KeyCorp
NYSE:KEY
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KeyCorp
Earnings Call Analysis
Q4-2023 Analysis
KeyCorp
During KeyCorp's fourth quarter earnings call, executives outlined the recent financial performance and future expectations for the company. In the fourth quarter, net income from continuing operations was $0.03 per common share, which is lower by $0.26 from the previous quarter and down $0.35 from the prior year. Several one-time costs contributed negatively to earnings, including a special FDIC assessment of $190 million, efficiency-related expenses of $67 million, and a pension settlement charge of $18 million, combining for a pre-tax total of $275 million or $209 million after tax.
KeyCorp focused on optimizing its balance sheet by prioritizing full relationships over standalone credit services, leading to a 3% reduction in average loans from the previous quarter and the year before. In particular, the reduction in commercial and industrial (C&I) loan balances was deliberate as KeyCorp aimed to decrease its exposure to nonrelationship business. The company has also improved its capital and liquidity positions throughout the year, achieving $13 billion in liquidity generated mainly through loan reductions and growing relationship deposits, while also reducing wholesale borrowings by $12 billion.
Despite market volatility, KeyCorp saw growth in its core deposit base with a $3 billion year-over-year increase in period-end deposits. Although there was a downtick in noninterest-bearing deposits and increased pressure on deposit pricing, the company managed to maintain stability in average deposits compared to the prior year and reduce reliance on wholesale funding. The total cost of deposits stood at 206 basis points with the deposit beta approximating the previously guided 50% by the year's end.
The net interest margin stood at 2.07% for the fourth quarter, with actions taken to manage interest rate risk and improved funding mix contributing to a slight uptick from the prior quarter. Although higher interest rates have led to increased costs of interest-bearing deposits and borrowing, which outpaced the benefit from higher earning asset yields, these factors combined with a strategic reduction in loan balances helped enhance KeyCorp's net interest margin.
Noninterest income reached $610 million in the fourth quarter, marking a decrease from the previous year due to declines in investment banking and corporate services income. Expenses saw a relative increase, largely due to the aforementioned one-time items. Excluding these factors, expenses were relatively stable, and KeyCorp emphasized the continuation of proactive expense management to allow for reinvestments in the business.
Credit quality metrics demonstrated solidity, and KeyCorp reinforced its confidence in its well-positioned loan portfolio, despite a slight uptick in nonperforming and criticized loans. The capital position was notably strengthened, with the common equity Tier 1 ratio increasing to 10%, which is a 90 basis point improvement from the prior year. The company is well-prepared for future regulatory capital requirements while still engaging in client relationship activities and capital return efforts.
Looking ahead to 2024, KeyCorp anticipates average loans to decrease by 5% to 7%, largely a reflection of balance sheet optimization efforts. However, period-end loans by the end of 2024 are expected to stabilize with some growth in the latter half of the year. Average deposits may decrease by up to 2%, and net interest income might fall by 2% to 5% compared to the first half of 2023. On the upside, noninterest income could grow by at least 5%, and noninterest expenses are projected to remain stable at around $4.4 billion. KeyCorp predicts moderate positive operating leverage, with credit quality expected to remain strong throughout the year.
KeyCorp is on the verge of realizing a financial tailwind as short-term swaps roll off and treasuries mature, with an estimated $500 million net interest income benefit for 2024—substantially higher than the $85 million benefit in 2023. This buildup will lead to significant growth in the net interest margin, estimated to reach between 2.40% to 2.50% by the end of 2024. The financial trajectory is expected to be robust as the company enters 2025, fueled by improving net interest income and overall financial performance.
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[Audio Gap]
2023 Fourth Quarter Earnings Call. [Operator Instructions] 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.
Well, thank you for joining us for KeyCorp's Fourth Quarter 2023 Earnings Conference Call. Joining me on the call today are Clark Khayat, our Chief Financial Officer; and our Chief Risk Officer, Darrin Benhart, who succeeded Mark Midkiff at the beginning of this year.
On Slide 2, you will find our statement on 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 million or $0.03 per share. Our results included $209 million 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.
Fourth 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 in interest rates that transpired.
We took a number of necessary steps as we move through the year to enhance our balance sheet liquidity capital position in preparation for potential changes in capital rules, positioning ourselves to be a simpler, smaller, more profitable bank. 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 that Key accomplished a number of positive things last year. And as a result, I am confident we have laid the groundwork as we move forward.
First and most importantly, throughout the year, the tremendous work and dedication of our teammates, allowed us to continue to serve and support our clients through turbulent market conditions, particularly in the first half of the year. I am very thankful and proud of our teammates as they set aside the noise affecting our industry stepped up and continued to focus on executing on our strategic priorities and steadfastly serving our clients. Our focus on relationships continue to guide our balance sheet optimization efforts.
In 2023, we reduced loans by $7 billion, as we deemphasize credit-only and other nonrelationship 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 billion.
In consumer, we grew relationship households by 3%, with about 2/3 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. We also continued to raise significant capital for the benefit of our clients, over $80 billion 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 capital-intensive and nonrelationship 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 commercial banking and payments businesses. 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 client and prospect experience.
Altogether, these actions we took in '23 impacted 6% of our teammates. Additionally, we continued to rationalize our non-branch nonoperation 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 million on an annualized basis that we will redeploy to deliver value for our clients and drive future growth. More broadly, these actions, combined with our ongoing disciplined expense management, have enabled us to hold core expenses essentially flat at $4.4 billion annually over the past 2 years, and that is in spite of inflationary headwinds facing our industry.
On the capital front, our risk-weighted assets decreased by $14 billion from the beginning of the year, exceeding our full year optimization goal of $10 billion. Concurrently, we also increased our common equity Tier 1 numerator through net capital generation. 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 billion 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. 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 billion 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 the derisking we have done over the past decade and our distinctive underwrite to distribute model.
Net charge-offs were 26 basis points in the fourth quarter and 21 basis points for the full year. Our NPAs, which we firmly believe had very low loss content, remained well below our historical averages.
The quality of our loan portfolio continues to serve us well. With over half of our C&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 leveraged lending, office loans and other high-risk categories. 2/3 of our commercial real estate exposure is multifamily, of which, approximately 40% is in affordable housing, which continues to be a significant and unmet need in this country.
As we move to 2024, I want to provide my key takeaways from the guidance that Clark will walk you through in more detail shortly.
First, we have a clearly defined net interest 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.
We began to see some of that work pay off this quarter, as our net interest income grew slightly relative to the third quarter. Our momentum makes me confident that we saw our net interest margin bottom out in the third quarter 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 differentiated 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 sheet management perspective that I spoke about earlier.
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.
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 deposits proves to be a strong foundation. We are now in a position where we can be more opportunistic as we turn the page to 2024.
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 and 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.
At the same time, I am pleased to welcome Brian Mauney, 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?
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 fourth quarter, 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. First, $190 million from an FDIC special assessment; second, $67 million from an efficiency-related expense; and third, $18 million from a pension settlement charge, for a total of $275 million pretax or $209 million after tax. The breakdown of these items can be found in the last page of our slide presentation.
Our fourth quarter results were generally consistent with the guidance we provided last month. As expected, we saw stability in the net interest income line this quarter, and our net interest margin increased by 6 basis points relative to the third quarter, as we began to see some early benefits from our swap and treasury portfolios.
Fees declined 5% sequentially on the better end of the range we provided last month. Expense growth was primarily attributable to the 3 items I mentioned. Without these items, expenses would have been relatively stable, compared to the third quarter net charge-offs as a percent of loans remained low at 26 basis points, and we added $26 million to our allowance for credit losses to reflect some modest migration in 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 billion, down 3% from both the year-ago period and prior quarter. The decline in average loans was primarily driven by a reduction in C&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 nonrelationship business.
We reduced risk-weighted assets by $4 billion in the fourth quarter, and as Chris mentioned, by approximately $14 billion 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 2024.
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 billion, 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 billion 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.
Since the end of the first quarter, we generated almost $13 billion of liquidity by reducing loans and growing relationship deposits, and reduced wholesale borrowings by $12 billion.
Our total cost of deposits was 206 basis points in the fourth 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 noninterest-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 million for the fourth quarter, down 24% from the year ago period and up slightly from the prior quarter. Our net interest margin was 2.07% for the fourth quarter compared to 2.73% for the same period last year and 2.01% for the fourth 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 from higher earning asset yields. Additionally, the balance sheet experienced a shift in funding mix from noninterest-bearing deposits to higher cost interest-bearing deposits.
Relative to the third quarter, 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 an improved funding mix. The increase was partly offset by higher interest-bearing deposit costs, which exceeded the benefit from higher earning asset yields.
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 $345 million this quarter or by $1.4 billion for the full year, and lowered our net interest margin by 77 basis points this quarter.
As previously discussed during our third quarter earnings call, in October, we terminated $7.5 billion of received 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. Noninterest income was $610 million for the fourth quarter of 2023, down $61 million from the year ago period and down $33 million from the third quarter. The decrease in noninterest income from a year ago reflects a $36 million decline in investment banking and debt placement fees, driven by lower syndication fees and M&A advisory.
Additionally, corporate services income declined $22 million, driven by lower customer derivatives trading revenue. The decrease in noninterest income for the third quarter reflects a $13 million decrease in other income, primarily driven by a gain on a loan sale in the prior quarter.
I'm now on Slide 10. Total noninterest expense for the quarter was $1.4 billion, up $216 million from the year ago period, and up $262 million from last quarter. As mentioned, fourth quarter results reflect $275 million of impact from FDIC assessment, efficiency-related expenses and pension settlement charge.
Efficiency-related expenses included $39 million related to severance and $24 million 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 expense base and simplify and streamline our business, so we can continue to reinvest in all our businesses.
Moving to Slide 11. Overall credit quality and our related outlook remains solid. For the fourth quarter, net charge-offs were $76 million or 26 basis points of average loans. This compares to $71 million in the prior quarter.
Criticized outstandings to period-end loans increased 50 basis points this quarter, driven by movements in real estate, health care and consumer goods.
While nonperforming loans 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 million for the fourth quarter, including $26 million of reserve build, and our [ allowance ] for credit losses to period-end loans increased from 1.54% to 1.60%.
Turning to Slide 12. We significantly increased our capital position throughout 2023. We ended the fourth 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 in the near term.
Our AOCI position improved by $1.4 billion this quarter. The right side of this slide shows Key's go-forward expected reduction in our [ AOCR ] mark based on 2 scenarios: 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 $1.8 billion of capital build through that time frame.
In the flat rate scenario, we still achieved 90% of that benefit between now and year-end 2025. [ Said ] differently, we still accrete $1.6 billion 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. 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 31 forward curve, which assumes 625 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 dot plots, 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 2023 and are reflected in our year-end balance.
We expect period-end loans at the end of 2024 to be relatively stable compared to the end of 2023, with some decline in the first half of the year offset by growth expected in the second half of 2024. 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 fourth quarter exit rate relative to the first half of 2023. This equates to net interest income in 2024 that is up low single digits, relative to our annualized fourth quarter exit rate. I'll provide more color on our net interest income outlook shortly.
We expect noninterest income to be up 5% or better, with upside of capital market activity normalizes and market levels and GDP trends remain constructive.
Noninterest expense should be relatively stable at about $4.4 billion, as we realize the benefits from our 2023 efficiency actions. We will continue to tightly manage our cost base, including executing on additional opportunities to simplify and streamline our organization. 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 the first half.
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. 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 [indiscernible].
Now you're familiar with our well-defined net interest income tailwind as the impact of our short-term swaps roll off and treasuries mature, especially in the back half of 2024. The ultimate opportunity remains largely unchanged at approximately $900 million.
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 first quarter of 2025. So this all builds quarter-by-quarter, since the initial set of swaps came off the books in first quarter of 2023.
As we turn the page on 2023, we are nearing the halfway point of this journey. Since 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. In total, for 2023, that was approximately $85 million of additional income. The next 4 bars showed the progression 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 '24, we expect to realize $78 million of additional net interest income versus 1Q '23 from these positions.
For 2024, we estimate the benefit to be approximately $500 million in total, which is the sum of the 4 quarterly bars. This would represent an increase of more than $400 million over the benefit received in 2023, which, as previously mentioned, was approximately $85 million.
The final bar to the far right, which has been the main focus of this discussion over the last year or so, is the first quarter 2025 number. This shows the benefit, currently estimated for the quarter, at approximately $220 million from essentially the entire swap and short-term treasury portfolios rolling off. Again, this is incremental to 1Q '23 and represents an annualized value of approximately $900 million.
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.
Putting this all together, we expect our first quarter NII to be down 3% to 5% from the fourth quarter. From there, we expect to grow and start to accelerate in the second half of the year, as the pace of swaps in U.S. treasury maturities pick up meaningfully and nearly $5 billion in aggregate per quarter.
From the fourth quarter of 2023 to the fourth quarter of 2024, we expect our quarterly net interest income to grow 10% plus and exit the year north of $1 billion. We would also expect the net interest margin to improve meaningfully to the 2.40% to 2.50% range by the end of 2024. 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&A portion of our call. Operator?
[Operator Instructions] Our first question will come from Peter Winter with D.A. Davidson. Mr. Winter, I apologize here. Go ahead, Mr. Winter.
All right. Great. 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 first quarter down 3%, but clearly, it's going to be a pretty meaningful impact -- uptick in the second half of the year.
Sure. Thanks, Peter. And I 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, and I'm going to just categorize sort of the big movers. I think one, 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 '23 to full year '24, which we've said down 2% to 5%, 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 a 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 fourth quarter kind of annualized number rolls through.
So those are the headwinds. What we have coming our way 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's sort of dimensionalizes what that year-over-year look shakes out to be.
If you take the fourth quarter of '23 annualized and you compare that to the full year '24, we're guiding up low single digits there. The biggest difference being that, that funding cost, that really is pretty flat from fourth quarter through '24, which 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.
So you start to see that down 2% to 5%, flip to up low single digits. We talked a little bit about the first quarter being down, but let me just go fourth quarter to fourth quarter. So I think that exit piece is important. You're going to have deposits down a bit and earning asset yields down a bit, going from fourth quarter of '23 to fourth quarter of '24, but you get a nice pickup in the quarterly swap and treasury portfolio, our overall funding costs 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. And 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 the year. And then as you roll into 2025, you have that last $5 billion tranche of treasuries and swaps maturing in the fourth quarter that accrues to the first quarter of '25, so we start to hit the ground running really nicely with a very steep trajectory as we enter '25.
So I'll stop there. That was a lot of stuff, but just trying to give you the components that are moving around.
And just what are you expecting or assuming in terms of the forward curve and the timing of the rate cuts?
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 first 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. But we're trying to provide guidance that I think incorporates all that. And as you know, when those cuts occur and the magnitude of that will roll through to how we manage our deposit pricing, obviously.
Got. And then Vern, congratulations on the announcement. It's just been a pure pleasure working with you and the investment community will be missing you.
Thank you, Peter.
Next, we go to the line of Scott Siefers with Piper Sandler.
Thanks for all the moving pieces in the [ NII ] color. I guess, Clark, you discussed the 3% sort of normalized margin. I know we get sort of one final uplift between fourth quarter of next year and first part of 2025. So the -- I think the way you've guided to fourth quarter 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 bogging, and what has to happen to get us to that sort of range?
Yes. Thanks, Scott. So if you just go back and we talked a little bit about this, and it's overly simplistic to be clear. But if we took second, third, fourth quarter of '23 and put the impact of swaps and treasuries back in the margin, we'd be [ 2 81 to 2 84 ] 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 slipping 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 slipping yield curve, just that tends to accrue a little bit to all of our benefit on NIM. But I do think that [ 2 80 ] plus is pretty reflective of the underlying core ability of the business as it stands today.
Perfect. 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?
Sure, Scott. Happy to address that. So if you take what we just reported of $136 million, specifically on the line you asked about investment banking and debt placement fees, that would annualize at about $544 million.
Conversely, if you took sort of the business and remove 2021 and said that's an outlier, the traditional run rate is at least kind of $650 million. 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. 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.
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.
Okay. Perfect. And then finally, Vern, best wishes. Thank you so much for everything.
Thank you, Scott.
Next, we go to John Pancari with Evercore.
First, congratulations, Vern. Best of luck, our legend, and Brian, welcome looking forward to working with you again.
Question on the -- a little bit more on the NII dynamics. I wanted to get your thoughts on if we do see the cuts to 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 a cumulative on the way down? And what is factored into your net interest income outlook in terms of that beta?
Yes, John, so I'll just -- I'll start with that, and 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, $145 billion are commercial. And of those, about 2/3 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-bearing, but we think we've sort of bottomed out there.
Clark, what would you add to that?
Yes. So maybe broadly, John, on the NII guide, we would expect some drift up, particularly in the first quarter 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, 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 is more like the [ 4 ] cuts 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 '25. We'll see some benefit in '24, but on the consumer book, it's just going to lag a little bit. And that -- and candidly, that's just going to be as much a 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.
And frankly, all markets are not the same. We're out there experimenting with a few things as we speak.
Got it. Okay. And then separately, on the credit front, can you give us a little bit more color on the [ 25% ] increase in nonperformers 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%. What was that last quarter? Was that the biggest increase in the nonperformers?
Yes, I'll come back to you on the increase from third quarter. 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.
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 criticized 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% or lower CLTVs out of the gate, we just don't see a lot of loss [ content ] there.
And just one clarification, so it was primarily C&I related in terms of the NPA increase or [indiscernible]?
There were 3 specific credits, 1 of which was real estate.
Next, we go to the line of Manan Gosalia with Morgan Stanley.
I wanted to extend my best to Vern as well. And I just wanted to say we really appreciate all your help over there. So a big thank you.
And then on my question, I think you said you still expect some modest RWA reduction in the first half of 2024. 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?
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 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. 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. But in terms of really seeing the step down in RWAs, as you saw last year, $14 billion, 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.
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 shrink some loan demand.
The other thing that we have to grow through, and this is by design, is we're going to have $3 billion 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 perspective, I'm confident that we can get it.
The only other thing I'd add, Manan, is just to reground everybody in the average-to-average move. So 118 billion of average in '23, ending point [ 112.6 ] 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 first quarter, maybe into the second quarter, as some of that nonrelationship business continues to move out. But we'll see the build back through the course of the year and expect the ending of '24 to be relatively stable with where we exit '23. 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.
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 a flatter yield 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 we're liability sensitive 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.
And our next question is from Erika Najarian with UBS.
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 or you're telling us is happening over 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?
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.
Yes. So thank you, Erika. 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, relationship -- nonrelationship and credit-only related clients coming down.
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 first quarter, as will the fact that rates remain high in the first quarter under almost any cutting scenario, and we'll have a little bit of beta drift. So that's really the first quarter 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 and 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.
Got it. And my second question is a bit of a 2 quarter as I'm trying to squeeze it in. One, Clark, I think when I first met you, I was very impressed by how you were so good at understanding where your funding needs and funding sources.
So my question for you is, are these 2/3 of your commercial deposit 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.
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 happen, which clearly impacts some of the math behind the swaps.
Yes. So the second one, Erika, is easy. We've -- I think we've provided that breakout before 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. So I think that's the right question. There's always a little bit of 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 component of what we think is our indexed will come through. And just as a reminder, the -- when we say indexed, it's not all 100% index.
So there's a range of that. So bringing a client down is indexed kind of 50% doesn't feel as challenging to negotiate than somebody who's coming down at 100% plus. 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.
Got it. And [indiscernible], Vern.
Thanks, Erika.
Next, we move to the line of Matt O'Connor with Deutsche Bank.
Just a quick clarification. The fee guidance of 5%, you walked through a lot of detail on that on banking. Does that assume the 4Q annualized level? The kind of up $100 million more normal level or somewhere between?
It's a little bit in between, Matt, probably a little more leaning toward the higher number, but we do think if markets kind of fully normalized, we'd see a little bit outside. So it's better than the annualized fourth quarter, not quite all the way to what we would think is normal operation.
Next, we move on to the line of Gerard Cassidy with RBC.
Chris, one of the interesting developments over the last 12 to 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 a strong, big regional lender in the C&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?
Sure. It's a great question, and it's developing quickly. So principally, they are customers of ours, and let me explain what I mean by that. As you well know, we distribute 80% of the capital we raised. 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.
As we've said many times, for banks, a stand-alone 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.
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, it doesn't hurdle. So I look at it, frankly, as an opportunity for us. I think we're well positioned for that. .
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?
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 insight in that we have this third-party commercial loan servicing business. And we are the named special servicer on over $200 billion 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 for the reconnaissance we get through our third-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. Actually, what is in special servicing is down -- we had a record year in 2023, 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.
Great, Chris. And Vern, really good luck on retirement. And I do want to point out that I have a [indiscernible] on the investor conference book from September of '95 when we had the infamous Elvis impersonator entertain us that [ night. ] So thank you, those are great memories, Vern. Thank you.
Well, fortunately, I wasn't around for that, but I'm sure Vern will be happy to sign it for you, Gerard.
Next, we go to the line of Mike Mayo with Wells Fargo Securities.
Well, Chris, one of your competitors' CEOs [indiscernible] 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 in the past year?
And I have 2 specific questions before you give that broader answer. What percent of the value of commercial relationship is from the deposits? That's a specific number. And then what percent of the revenues that you get from your typical commercial relationship is fee-based versus lending base, because I think that gets to the larger value proposition of Key.
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 institutional bank, the split there in some areas is as high as 80% fees, 20% spread. And it varies depending on the business because some businesses are more capital-intensive than others. 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 is 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. Having said that, I do not think scale is the answer for a bank like Key.
And I say that because when you have competitors that are 20x 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?
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 from treasury management and other services that you provide corporate treasurers, is that still sticky? And is that like 20%, 30%, 50% of the value, as some have said?
And then just another follow-up is just what does all your thinking mean about acquisitions, if and when the unrealized securities losses go down for you and the targets? Are you looking to be in that game or not?
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 positive 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 regulatory/approval process, I think there's a lot of questions around that.
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 [indiscernible] is a significant value in the deposits. 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 content percent of the value is in the payments and deposits. But we will circle back to you and confirm that.
Next, we go to Steven Alexopoulos with JPMorgan.
I want to start out, Vern, like everybody else said, almost everybody on the call. Congratulations. You're really one of a kind, so we're going to miss you.
In terms of my question, so first, I want to go back, Clark, to your response to Scott Siefers earlier question on where NIM could go. You said [ 2 80 to 3, ] like in a more normal environment, whatever the hell that is, right? We haven't seen that in 20 years. But you guys used to do [ 3 to 3 20. ]
Is there something -- it's really a 2-part question. One, is there something structural maybe the way you're using swaps today that there's a lower ceiling on them, like [ 3 to 3 20 ] is done, maybe 3 is like upper end?
And then secondly, assuming this benefit accrues through 2024, that's up for a good 2025. Now -- and maybe for Chris, how do you think about this, like NIMs expanding pretty nicely in 2025, assume we have a more normal curve. Is that the time you now step up the pace of investment you've been cutting or expenses forever? Is that the time where you step up? Or do you let that benefit fall to the bottom line?
Yes. 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 different.
So if you think about the quality of the borrowers, the 55% of C&I being investment grade, the structural differences in our CRE portfolio, the largely residential real estate, collateralized kind of super prime consumer, all of those things kind of lean you towards a little bit lower base NII just because of the quality of that portfolio.
Clark, I would add card as well.
I mean, yes, card, which we have, but it's highly 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. We think we're doing that better and better as you go down market in commercial with things like payments, and we think we're getting much better on wealth and building the wealth business and 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 at length.
We have been tight on expenses. We've been doing that largely to maintain our ability to invest. 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've 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. But we're going to continue to make sure that we can invest and build the franchise the way we need to, to be competitive.
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 billion of AUM. We think that platform is eminently leverageable. We'll be investing in that. I mentioned also payments, and then lastly, I also mentioned business banking. Those are the areas where you'll see us leaning in from an investment perspective.
Got it. Okay. If I can ask one other question. So Chris, it's interesting 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 fourth quarter. I know you don't have a large office portfolio, but I'm sure some of them came up for [indiscernible].
What's happening? Are you able to renew because the LTV, like you said, was 60%? You've got 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.
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 rip the business down to the studs and rebuilt it, and rebuild it around an underwrite to distribute model. So [ Fannie, Freddie, FHA, ] the life companies, the CMBS market.
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, when we go through the math and because of the rise in interest rates, because they qualify them as a criticized loan, we go to them and we ask them for an interest reserve and they give it to us.
So what is going on, 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.
Got it. May be unique, but still nonetheless, not the overhang that maybe some are being led to believe.
Indeed.
Next, we go to Ken Usdin with Jefferies.
Sorry for the late question here. Congrats to both Vern and Brian. Just one on expenses and efficiency. You guys did a great job last year, [indiscernible] taking the actions to continue to head towards stable [indiscernible] expenses.
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 how can you keep that stable trajectory as you look further out?
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 $1.1 billion a quarter. There are always things that we can do better to create the raw material to continue to invest.
And in our business, unfortunately, the real cost is people. And if you look point-to-point, we have [ 1,369 ] less people on the team today than we did a year ago. And obviously, that will pull through.
There's also -- you also 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. 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.
And next, we go to a question from Bill Carcache.
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?
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 in order to get inflation under control?
Right now, our customers are in good shape. As you know, the job market is in good shape. Interesting data point and one of the reasons I think inflation is going to be stickier than people think.
Our noninterest-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. And so if we get a soft landing, I think there'll be opportunities for loan growth. We, in our planning, we're assuming a short recession in 2024 for all the reasons I just described.
Understood. Very good. That's very helpful. And let me also add my congratulations for Vern. All the best and looking forward to working with you as well, Brian.
And ladies and gentlemen, we will now be turning the conference back to Chris Gorman for closing remarks.
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, 216-689-4221. This concludes our remarks. Have a good day all.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.