April 18 (Reuters) - KeyCorp ( KEY ) reported a 33.5%

drop in first-quarter profit on Thursday as its net interest

income was eroded by higher deposit costs and elevated interest

rates kept borrowers on the sidelines.

U.S. banks have been grappling with increased funding costs

as elevated interest rates prompt customers to move cash from

banks to safe-haven higher-yielding alternatives like

money-market funds for better returns.

Net interest income (NII), or the difference between what a

bank earns on loans and pays out on deposits, fell 20% to $886

million in the quarter.

Net interest margin in the first quarter contracted to 2.02%

versus 2.47% in the year-ago period.

The bank kept its forecast of NII declining between 2% and

5% in 2024 unchanged. Analysts on average expect it to fall

3.4%, according to LSEG data.

Meanwhile, loan growth has also receded as higher benchmark

lending rates keep borrowers on the sidelines. In recent weeks,

analysts have pushed back expectations of interest rate cuts

this year due to strong economic data.

KeyCorp's ( KEY ) average loans and leases decreased $2.6 billion,

or 6.1% in the quarter versus a year earlier.

It maintained its forecast of average loans declining

between 5% and 7% this year.

The company's net income fell to $183 million, or 20 cents

per share, in the three months ended March 31 from $275 million,

or 30 cents per share, in the year-ago period.