KeyCorp
Q4 2020 Earnings Call Transcript

Published: 21 Jan 2021

[Operator:]

Good morning, and welcome to KeyCorp's Fourth Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to the Chairman and CEO, Chris Gorman. Please go ahead.

[Chris Gorman:]

Thank you, John, and good morning, and welcome to KeyCorp's fourth quarter 2020 earnings conference call. Joining me for the call today are Don Kimble, our Chief Financial Officer; and Mark Midkiff, our Chief Risk Officer. Slide 2 is our statement on forward-looking disclosure and non-GAAP financial measures. It covers our presentation materials and comments as well as the question-and-answer segment of our call. This morning, KEY reported record revenue and earnings. But before we get into the details of the quarter, I want to share a couple of broader and contextual comments. I am very proud of the way our team continues to navigate the pandemic and related economic downturn. Their dedication, combined with our investments and talent and digital capabilities continue to serve the company, our clients, our communities, and our shareholders well.

[Don Kimble:]

Thanks, Chris. I'm now on Slide 5. As Chris said it was a very strong quarter for us, with record net income from continuing operations of $0.56 per common share, up 37% from the prior quarter and 24% from the prior year ago period. Return on average tangible common equity for the quarter was over 16%, up over 400 basis points from the third quarter. I will cover the other items on this slide later in my presentation. Turning to Slide 6. Total average loans were $102 billion, up 9% from the fourth quarter of last year, driven by growth in both commercial and consumer loans. Commercial loans reflect an increase of over $7.5 billion from the PPP loans. Consumer loans benefited from the continued growth from Laurel Road and as Chris mentioned, strong performance from our consumer mortgage business. Laurel Road originated $590 million of loans this quarter and $2.3 billion for the full year, up over 20% from the full year of 2019. We also generated another record $2.5 billion of consumer mortgage loans in the quarter, bringing the total for the year to $8.3 billion. The investments we've made in these areas continue to drive results and importantly add high quality loans to our portfolio. Linked quarter average loan balances were down 3% reflecting pay downs from the heightened commercial loan draws, as well as a small reduction in PPP balances related to the initial forgiveness. Line utilization rates are at the pre-pandemic levels given the strong liquidity levels in the environment. Importantly, we have remained disciplined with our credit underwriting and have walked away from business that does not meet our moderate risk profile. We remain committed to performing well through the business cycle and we manage our credit quality with this longer-term perspective. Continuing on the slide 7; average deposits totaled $136 million for the fourth quarter of 2020, up $23 million dollars or 21% compared to the year ago period and up 0.6% from the prior quarter. The linked quarter increase reflected broad based commercial growth as well as growth from higher consumer balances. The growth was offset by continued and expected decline in time deposits. Growth from the prior year was driven by both consumer and commercial clients.

[Operator:]

Our first question comes from the line of Scott Siefers with Piper Sandler.

[ScottSiefers:]

Good. Morning, guys. Thank you for taking the question. I'm just curious, I guess I can infer it from the up low-single-digit guide on KEY, but I was hoping you could provide a little more thought on your outlook for investment banking. It ended up being just a terrific end to the year, but maybe thoughts on how you see the year playing out just in terms of the nuance. I feel like last year, it was kind of less traditional M&A, sort of other drivers within investment banking or that line item that drove it. Whereas this year, maybe it's more the traditional stuff that we would think of. How do you see it planning out, and do you think you can sustain that level or grow upon this level of annual revenues in total there?

[ChrisGorman:]

Sure, Scott. Well, thanks for the question. Just to step back for a second. Our invest -- our integrated corporate and investment bank is a unique and growing franchise. It's unique among all of our peers. It's really hard both to coordinate and collaborate and get it done from a cultural perspective. And as you know, Scott, we've been at it for a long time, and we've made a bunch of significant investments. If you think about the investments we've made in technology and in healthcare, within any year there's always variability. But as we step back and look at that business over the past five years, it's had a compound annual growth rate of about 8%. And so, if you look at from 2015 to present, I think we've had one year where we were down slightly, I think last year, we're down like 3%. So I'm just giving you that as kind of a backdrop as we look forward. There's no question that it's the transaction business, and there’s a lot of variables that clearly are not within our control. Having said that, for us, it's a relationship business. We continue to grow it. Our pipelines today are strong. Our pipelines are in good shape. What's interesting about our business is whereas a lot of people had a huge lift from investment grade debt through the pandemic, that really is not core to our business. Our business was really driven, Scott, by a big surge in M&A and syndications, in some cases, related syndication. So we feel good about the trajectory of the business and will continue to invest in it.

[ScottSiefers:]

Terrific, thank you. And then, I guess more of a ticky-tacky guidance question in expenses. I know you had the $22 million in severance costs in the fourth quarter. Will there be any further charges or did you sort of take care of all of those in the fourth quarter? And if there are any, are those included in the full year 2021 guide?

[DonKimble:]

We would typically have some severance throughout the year. We would not expect to have any of that size going forward into each of the quarters in 2021. So, the normal recurring level would be reflected in that guidance, but not assuming any significant charges on top of that.

[Operator:]

Our next question comes from the line of Bill Carcache with Wolfe Research.

[BillCarcache:]

Thank you. Good morning. I wanted to ask about loan yields, although there were some quarters of relative stability in KEY's loan yields during the last reserve cycle. The overall trajectory of loan yields was lower until we exited the reserve. I believe you guys have -- about 70% of your loan book is indexed to the short end of the interest rate complex, and so a lot of it's repriced already, but there's still some, and that dynamic happened not just for you guys, but for other banks as well. So, can you discuss whether you expect downward pressure in loan yields to persist in this reserve cycle as well? And are you simply going to work through to offset those headwinds? And, in general, is there anything I guess different about this cycle that leads you to expect those dynamics to play out any differently this time?

[DonKimble:]

Sure, a couple things there. One; on the loan book, but keep in mind that a significant portion of the swaps that we enter into from a balance sheet perspective are matched up against the commercial loan book. And so, it does convert some of those over to fixed rates, and we've talked over the last couple of quarters about the impact of those swaps going forward. And so, you will see some very modest pressure on yields coming from that as those swaps rollover. On the consumer book; we are seeing rates coming down as far as the new originations compared to what was the existing book, but we're also seeing improved credit quality for those new originations. And we're also seeing margins a little wider on the consumer originations compared to the current rate environment than where we've been historically. And so that will also help and so there will be some pressure going forward, but I would say that we still have other levers to help offset that including the full-year benefit of the repricing of our deposit book that we realized in the fourth quarter, and then also just this excess liquidity position. We think over time, we can start to absorb some of that and maybe reinvest that over time as well.

[BillCarcache:]

Got it. Thanks Don. That's super helpful. Maybe along the similar lines, can you talk about on PPP, how much PPP contributed to loan yields this quarter? And how we should expect that contribution to loan yields and NII to trend from here? Maybe any color on how long the benefits of PPP 1.0 and 2.0 are going to last just largely to the rest of 2021 or do they extend to 2022, and that's my last question. Thank you.

[DonKimble:]

That's great. And we've mentioned just briefly that in the fourth quarter, we had about $1.3 billion of the PPP loans becomes forgiven, and so that accelerated about $28 million of fee income for the quarter, and so that roughly added about six basis points or so as far as the overall margin, and so that clearly was added up. If you look at that first wave of PPP loans, we had about $8 billion of issuance that, as I mentioned, we had about $1.3 billion of forgiveness this quarter. And so that puts about $6.7 billion. We would expect about 80% of that initial $8 billion to be forgiven. And so, you'll see that come throughout the rest of the year, I would say that, for example, we would expect about $1 billion of forgiveness in the first quarter. And so, that's a little less than what we've seen in the fourth quarter, but that still continues to show that kind of a pace. The next wave of PPP will be helpful for that, and we would expect to see about $2.5 billion of originations in the second quarter. And so, some of that decline that we would be expecting from that forgiveness will be directly offset by the new originations, and we’ll probably start the end of the first quarter with balances of over $8 billion. And so, I think that is helpful as far as just the perspective there. As far as the fee income component to it that if you look at both the normal accretion of the fee income plus the acceleration coming from the forgiveness that was about $110 million of fee income for 2020. We would expect for the first wave of those $8 billion of loans that number would be up to around $120 million or so as far as the fee income from both normal accretion and also the impact of forgiveness. And so we have a little bit of a lift on a year-over-year basis from that, and that on top of that, we would have the benefit from the new wave 2 of the PPP program coming through with loan yields and fee income realization from those credits as well.

[BillCarcache:]

So the vast majority, by the end of 21, should be realized. It doesn't spill over into 2022.

[DonKimble:]

I would say that the vast majority of the first wave will clearly be addressed in 2021. We will probably see some of this next wave continued to hang over into 2022 as well. And so I would say that incremental lift that we're getting from that will be realized in both 2021 and 2022.

[Operator:]

Next question is from Ken Usdin with Jefferies.

[KenUsdin:]

Hey, thanks. Good morning. Hey, Don. Just a follow up on that last point. So all of that what you just ran through on PPP is inside your NII guidance for this year?

[DonKimble:]

That's correct. Yes.

[KenUsdin:]

Okay. Got it. And then secondly just on the loans. I heard your point earlier about some of the moving parts and can you just reconfirm for us just how much you think Laurel Road can do this year, and how much more the mortgage business can grow as it as an offset to the plan run off in the auto portfolio on the consumer side?

[DonKimble:]

Sure, Ken. As far as consumer loans that relatively stable outlook for total loans would assume consumer loans in aggregate grow about $2 billion and from 2020 to 2021. And that growth really coming from both residential mortgage and from Laurel Road. Just to put that in perspective, we had almost $600 million of origination from Laurel Road in the fourth quarter, just continuing at that pace would be in the $2.5 billion dollar type of range as far as 2021 originations from that category. On the residential mortgage side but despite what we're seeing and hearing in the industry, that we think that we can actually show stable to maybe even increasing our overall residential mortgage originations in 2021. But keep in mind that we're at the early stages, as far as rolling out that platform throughout our branch network seeing strong growth there, and of that, $2.5 billion in the fourth quarter, and of the $8.3 billion for the full year, about half of that was for purchase money, as opposed to refinance. And so we think that there still will be opportunities to continue to show growth there. And that's adding over a $1 billion a quarter as far as the new loan originations in the residential mortgage side. And so those consumer growths in those two areas specifically are at the foundation of how we can get to that kind of relatively stable outlook for total loans.

[KenUsdin:]

Got it. And then just a follow up on expenses. Given the plan for expense to be overall flat, I'm just wondering if you have some variability in the investment banking stuff, but just in terms of the cadence of it, given the plan to reduce branches and the severance related benefits that you get over time? Is there any way to understand like the cadence of how expense is traject to the year, whether or not you're ending lower than you're starting? That type of thing? Thanks.

[DonKimble:]

Great question. And I think you've hit on some of the challenge here, which is a number of our drivers of our revenue growth, really have a variable costs component to it as far as the origination and so that's a little bit of a challenge. I would say that as we look going into the first quarter, we would tend to have some seasonality in those numbers and we highlight it a little bit as far as the benefit expense being up in the first quarter. We would expect expenses down considerably from where they were in the fourth quarter, but probably up from what we were seeing in last year. In last year, our revenue outlook was negatively impacted by some market valuation adjustments but also had a corresponding adjustment to our incentive compensation. And so we think that we'll be in a position to generate positive operating leverage for the first quarter and have positive operating leverage for the full year. And just want to restate that, as far as our expense out what we are saying it's down low single digit, so down 1% to 3%, as opposed to stable. And so that's after funding the investments we're making as part of our strategic initiatives as well.

[Operator:]

Next, we'll go to Saul Martinez with UBS.

[SaulMartinez:]

Hey, good morning. So just wanted to back up a little, just make sure I understand the mechanics on the PPP dynamics through net interest income. So on the -- there's an incremental, I guess, $10 million. So pretty modest on the first waves of PPP. And then on top of that, you overlay the second round, which I think you said was $2.5 billion. So if we were to adding that second round and obviously, recognizing that these are five years and fee rates might be lower, I mean, how much of an incremental lift is that from the second round? Are we talking? It seems like a modest number. Are we talking in the neighborhood of something like $10 million a quarter? If you could just kind of help a square away sort of the full year, and then connect the dots fully on the full year 2021 versus a full year 2020 tailwind that you get more broadly from PPP.

[DonKimble:]

Sure, Saul. As far as the impact of that second wave that we talked about $2.5 billion in the first quarter. I would say that the full year average probably will be somewhere around $3 billion related to that next wave of the PPP loans. If you look at both the stated coupon on those loans and the realization of the fee income, it tends to be something a little north of 2% type of yield. So your pick up over 200 basis points on those balances through the year. So you're probably looking at something for the full year somewhere around $60 million kind of a lift from that compared to just having to sit in cash.

[SaulMartinez:]

So we should think about the tailwind then just 2021 versus 2020 from PPP more broadly, being sort of that $60 million plus the incremental 10 of 120 versus 110. So something in the neighborhood of $70 million? Is that a fair way of looking at it?

[DonKimble:]

Well, what I would say is that for the fee income, we had $110 million in 2020. For the first wave, that's about $120 million for that first wave of loans, and then this new origination volume of the roughly $3 billion for average, would be on top of that. And so we'll actually see a lift year-over-year of say $70 million would be a ballpark.

[SaulMartinez:]

Yes. And that is embedded in your guidance obviously.

[DonKimble:]

That is embedded in our guidance. That's correct. Yes.

[SaulMartinez:]

How much of a headwind are, is the roll off of the hedges in 2020? Do you have that figure, how much of that goes the other way? And how -- because I presume that those hedge roll offs and the incremental headwind is also embedded in your guidance.

[DonKimble:]

The headwind is embedded in the guidance. I don't have the dollar amount for 2021 as far as the direct impact there, but it is reflected in that outlook.

[SaulMartinez:]

Do you know offhand how much hedge benefit you got this quarter from the swaps?

[DonKimble:]

From the swaps, when you say benefit, I am reluctant to know what that is because it is part of our true hedging strategy. And so as far as the cash flow swaps the net interest income add to us for those cash flows. Swap was about $99 which is down about $5 million excuse me about $4 million from the previous quarter.

[Operator:]

Next, we'll go to Gerard Cassidy with RBC.

[GerardCassidy:]

Good morning, Chris. Good morning, Don. Don, can you share with us when you look at the allowance for loan losses, currently, based on your slides, excluding the PPP loans, you look like you're at about 193 basis points. And at the start of the year when all of -- you and your peers had to convert over to the CECL reserving. I think your reserves are about 122 basis points. As we look further out, maybe end of 2022; what do you think the reserve levels could get to? Do you think they could get back down to where they were in January of this year before the pandemic?

[DonKimble:]

I think we could see trends in that direction. I don't know the absolute timing of that. I don't know how to predict where the economic outlook will shift over time. But I would say as we would go into 2021, but the three pieces that impact our provision expands under CECL are one the economic outlook. And so assuming that's stable with what we would have predicted won't see any impact there. Credit migration, it has been a positive for us. And each quarter as we take a look at what our projected credit losses are, that trend continues to get better. And so that's allowing for reductions to the provision compared to normal. And then the third piece is for loan production; and I've mentioned on the call a couple times in the last few quarters is that provision each quarter would be in that $80 million to $100 million range. And so if the economic outlook doesn't change, and if the migration is consistent with expectations, that would imply about a $90 million per quarter provision expense on average, and about $360 million for the year, and which would be below what that charge off guidance would imply. And so we would expect to see that allowance ratio come down over time and could have some opportunity to see that come down more quickly, if we continue to see the credit migration outperform like we have.

[GerardCassidy:]

Very good to hear those insights. And, Chris, the bigger question for you or bigger picture. Obviously, KEY and your peers are positioned to really benefit from a recovery in the US economy coming hopefully this year, as the vaccines are more widespread over the summer -- by the summer time. The stock shares included since the Pfizer announcement in November have had a real strong run here. And so everything is shaping up good. And as you pointed out, your fourth quarter investment banking numbers were blockbuster. When you go home at night, and you go down the elevator, what are the risks that you think about? Since things are shaping up pretty, pretty good for you and your peers as we look out over the next 12 months?

[ChrisGorman:]

Hey, Gerard. I think for our entire industry, the number one risk is cyber. I think we're in the trust business. And to the extent there was a significant breach in the industry, or of any particular company. I think that is I think that's the number one risk. The number two risk, I think that we all need to focus on, are just a whole another cadre of competitors. If you think about a lot of the fintechs and you think about what some of those companies have been able to do, in terms of garnering new clients. I think that is a strategic risk, kind of more tactically we think about sort of the key areas where I think you could see significant degradation in asset values. And fortunately, we're well positioned here. But I think the obvious ones are travel and entertainment. I think that's, as you point out, I think that will come back, because I think the vaccine has a lot to do with that. I think hospitality industry is one that you need to focus on. The other couple areas and as you know we've been out of them by strategy is both retail and office. I think those are areas that as an industry, we need to keep a close eye on. So those are kind of starting with sort of strategic down to tactical, what I think about.

[Operator:]

Our next question is from Erika Najarian with Bank of America Merrill Lynch.

[ErikaNajarian:]

Yes. Hi. My first question. I'm sorry for another question on your net interest income outlook. But I'm wondering if you could give us a sense, Don, on what level of cash appointment or what level of investment securities growth you expect for 2021. And maybe this next one is for Chris. Embedded in that net interest income outlook; how do you see core commercial loans, ex-PPP trending throughout the year within your guidance? It seems like a lot of your peers have been quite optimistic surprising the market on loan growth recovery, particularly in the second half of the year.

[DonKimble:]

Sure, as far as our outlook for core net interest income and some of the assumptions we've had there for the reinvestment. In the fourth quarter, we increased our core investment portfolio by about $3 billion. And that was investing at a faster pace than the runoff. And I would, in our outlook would have some of that same type of pace continuing throughout the current year that we're currently sitting on over $14 billion in cash and about $2 billion in T-bills that we think would be available for us to continue to redeploy either through loan growth or through reinvestment. And so that would be the core assumption that we have there. Just on that component for the roughly $6 billion that we invested this quarter, the average reinvestment yield was about a 1.28%. So down from what the runoff level would be, but reflected some of the strategy as far as investing in certain securities and then swapping them back so that say, five years down the road, those fixed rate securities would convert over to floating rate. So our expectation would be to continue that kind of a strategy going forward. Chris, on commercial loan growth?

[ChrisGorman:]

Sure, Erika, so a couple things, as Don mentioned, loan growth, first of all consumers an area that will continue to be an outlier of growth for us. And I think we're well positioned for that. Next area, if you think about commercial real estate; we have a very, very good franchise. We're actually not growing the on balance sheet debt there. And that's by strategy. I think last year, we probably placed $11 billion with our targeted customers in our real estate book. As it relates to C&I; we haven't yet seen growth if we're looking at utilization, Erika, it is now at or below even pre-pandemic. We haven't seen people investing in property, plant equipment, investing in people. But what we have seen and I think is a very good sign, and you saw in our investment banking numbers in the fourth quarter, is people are starting to make strategic moves. And so we're having great strategic discussions with our clients and our prospects. And I think people are thinking now with the election behind us with the vaccine rollout of really, what are they going to do to grow their business? So I too am optimistic that we'll see an increase in line utilization and those we'll see people start to invest in their business. The other thing that would obviously be helpful for line utilization is if we had a bit of inflation if people actually started investing and going long in inventory. And I don't think that's an unrealistic scenario, as you think about the back half of the year.

[ErikaNajarian:]

Got it. And just one follow-up question on expenses, Don. Your guidance is off of the GAAP base of $4,109 million.

[DonKimble:]

That's correct. Yes.

[Operator:]

Our next question is from John Pancari with Evercore.

[JohnPancari:]

Good morning. Appreciate the color you gave on the reinvestment and the impact of liquidity as well as your NII guidance. Just want to see if you can help us and how to think about the trajectory of the net interest margin here in the coming quarters. I know there's also a PPP benefit. But I just want to see if you can give us a little bit of color in terms of how that could trend in the next coming quarters. Thanks.

[ChrisGorman:]

Good. As far as the margin, it's challenging to predict just because the timing of some of the deposit flows is also creating either pressure or change there. And so with our assumption of having deposits growing a low single digit that implies that our margin will come down slightly from where it is as of the fourth quarter, so something slightly below the 270. And I would say that from quarter-to-quarter that will be impacted based on like you said, the PPP forgiveness timing and also the changes in the overall equity position.

[JohnPancari:]

Okay, all right. Thanks. That helps. And then separately, Chris, just want to get your updated thoughts on M&A interest, both bank and non-bank. We've clearly seen some banks there in your backyard; move on some deals and I know you've flagged competition as one of the risks that you think about. And you can certainly see that intensifying in the coming years. So basically want to get your thoughts on whole bank M&A from that perspective, and then also on the non-bank front. Thanks.

[ChrisGorman:]

Sure. Thanks for your question. Well, my comment with respect to intensity of competitors was really non-bank. And thinking about some of the fintechs. But as it relates specifically to your question, we're not really focused on whole bank consolidation or acquisitions really at all. We think we have everything we need to be successful. We think the best way for us to generate value is to execute our targeted scale, and go out and grow organically. So having said that, obviously, we take the responsibility very seriously of being a public company. We know we have to go out there each and every day and create value. As it relates to non-banks; I'm really proud of the job we've done over many years of being able to buy entrepreneurial firms and successfully integrating them into our business. And I think about Cain Brothers, I think about Pacific Crest Securities, and most recently, Laurel Road, that was a born digital company that we've been able to really not only integrate into our business, but actually helped key growth -- helped both KEY and Laurel Road have grown. So I think you'll see us continue to go out in keeping with our focus around targeted scale, buying these niche businesses that can help us really serve our targeted client basis.

[JohnPancari:]

That's helpful. What areas of businesses would you emphasize in terms of the non-banks?

[ChrisGorman:]

I think we'd probably look at the verticals that we're in. And I think we also would probably look at, if you think -- let's look at what we've done. We bought boutiques that are really focused. We bought digital businesses and/ analytics businesses. Those are the kind of businesses that I think really turbocharged our existing 3.5 million clients.

[Operator:]

Our next question is from Steve Alexopoulos with JPMorgan.

[JanetLee:]

Hi. This is Janet Lee on for Steve Alexopoulos. So my first question is on deposits; your guiding to deposits going up even more some here after 20% growth in 2020. Is this a function of your customer still holding on to cash and their accounts or does this bake in any assumption about new client acquisitions from your successful PPP?

[DonKimble:]

I would say it's on all fronts. And so we are assuming growth on a continued basis. One is that we have in the last three quarters have shown a lot of strong retail household growth and with a focus there on primary operating accounts for the retail customers. Throughout our commercial customer base, we have increased efforts around making sure that we have that expanded full depository/ operating account relationship there as well. And so those will be helpful. It would also reflect the assumptions like we saw last year that as the PPP loans were originated, a good portion of those proceeds were deposited into deposit accounts with our customers. And so we would expect to see some lift from that. And then just the most recent round of stimulus, also add deposit balances. And each quarter this year, we tried to estimate where our deposit flows will be. And I think each quarter we probably underestimated where they actually come through. And so I think the customers continue to have liquidity and continue to build those positions. And that's essentially why we're assuming that we'll have continued growth there as well.

[ChrisGorman:]

Don, the only thing I would add to that is we have a very successful third-party commercial loan servicing business where we are named primary service around $300 billion worth of commercial real estate. That business has grown very, very well and that generates deposits. And we also from a strategic perspective are very focused on primacy with both our consumer clients and our commercial clients and we're getting a lot of lift there.

[JanetLee:]

That's helpful. And I was positively surprising to hear that you expect overall residential mortgage originations to remain stable to potentially increase in 2021 versus 2022. So do you -- are you saying that the consumer mortgage income line on your fee income, is that going to be stable or is it going to go down like single digits? And how does it fit into the overall fee income guidance of up low single digits, like where are the other like offsetting line items that are going to see bigger drop?

[DonKimble:]

Yes, as far as, yes, look for 2021, that we would expect that line item to come down slightly more reflecting the impact of the extremely high levels of gain on sale we experienced, especially in the third quarter of this year. So we saw that come down in the fourth quarter and would expect to see ongoing pressure there. So even though the origination volumes would be stable to maybe up, we would expect to see some pressure there. As far as the other categories on fee income that we would expect good growth in service charge line item but those categories were under pressure throughout a good portion of say second and third quarter of 2020. And we would expect to see growth coming from that category and especially reflecting the impact of the low rates. We would expect to see good growth in trusted investment services line item between what we're doing from a retail and commercial brokerage/ account activity there and just our overall investment management strategy. We would expect to see some growth there. And then even though we've had a record year for investment banking and debt placement fees, we do expect that to grow again for 2021. And so we've got a good pipeline in that business. We've got a good team, and we're expecting to add bankers to that area throughout 2021 as well, which will help deliver those results also.

[Operator:]

And we'll go to Peter Winter with Wedbush Securities.

[PeterWinter:]

Thanks. Good morning. I just want to follow up on line utilization. Where is it today? And where do you think it can go? And kind of what's the sensitivity for every 1% increase to commercial loans?

[ChrisGorman:]

So, this is Chris. This is an area that frankly, through the pandemic; we've been challenged to really pin down on where we think it's going to go. If you think about people drawing on their lines, and then paying back those draws. We're about at 50% in our C&I book right now, which Peter is a little bit below where we would have been pre-pandemic. And I think the real catalysts, there is one, our clients are sitting on a lot of cash. So arguably, they'll have to burn down some of their cash before they start to utilize their lines. So they have elevated cash positions. That's the first thing. And the second thing that I mentioned is there's plenty of -- there's plenty of slack now in the global supply chains. And so people aren't really investing and going long, per se, on inventory. So I think you'd need those two things to happen. The biggest driver of both of those, obviously, is to get real economic growth. Don, what would you add to that?

[DonKimble:]

No, I think that's right. And I mean, as far as the 50%, that implies roughly about $50 billion in outstanding balances on those lines for us, so just to put that in perspective, if that would increase by 1%. And that's, which would show that at 1% growth on the $50 billion.

[PeterWinter:]

Got it, that's helpful. And then just one question just on net interest income. The outlook of low single digit that's 2020 on a GAAP basis as well. Is that right?

[DonKimble:]

I'm sorry, repeat that, please.

[PeterWinter:]

Sure, I am sorry. The fee income outlook, the 2020 base, that's a GAAP number.

[DonKimble:]

The 2020 base is the GAAP number and our FTE adjustment isn't assuming much of a change on a year-over-year basis there, but I guess we would have a tax rate change, we would start to see that but it's runs usually about $29 million to $30 million a quarter for a year, excuse me, a year for the FTE adjustment.

[Operator:]

And with no further questions in queue, I'll turn it back to the company for any closing comments.

[Chris Gorman:]

Thanks, John. 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. They can be reached at 216-689-4221. Thank you for your interest in KEY and this concludes our remarks.

[Operator:]

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