All right, up next, happy to once again have KeyCorp joining us at the conference. Key has navigated the challenge environment well, moving to improve its capital position by optimizing its balance sheet and continuing to have a tight focus on costs. In addition, it should be one of the most idiosyncratic NII stories in the regional banks in 2024. Joining us from KeyCorp is Chairman and CEO, Chris Gorman. Also joining us is CFO, Clark Khayat. So with that, I'm going to turn it over to Chris for a short presentation before we get into the Q&A.
Well, great. Good afternoon, everyone, and thank you, Ryan, and thank you for including us in your conference. Slide two, you'll find our statements on forward-looking disclosures. These statements cover our presentation materials and comments, as well as the question-and-answer segment of our presentation. I am now moving to slide three. We will devote most of our time this afternoon to Q&A, but I want to begin with a few opening comments which highlight our fundamental strengths, priorities, and outlook. It starts with having a sound foundation with a strong core funded balance sheet, supported by our long-standing strategic commitment to Primacy. That's namely having our client's primary operating account. Primacy provides us with stable, granular, and diverse deposits through all market conditions, such as we experienced earlier this year.
Our capital remains strong, and we are well-positioned relative to our capital priorities and the phase-in of the proposed future capital requirements. In the third quarter, we continued to benefit from our proactive balance sheet management, which resulted in a reduction of $7 billion of risk-weighted assets. This keeps us on pace to achieve our 2023 full-year RWA reduction target of $10 billion. Importantly, roughly one-half of the decline in risk-weighted assets came from applying more attractive capital rules to existing portfolios, which therefore had no impact to net interest income. The other half came from lower loan balances as we continue to de-emphasize credit only and other non-relationship businesses, consistent with our focus on relationship banking.
Although we would not expect the same magnitude of change in risk-weighted assets next year, we continue to take steps to manage our balance sheet in conjunction with anticipated regulatory changes. Our business model also positions us well relative to the proposed new capital requirements, including a revised risk weighting for market and operational risk. As currently proposed, and my personal opinion is it will do nothing but get better, we estimate that the all-in impact to our risk-weighted assets would be an increase in the low- to mid-single-digit range. In the third quarter, our Common Equity Tier 1 ratio increased by 50 basis points to 9.8%. This moved us above our targeted capital range of 9%-9.5%. We expect to continue to build capital through further balance sheet optimization and capital generation in the ordinary course of business.
There's been a lot of focus on our balance sheet positioning this year, which clearly has been a challenge. However, we are now at the inflection point, and over the next five quarters, Key will benefit from a well-defined net interest income opportunity as our short-term swaps and Treasuries reprice. On our third quarter earnings call, and based on the forward curve at that time, we indicated that we expect our net interest income benefit to reach approximately $1 billion on an annual basis by the first quarter of 2025. Consistent with our previous guidance, we believe the third quarter represented the low point from a net interest margin perspective. Further, we expect to be at or near the bottom from a net interest income perspective.
Additionally, we benefit from our strong fee-based businesses, with approximately 40% of our revenue coming from fees, a competitive advantage in the proposed new regulatory framework. Our fee businesses are driven by our leading positions in Capital Markets, Payments, and Wealth Management. We have meaningful growth opportunities in each of these businesses. Strong expense management also remains a priority. In addition to the successful completion of a company-wide expense initiative earlier this year, namely in the first quarter, we have taken additional steps in the fourth quarter to further simplify and streamline our businesses. Last month, 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 consolidating our product-based payments organization into our relationship-based commercial bank, we create synergy, synergies by establishing a single organization to serve the needs of our clients and prospects. By the way, this is something we've done successfully in the past. You'll recall when we built our integrated commercial and investment bank. Expenses in the fourth quarter are expected to remain relatively stable. Our expense outlook excludes the previously discussed notable items. And again, just to, just to rattle those off, $990 million pre-tax FDIC special assessment, $50 million of efficiency-related expenses, and $20 million from a pension settlement charge, all part of the fourth quarter. Finally, I want to comment on credit quality. I believe credit quality is the most important determinant of return on tangible common equity and as such, shareholder value over time.
Credit, credit quality remains a clear strength of Key. Our credit measures reflect the de-risking we have done over the past decade and our distinctive underwrite to distribute model. The quality of our loan portfolio continues to serve us well, with over half of our C&I loans rated as investment grade or equivalent. That's on the commercial side, obviously, and on the consumer side, weighted average FICO score of approximately 770 at origination. As a reminder, we have limited exposure to the following asset classes: leveraged lending, office loans, and other high-risk categories. By the way, B and C class office exposures in Central Business Districts are $116 million. Two-thirds of our Commercial Real Estate exposure is in Multifamily, and approximately 40% of our Multifamily exposure is in affordable housing , which continues to be a significant unmet need in this country.
We continue to benefit from insights gained from our third-party Commercial Real Estate servicing business as we service over $640 billion of off-balance sheet real estate. Before moving to Q&A, I want to bring to your attention the earnings guidance in the appendix of our presentation. There are no changes from our previous full year guidance. Our fourth quarter outlook reflects one change. Fee income is now expected to be down 5%-8% relative to the third quarter level. Our revised outlook for fee income reflects weaker than expected capital markets conditions and lower corporate services income, driven by a decline in client derivative activity, most of which, by the way, is tied to our Transactional Business that I just mentioned and our Investment B anking business.
Although we've revised our fourth quarter fee guidance, I remain confident in the long-term outlook for both our balance sheet and our fee businesses, supported by our unique business model in conjunction with our strong risk management practices. We have a very well-defined net interest income opportunity as our short-dated swaps and Treasury securities mature over the next five quarters. As these positions mature and capital markets activity normalizes, we expect to deliver results which will reflect the long-term earnings power of our company. We expect to continue to build capital in order to position Key for the new capital requirements under the proposed Basel III Endgame framework. We will benefit from ongoing capital generation, balance sheet optimization, and the continued roll down of our AOCI. Credit quality remains one of our most significant strengths.
We will continue to focus on maintaining the quality of our loan book and enhancing our risk management framework. This positions us well to deliver sound, profitable growth and in so doing, create value for our shareholders. With that, Ryan, let me turn it over to you, and we'll jump into the Q&A. Thank you.
Great. Thank you for the comments, Chris. So you talked about the RWA diet that you had been on over the past few quarters. You know, you talked about reducing $10 billion in 2023, and I think you made comments, Chris, that, you know, you wouldn't expect as much optimization in next year. Can you maybe just talk about, you know, how much more is there to go, and when will you shift your focus from optimizing the franchise to growing the balance sheet?
Sure. So just, just to be clear, Ryan, you know, this whole time, it's always about optimizing...
Mm-hmm.
and it's about making sure if we're a relationship bank, that we really have relationships. And what we did is we went with a fine-tooth comb through every single account that we have. And, you know, there's always accounts, even if you're, even if you're really disciplined, that you think you're going to completely sell through and sell into. And a lot of times, you know, people, after a period of time, aren't successful at that. And our view is, you know, I've always said this, on a standalone basis, the... If you consider a properly graded commercial loan, it cannot return its cost to capital. So with that as kind of a, as, as a backdrop, because there's too much excess capacity-
Yep
... you have to cross-sell. And as we went through our portfolio, there were kind of three categories of things. One, there were relationships where people, our teammates, had said they thought they could be really impactful, and for one reason or another, they couldn't be. We have to have the discipline to redeploy that capital. We did that. We also looked through all of our businesses and said, "We're a relationship bank. Are there any businesses that aren't truly relationship businesses?" You'll recall, Ryan, we got rid of-
Mm-hmm.
our indirect auto business, which was, at the time, I think, was like $4.4 billion in 2021. That's not a relationship business. For example, as we went through this exercise, we have a vendor finance business, which is basically white- label financing. And we said: "We're going to wind that business down, take the costs out, let it run out." And then the other thing that we did, and you know, you can imagine before these new capital rules came out, and everyone had a ton of capital, people weren't as prescriptive as they could have been in terms of applying the right RWAs. And so in some instances, we actually just went through the portfolio, and in probably $4.5 billion or so, it was just properly accounting for how many RWAs should be applied against us.
That's the best of all worlds, because without reducing your balance sheet at all-
Sure
... you reduce your RWAs. So as we think about going forward, what I wanted us to do is to take swift and decisive action around costs, around our wholesale funding, around RWAs, such that we could put this behind us, and we could be focused on growing our unique business as we go forward. As you know, we'll have the benefit of the tailwinds around the capital markets business, which, as I just talked about, is weak for us in the fourth quarter or weaker than we would have anticipated. That will come back because the pipelines are still there. We have the benefit of an NII tailwind, and so, you'll see RWAs run down a little bit more.
We guided to loans being down 1%-3%, but as we turn the page into 2024, frankly, we've done the heavy lifting that we needed to do to position Key for success in kind of the brave new world of the Basel III Endgame.
So, you know, with that as background, you know, the balance sheet diet, and as you said, loans are going to shrink again in the fourth quarter. But as you look out to next year, you know, where do you see the best revenue growth opportunities, either on the balance sheet? Obviously, you have the billion-dollar annualized tailwind.
Yeah.
Or, where do you see good opportunities within your fee businesses?
Sure. So, first of all, 40% of our revenues are fee revenues, and so I'll start with the fee side. The three buckets on the fee side that I'm very excited about are the Capital Markets business. As we execute that pipeline, that will come back. We have $54 billion of AUM in our Private Banking business, which is very, very significant. We've got a strong management team. We'll continue to grow that. The third business is a business that Clark actually built a decade ago. We have a unique payments business. Because we go to market based on industry verticals, we're able to partner up and with principally with software companies and have a really unique payments business. Those are three areas where we can lean in.
As it relates to the balance sheet, the reason I wasn't concerned about shrinking the balance sheet at all this year is anytime we want to step on the gas with respect to the balance sheet, we can. Keep in mind, we only put on our balance sheet around 19% of the capital we raise, and so when I think about when we get back to growing the balance sheet next year, where can we grow it? We'll grow it in places where we have a competitive advantage. I'll give you a for instance. Clark and I just had our business reviews, for example, with the folks that are responsible for our Renewables business. Well, as it turns out, as we've been shrinking our balance sheet and being on an RWA diet, we haven't been focused on financing the projects.
What's interesting, though, is our M&A backlog is exactly identical to what it was last year in Renewables. If you're providing the strategic advice, if you want to provide the capital, that's an easy transition. And so you'll see us within our industry verticals focus on growing the balance sheet as opposed to just distributing it all, which is what we've been doing.
So, Chris, some of the lack of near-term balance sheet growth is, you know, it's, decisions that you and the team are making, to become capital compliant. But we've heard from a lot of other companies that, you know, there's just not robust demand out there, and there's clearly signs of things slowing, and I know you frequently meet with lots of CEOs-
Mm-hmm.
of your clients. Maybe just talk about what's on the minds of your clients and what is holding them back from making investing decisions.
Yeah. Well, I mean, they're worried about the same things that everyone in this room is worried about. You know, has inflation been tamed? Question number one. What's going to... How is it going to be a soft landing? Is it going to be a hard landing? Is it possible to have a soft landing without damaging the labor market? Speaking of the labor market, they're still worried about getting people, getting enough workers, getting enough workers that want to work, being able to pay them. So that's a challenge. And when you look at all that uncertainty, although their businesses are performing well, what they're not doing is they're not really investing significant dollars in capital projects. And so the slowdown that you reference is real.
People are not investing right now in the capital cycle. Part of it is interest rates, but most of it is just uncertainty. If you think about it, this is one of the most uncertain times I've seen in my business career. If you think about what's gone on with the 10-year, just since October, and you know, the first of all, we had the biggest hike in interest rates in 40 years. I'm told the decline in interest rates over the last few weeks is the most precipitous in the last half a century. There's obviously hotspots all over the world, whether it's Taiwan, whether it's Ukraine, whether it's what's going on in the Middle East.
And so I just think, I just think right now, people feel good about their business, but I think people are just concerned about some of the unknowns out there, some of the same things all of us are dealing with day in and day out.
Maybe, Chris, we'll see if we can get Clark into the discussion here.
Sure.
And Clark, I think we talked about that the NIM had bottomed in the third quarter, and you're at or near the bottom for NII. Can you maybe share your thoughts on the trajectory of the NIM and NII, both under the forward curve and higher for longer, and any changes to your beta expectations of, I think it was like 50% by the end of this year, and how you're thinking about it in the couple of quarters ahead?
Sure. So we exited the third quarter at about 46%. We said, approaching 50%, so we think we'll be short of that. We haven't offered a terminal beta because frankly, you just don't know where rates are going to be.
Yeah.
I do think we've modeled sort of if they go up, if they stay flat, if they come down for the forward curve. Forward curve continues to change pretty rapidly. If you just think about a flat, kind of short-term rate curve through the rest of next year, we'll continue to see some drift, all of which has begun to plateau. So I think when you see 500+ basis points of rate rise, you see that slope, and we saw that, I think, a lot of 2023. You're starting to see beta slopes, you know, flatten a little bit. NIB runoff flatten a little bit, but again, if rates stay kind of where they are today, you'll just see drift. How much of that?
Hard to tell, but, you know, something—if it went through all of 2024, something in the fifties, I think, is reasonable. As it relates to NIM, we think that bottomed out in the third quarter. We feel pretty good about that. I think as you progress through 2024, we'll start to see NII strengthen. Some of that will be a function of the economy. So if we get a soft landing, I feel good about that. If there's credit issues, then that, you know, we'll have a different conversation at the time. I mean credit issues broadly. I don't see us being an outlier to the negative, obviously, on credit.
I do see, as we progress through 2024, you'll see NIM and NII strength, particularly in the back half of the year, when we see most of the swaps and treasuries work their way through.
Is there any differential in performance if we do get rate cuts versus not?
Yeah, I mean, we've talked as—you know, we've generally, one, tried to isolate those swaps and treasuries-
Yeah
- for folks. And maybe let me just unpack that for a minute. If you go back to our original view of the $1 billion, which I think was third quarter 2022, some of that has matured, mostly in the swap portfolio, so $4 billion-$5 billion, depending on if you include fourth quarter 2024. There's about $18 billion left between the swaps and the Treasuries. Treasuries just started in the third quarter-
Yeah
So the vast majority of that's 24. We've shown you a number that looks as low as 720. We've shown you a number that looks above $1 billion. The reality is that is those two-
Uh-huh
portfolios. What we're not reflecting there is the sort of funding cost that connects to that. So short-term rates stay high, that number looks better. Betas are going to be a little bit higher, funding costs are going to be a little bit higher. So there's some variability to when that number goes up, the funding will be a little bit higher. When that comes down, we'll get some relief. So they're in tandem. It's probably not perfect.
A couple of pieces to this question. So you highlighted the billion-dollar tailwind at 3Q using the 9/30 forward curve, maybe just to mark-to-market-
Yeah
- as, you know, using more updated rates. And then second, if you look at market expectations, by the end of 2025, The Street does not have NII growing nearly $1 billion, right? It's somewhere in the, let's call it $600 million-$700 million -- $600 million- $650 million range. Can you talk about some of the core drivers outside of the billion, and, and do you think you could, you know, hopefully perform better than market expectations?
Yeah. So you, you did some, I think, some very fair math there, Ryan, kind of Q1 to Q3. So look, I, I think the biggest issue, honestly, is just going to be around the funding cost. So how much... I mean, one, as I shared, some small portion of that's already in.
Yep.
and again, we can break that out for folks, but really it's going to be, and I think the game, as you go into 2024 and 2025, is really going to be around how do you manage your deposit portfolio, both balances and rates? We've talked a lot about our commercial book, which is largely indexed, either contractually or behaviorally. We think that, you know, we feel good about that. It's not all at 100% beta, which was good on the way up. It'll be, you know, less good on the way down, but still positive because it'll move naturally. The trick will be, you know, the consumer book, which for everybody, sort of sticks on the way up.
Sure.
And then, you know, it gets sticky, obviously, on the way down, and every cycle looks that way. We have been testing in the last several quarters, kind of where we can reduce rates. Again, I've shared this with a couple folks, but if you think about the consumer world, it's about client type, it's about product type, and it's about geography, and all three of those matter. So if you had some three-dimensional box, you'd be pulling your client, your product, and your geography, and you'd be saying, "How much flexibility and elasticity can I test here?" And we're trying to test in various different versions. We've not deployed more rate in consumer in the back half of the year.
Mm-hmm.
I mean, we've seen some rate go up just because of-
Sure
- mix shift, but we have not deployed more price, and we are actively testing sort of where we can be lower. So I think that'll, that'll be the game, and I think, you know-
Mm-hmm
... not a great answer, but the answer will be, how well do you manage that client portfolio going forward? And we feel good about what we've done this year, but, you know, the market changes frequently, so we'll see what happens.
I'll try it again on the earnings call.
Yeah.
Chris, so maybe near and intermediate terms, you highlighted Capital Markets slower in the fourth quarter. Historically, your business had a seasonal tilt towards the fourth quarter. So maybe just talk a little bit about what specifically was slower. And then second, you know, obviously, the Capital Markets have been under pressure for two years here, and, you know, you talked about pipelines being strong. What are expectations into next year? What do you think it takes for us to start to see activity picking up over the intermediate timeframe?
Sure. So specifically, what adversely impacted us this quarter are the financing markets, right? And so that goes to M&A deals. When you have interest rates moving the way we just described, that kind of uncertainty puts everything on pause. So basically, what happened, whether it was financings or it was financings of acquisitions, that impacted... And once people decide that they're going to hit the pause button, and they hit the pause button, and it's the middle of November, you sort of miss your, you sort of miss your window-
Mm-hmm
To get it done, whatever it is, by the end of the year. What I think clearly starts to clear the market, there's a couple things that have to happen. One is, it doesn't matter where rates are, we just have to have some lack of volatility. People have to believe that, you know, tomorrow, rates aren't going to be 30% higher or 30% lower, that they're not making a bad deal, that it's not a bad trade, that they're not going into a market where they can absolutely have a failed deal. And so I don't care, frankly, if - I think there's two options: either rates are going to come down. My personal view is rates are elevated higher for longer, and that's just fine.
But we need it to be elevated as opposed to having the kind of volatility. The other thing that's at play right now is just sort of the price discovery of what's going on. Because financing markets have changed so much, it impacts, obviously, the value of transactions, and nowhere does it impact the value of transactions more than, say, real estate, which is all about the cap rate. That has a fundamental difference, and until you get sort of a meeting of the minds with respect to sort of the bid ask, and that's happening because people can't put off transactions forever.
As all of you know, if you need liquidity, you need liquidity, and sort of if you want to do something strategic, you have to do it because there's an inverse relationship between how long it takes to get it done and your probability of actually getting something done. So I think, I think all we need is just for these markets to settle in a bit. The discussions we're out there having with our clients, it's going to be hard. Let's face it, it's going to be hard to grow organically. A lot of people have had sort of a. I'm not talking about banking. Banking is going to be hard to grow organically as well, but it's gonna because we can only do as well as our clients.
But think about a lot of companies that have been sort of on a sugar high of being able to just pass through price increases that look like they're really growing their top line, when in fact, on a unit basis, they're not. And so people are going to start looking at expenses as we have, not once, but twice this year. And they're gonna look at expenses, and they're gonna look at doing things inorganically. And that would apply to the financial services business and obviously the rest of the economy as well.
Maybe to touch on expenses, I think you're talking about-
Yep.
Relatively flat. Where are the most significant opportunities? How do you balance expense discipline, investing for the future, and, you know, how do you think about returning to positive operating leverage over the next year or two?
Sure. So that is a great question, because one of the things, when you're in the mode of cutting expenses, people have a tendency to try to hit a number, and when they are working on hitting a number, they're not investing, and you have to invest in your business. You also have to take expenses out of your business all the time. So when we talk about being relatively stable on a linked-quarter basis, or we talk about being relatively stable year-over-year, that is inclusive, Ryan, of us investing in the business, because you have to do that. And that's why, frankly, you know, we went through one exercise, which was mostly focused around people in the first quarter. What we just announced in the last couple weeks is, in some ways, a restructuring of our business.
For example, we put our Payments Business, our Business Banking, and our Middle Market together. It's better for our clients. It's better for our bankers because what bankers want to be- the good bankers want to be more impactful, and it makes them more impactful, and it enables us to take out layers of management and simplify our business. And so, we- you know, we're big believers that you have-- I always talk about pulling both levers. You always have, you always have to be taking costs out of the business, but you have to be investing in your business. And for us, we took out a lot of costs so we can invest. Going to your last question, we'll give formal guidance on positive operating leverage when we come out with our guidance for 2024.
But, positive operating leverage, I've always felt is really, really important. So we've taken out a bunch of costs. We're going to get a tailwind on NII. We're going to get a tailwind on capital markets. You know, we'll have more to say later, but that's a pretty good formula for trying to have positive operating leverage.
Sounds good. A couple other topics in the last 6 or 7 minutes here. So first, just, you know, capital. You guys did a nice job growing capital this past quarter, approaching 10%. Obviously, on an adjusted basis, we're a little bit below. Maybe just talk a little bit about, you know, the capital priorities and how do you balance eventually returning to growth, but wanting to become compliant with the new rules that are going to be put into place?
Yeah. So, let me kick that off, and then, Clark, I'll, I'll turn it over to you. We feel good about if, if Basel III was adopted as it's presently drafted, we're just fine on the trajectory that we're on. Our capital priorities are, first and foremost, to support our clients, and secondly, to pay our dividend, and third, to continue to grow capital. We sort of checked each of those boxes in the last quarter, and there's no reason why we can't continue to do that. Clark, as you think about capital going out into 2024 and 2025, what would you add?
Yeah, I mean, I think we took the I think we spent $23 doing what we had to do. And you've asked a couple of these questions, Ryan, so I think it's just important to acknowledge it, that the question is: When can we be on the offense a little bit more? And I would think, look, our focus has always been use capital first to support clients. That's where we'll want to go. To the extent we're bringing down RWAs, we're also recycling them, right?
Mm-hmm.
We're recycling them for portfolios of clients that we, you know, have a distinctive advantage with. In places where we have targeted scale, we'll continue to do that. And what Chris is pushing the team to do is, how quickly can we get to the point where we can go back on offense more aggressively? And some of that's going to be, you know, getting, you know, firmer view of the rules. Right now, if the rules are going to be better than planned, we feel really good about that from a phase-in and an absolute level standpoint.
... but it's also where the economy goes. So the combination of sort of get the rules finalized, understand what our macro view is, and then, you know, where we see stability there, I think you'll see us be aggressive.
It was good to see the fourth quarter dividend had been approved. You know, can you give us an update on your ability to maintain the dividend? And what do you think is the right payout, given that the company's obviously underearning today, but there's a hope that as we look out several quarters, that the earnings profile will be much better?
Sure. Well, I mean, I've my view on this, Ryan, has been very consistent throughout the year, and my view is that we, as a board, have a responsibility to take a long-term perspective, and our board takes a long-term perspective. Our business is performing just fine. We obviously have had a huge headwind based on the fact that we've been, we have been and are liability sensitive in a huge hiking cycle. I am, I think a good number for a payout over time, a dividend payout, cash dividend payout, would be 40%-50%. We paid out about 71% on $0.205, you know, or we will, I should say, December 15th.
Keep in mind that many times we're not buying back any of our shares right now, and we won't buy back any of our shares until, at a bare minimum, we have great clarity on where Basel III Endgame's going. It would be silly to do so. But I'm, for one, comfortable having that kind of a payout rate. If you look at it, the combined cash dividend and share repurchases for Key over history, at many times, we've been paying out 80% in total. So I'm just focused on the long term. I'm focused on how do we continue to build this business?
How do we pivot to, as Clark mentioned, to take away, to take advantage of what we think is a, is a unique business model that we have, that we know we can grow when we need to.
Maybe just spend a minute on credit. Any areas you're watching closely? Do you expect to... You know, you had—you reiterated the fourth quarter and full year guidance, which has been—credit performance has been better than most peers. How are you thinking about credit into 2024? Do you expect to remain below that historical 40-60, which I think you've highlighted might be lower going forward?
Yeah. So, we feel really good about our credit. There's really... You know, when you think about a credit cycle, and if you think that it's not gonna be a soft landing, and I, for one, think that it's not a fait accompli that it is, you start looking and really being very careful at looking any place that there's leverage and any place where you could have degradation of the equivalent of cash flow EBITDA. And for, for us, you look at kind of where there's leverage finance. We have $2.1 billion out of $118 billion of leverage loans. I feel very comfortable with those. And the other is real estate, and as I mentioned earlier, I'm very comfortable with our real estate. So I feel good about it.
I do think as this cycle plays out, one of the things that we, we will revisit, Ryan, will be the 40-60 through the cycle because, you know, we charged off 24, last quarter, 24 basis points, that is, and I just don't see a path to get to 40-60. And so that means we need to step back, and we need to look at, you know, what targets we're giving you and the rest of the investors. 40-60 through the cycle is probably too high for the way we've now configured the business.
You know, you had talked about this, I think, last quarter, and I want to tie two things in together. When you think about the return improvement that the company's going to see over the next couple of quarters, do you have an updated view on where you expect to be targeting returns over a medium-term timeframe? And, you know, when we were sitting here last year, you talked about execution and what was misunderstood about the story. You know, what do you think investors are still missing in the Key story in closing?
Well, I think, I think what investors are missing is, while we have had short-term, very clearly defined headwinds, I think people, what people are missing is how Key is positioned in the brave new world under Basel III. And it's all gonna be about what is the duration, the granularity of your deposits? Ours are, ours are very good. And how much velocity do you have, on your balance sheet? Because loan-to-deposit ratios for Category IV banks used to be targeted at 90%-95%. My personal view is they're gonna be mid-70s%.
Mm-hmm.
And so the winning model going forward is to have a lot of fee income. We have that 40% in the three areas I mentioned earlier. Do you have a distinctive business model, and can you get velocity of capital? And so I think what people are missing is they're focusing a lot on kind of what has happened over 2023, when we were liability sensitive, when it would've been great to be asset sensitive. And I don't think they're focusing enough going forward of what is the construct of banking gonna look like. And I think we're really well positioned for that, Ryan.
Great. Well, we're out of time, so please join me in thanking Key.