July 18 (Reuters) - KeyCorp ( KEY ) forecast a bigger

drop in average loans in 2024 than previously anticipated on

Thursday, and posted a 5% fall in second-quarter profit as

costlier deposits eroded the regional lender's interest income,

sending its shares down 2% in premarket trading.

Elevated interest rates have stymied loan activity as

customers remain wary of borrowing at higher costs, while banks

are shelling out more on deposits to prevent clients from

chasing better returns elsewhere.

The bank now expects average loans to fall between 7% and 8%

in 2024 from last year's level of $118 billion. It had earlier

forecast a decline of 5% to 7%.

"Loan demand remained tepid; however, we are optimistic that

we will begin to see growth in the second half of the year," CEO

Chris Gorman said.

KeyCorp's ( KEY ) average loans fell 9.7% to $108.96 billion in the

quarter, driven by a decline in commercial loans, KeyCorp ( KEY ) said.

Cleveland, Ohio-based bank's net interest income (NII) - the

difference between what a bank earns on loans and pays out for

deposits - fell 9.3% to $887 million.

The bank maintained its forecast of annual NII declining

between 2% and 5% from the 2023 level of $3.94 billion. Analysts

on average expect it to fall 3.7%, according to LSEG data.

The cost of total deposits jumped to 2.28% in the quarter

from 1.49% a year earlier.

Provision for credit losses came in at $100 million in the

quarter, compared with $167 million a year earlier.

Meanwhile, trust and investment services income jumped 10.3%

to $139 million, driven by market performance and the strength

of its wealth management service.

Net income from continuing operations attributable to common

shareholders fell to $237 million or 25 cents per share, in the

three months ended June 30, from $250 million or 27 cents per

share a year earlier.