 18.6% sequential spike in nonperforming loans and elevated personnel expenses are starting to weigh on the narrative of pristine credit and aggressive operating leverage.
🐂 Bull Case
The strategic remix of the balance sheet is firing on all cylinders. Net interest income (TE) grew 9.4% YoY, and NIM expanded to 2.89% (up 23 bps YoY), proving the success of proactive deposit cost management and asset repricing.
Management executed $341M in share repurchases this quarter, capitalizing on their strong 11.2% CET1 ratio. This accelerates their previously stated target of at least $300M per quarter, directly supporting EPS growth.
🐻 Bear Case
After quarters of management touting improving credit metrics, nonperforming loans jumped 18.6% sequentially. Net charge-offs also ticked up to 42 bps, signaling potential cracks in the portfolio.
Total noninterest income decelerated sequentially, falling 2.4%. Investment banking fees dropped 14.2% QoQ, and commercial mortgage servicing fees collapsed 30% YoY, exposing vulnerabilities in the fee-based growth engine.
⚖️ Verdict: ⚪
Neutral to Bullish. The structural core of the bank is performing exceptionally well, with NII and C&I loan growth fully intact. However, the unexpected reversal in credit quality prevents a top-tier rating and demands intense monitoring in upcoming quarters.
Key Themes
Balance Sheet Remix Accelerating Margin
KeyCorp's deliberate strategy to run off low-yielding consumer loans and redeploy capital into Commercial and Industrial (C&I) lending is visibly accelerating. Average C&I loans grew 11.7% YoY to $62.1B, while consumer loans fell 7.4% YoY. This mix shift directly fueled the 9.4% YoY growth in Net Interest Income and pushed NIM to 2.89%, up from 2.66% a year ago.
Record Wealth Management AUM
The mass affluent strategy and technology platform investments are paying off, pushing Assets Under Management to a record $74.2 billion—a 15.5% YoY acceleration. This growth translated directly to the bottom line, with Trust and Investment Services income growing 8.9% YoY to $159M.
Cost of Deposits Declining
While many peers struggle with deposit betas, KeyCorp successfully reduced its cost of total deposits to 1.63% (down 36 bps YoY and 2 bps sequentially). Non-time deposits grew 3% YoY while expensive time deposits were actively managed down 24.7% YoY, providing a stable, lower-cost funding base.
Credit Quality Reversing Course
Contradicting management's narrative from prior quarters that credit was strictly managed and improving, Nonperforming Loans (NPLs) spiked 18.6% sequentially to $809M. The NPL-to-portfolio loans ratio rose 11 bps QoQ to 0.73%. Concurrently, Net Charge-Offs rose 4 bps QoQ to 0.42%. This reversal in asset quality requires immediate attention.
Investment Banking Vulnerable to Macro Delays
After a strong Q1, Investment Banking and debt placement fees decelerated sharply, falling 14.2% sequentially to $169M (down 5.1% YoY). This drop highlights KeyCorp's vulnerability to macroeconomic uncertainty and the ongoing delays in middle-market M&A recovery, which clients appear to be 'slow-playing'.
Commercial Mortgage Servicing Fee Collapse
Commercial mortgage servicing fees have emerged as a significant laggard, plummeting 30% YoY and 21% sequentially to $49M. This segment is suffering structural headwinds and represents a material drag on the Commercial Bank's noninterest income.
Personnel Expenses Eating Operating Leverage
Noninterest expenses grew 5.5% YoY, completely driven by an 11.5% spike in personnel expenses ($786M). Management attributes this to employee benefits, incentive compensation, and headcount investments. While revenue growth (+6.7%) outpaced expense growth, this tightening gap puts future operating leverage targets at risk.
Other KPIs
Accelerating significantly (+23% YoY) despite an 8% intentional reduction in average consumer loans. The profit surge was driven entirely by a massive 52.7% YoY drop in provision for credit losses and strong wealth management fee generation.
Decelerating from 11.4% in 26Q1 and 11.7% a year ago. This decline is entirely intentional, as management aggressively executes share buybacks ($341M this quarter) to drive the ratio down toward their 9.5-10% long-term operating target.
Guidance
Stable. CEO Chris Gorman reiterated confidence in hitting this medium-term target. Current continuing operations ROTCE is 12.89%. Given the aggressive pace of share repurchases and NIM expansion, this target appears achievable, assuming the recent credit deterioration does not spiral into massive provision builds.
Accelerating. While management did not issue new quantitative guidance for the quarter, 1H26 NII sits at $2.49B, up 10.3% vs 1H25. This indicates the company is performing at the very top end, or slightly ahead, of its previously stated FY26 NII growth guidance of 9-10%.
Accelerating. 1H26 total taxable-equivalent revenue is $3.92B, an 8.4% YoY increase. This puts KeyCorp comfortably ahead of its previously issued full-year revenue growth target of ~7%.
Key Questions
NPL Spikes and Sector Concentration
Nonperforming loans jumped almost 19% sequentially. Is this deterioration isolated to specific commercial real estate or multifamily syndications, or is this a broader systemic shift in the C&I portfolio?
Investment Banking Stagnation
With IB fees falling 14% sequentially, are you seeing structural changes in middle-market M&A pipelines, or is this purely a timing issue related to delayed sponsor-backed deals?
Personnel Expense Trajectory
Personnel expenses surged over 11% YoY. At what point do these 'investments in people' reach a steady run-rate, and how much risk does this pose to your positive operating leverage targets if revenue growth slows?
Consumer Portfolio Floor
Average consumer loans are down 8% YoY as part of your planned runoff. What is the absolute floor for the consumer portfolio, and how will you replace that yield if C&I demand unexpectedly softens?