Key Institutional Bank (KEY) President Randy Paine joins Yahoo Finance to discuss market outlooks from the banking industry's perspective as it's likely the Federal Reserve may keep interest rates higher instead of cutting them at all in 2024.
Paine notes that the regional banking industry experienced "a period of stress" in early 2023, but the environment for smaller financial institutions has been normalizing since then. Paine highlights Key's plans to invest in "fee-generating businesses" to help boost and retain capital.
Under the prevailing high-interest rate environment, Paine acknowledges that "it's a time of uncertainty for sure." However, he emphasizes that Key's clientele has remained confident in their businesses, despite headwinds such as geopolitical risks, high inflation, and this year's election cycle. He adds a similar outlook for Key itself, which has reaffirmed its net interest income guidance: "Even if there are no cuts or we get three or four, we're going to hit our guide."
When asked about the outlook on the mergers and acquisitions (M&A) market, Paine expresses his expectation of an uptick in M&A activity under the current market.
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- On the Fed dialing back expectations of rate cuts in 2024 as Powell points towards rates staying higher for longer. The Fed's messaging painting a complicated picture for regional banks this year. For more on this, let's bring in Randy Paine, President of Key Institutional Bank. Randy, it is good to see you. I wanted to start off hearing because I heard your CEO talk and, Randy, was interested. He was saying that guys are ready to play offense. I think that's how he put it. What did that mean, Randy, playing offense?
RANDY PAINE: He did say that. He said that last week on our earnings call, and it's really about just the transition from last year. Obviously, the entire industry went through a period of stress. But we really saw things normalize over the course of the second half of the year, and now Key, specifically, we've built a tremendous amount of capital, and it's about supporting our clients, growing our relationships.
- Did that also mean-- Randy, we talked about that. Did that also mean emphasizing different businesses differently?
RANDY PAINE: He did. He did mention certainly our investment banking business, our wealth management business, being two of those areas. And in this new environment, Josh, where regional banks, specifically are going to have to operate with less capital when we can drive our revenues with fee-generating businesses, that's where you're going to see Key, and I think many of our peers invest, given the expected changes we see coming.
- And Randy, I am curious what you are hearing from clients. Obviously, a lot of uncertainty out there. When you think about interest rates, there's now the possibility that we could receive no cut. Is that giving your clients anxiety? Is that something that they're really focused on, or are there other risks?
RANDY PAINE: Yeah, it's a great question. It's a time of uncertainty for sure. But in general, when we talk to our clients, they say, well, my business is great know. We're growing. Inflation is still high, but it's starting to normalize. But they're concerned about what they see going on around them. So whether it's that inflation is still higher broadly, certainly, what's happening overseas, the election coming up. So it's a dichotomy and that broadly our customers feel good about how their businesses are positioned, but they're cautious about the overall environment.
- And Randy, was that in part-- no change, I don't think to your guidance for net interest income for Q4, why was that?
RANDY PAINE: Really, we're operating under a period-- a range of outcomes that even if there are no cuts or we get three or four, we're going to hit our guide. And so on the margin, it's going to determine whether or not we're at the upper end of that guide or in the middle of that guide. But we feel good about how we're positioned and our ability to meet that.
- I also wanted to get your thoughts on the IPO market because it's been pretty dry, maybe some pockets of pickup. Do you think we could see public markets accelerate this year, or we have to wait until 2025, or does it just ultimately depend on what the Fed does?
RANDY PAINE: Yeah, I think the Fed is going to be an important variable. And if we get no cuts, that, I think, will put some damper on what we expect to be a more normalized environment. We did start to see IPOs in the first quarter, and even a broadening of the IPO market. For example, there was a large health care REIT that went public. We were a part of that as a lead underwriter.
We hadn't seen a REIT go public since 2021. And so we do see as we look at our pipeline more IPOs coming, companies refiling, updating their filings, and it's broad-based. It's not just tech. It's not just biopharma. It's broader, and we saw that with the health care REIT transaction in the first quarter. So I don't think we're going to see a hockey stick, Allie. But we do expect more activity certainly this year than we've had the last two years.
- What about M&A too, Randy? Because I think there was probably some expectation some optimism there, and you've seen some, like the energy sector we've talked a lot about. But broadly, would you expect to pick up there as well?
RANDY PAINE: Well, we had the most large cap M&A that we've had since the third quarter of 2021 here in the first quarter of this year, and that's, I think, a precursor to more M&A to come and that's going to be driven by a few things if we were sitting here a year ago at this time, even before the banking crisis, we would have been talking about a recession coming, and we don't know if the rate cycle is over. Today, sitting here, we've got certainly consensus is that we're going to have a soft landing, and we might have two cuts, one cut, three cuts, but we all expect there to be cuts coming and certainly not increases in rates.
That's a very different psyche for companies and boardrooms as they think about M&A activity. And so we do see, and we saw this happening with our pitch activity starting in the fourth quarter of last year when consensus was that we were going to get a soft landing, and at the time, they were talking about six, seven rate cuts. I never bought into that. But still from a psychological standpoint, which M&A is a lot about having confidence, you saw that start to turn, and then when you add to that just the amount of capital that private equity has to deploy.
At the end of '23, it was $950 million. 10 years ago, it was 40% of that. And last year, private equity returned 11% of its NAV to its LPs. The median for the last decade has been 25% So there's a lot of dry powder. LPs have not seen a return of capital. You have more clarity around the economic, environment going forward. That is going to bring more M&A activity, and we've seen that at Key. We said last week on our earnings call that our M&A backlog was at record levels, and that was after our record first quarter, investment banking fee print.
- All right, Randy, thank you so much for joining us today. Appreciate it.