DBRS Comments on KeyCorp’s 1Q13 Results – Senior at BBB (high)

DBRS, Inc. (DBRS) has today commented on the 1Q13 results of KeyCorp (Key or the Company). DBRS rates the Company’s Issuer & Senior debt at BBB (high), with a Stable trend. Key reported net income available to common shareholders of $199 million for the quarter, up 1.0% from $197 million for 4Q12. Higher sequential earnings reflected a 7.2% decrease in non-interest expense and a 3.5% decline in provisions for loan loss reserves, partially offset by a 3.1% contraction in total revenues.

Highlights for the quarter included an increase in average loans, improved asset quality and a solid capital and liquidity profile. Furthermore, the decrease in expenses more than offset the decline in total revenues, resulting in positive operating leverage.

Overall, the $32 million, or 3.1%, quarter-over-quarter (QoQ) decline in total revenues was attributed to a 3.0% decrease in net interest income and a 3.2% decrease in non-interest income. Lower spread income was driven by two fewer days in the quarter and a 13 bps narrowing of net interest margin (NIM) to 3.24%. The narrower NIM reflected lower-yielding loans and securities and an increase in short-term investments. Meanwhile, the decline in non-interest income mostly reflected seasonality in investment banking and debt placement fees, which declined by 28.2%, sequentially. Additionally, lower fee income was attributable to an 8.0% decline in service charges on deposit accounts.

Positively, expenses were down 7.2%, QoQ, driven by a 7.3% decrease in personnel expense and to a lesser extent, a 35.2% decrease in business services and professional fees. Lower personnel expense was attributable to lower salaries, technology contract labor, incentive compensation benefits and severance. Going forward, expense management and efficiency of operations will remain a high priority. Overall, management believes that they are on track to meet their goal of achieving annual savings of $200 million by the end of 2013. Through March 31, 2013, the Company had already achieved $105 million in annualized expense savings.

The Company delivered loan growth of 1.5% (average basis) during 1Q13, mostly driven by a 3.9% increase in commercial & industrial loans, and to a far lesser extent, a 0.8% increase in commercial real estate (excluding construction) loans and a 0.4% increase in residential mortgages. Going forward, Key anticipates average loan growth for the year to be in the mid-single digit range, driven by commercial lending.

Credit quality remained sound, despite the difficult operating environment. Specifically, Key reported a $30 million, or 4.1% QoQ decline in non-performing assets, which represented a manageable 1.34% of loans and OREO, at March 31, 2013, down from 1.39% at December 31, 2012. Meanwhile, Key’s net charge-offs declined to a modest 0.38% of average loans for 1Q13, from 0.44% for 4Q12. Finally, Key’s reserve coverage remains adequate, at 1.70% of period-end loans and 137% of non-performing loans, at March 31, 2013.

The Company’s healthy funding profile is underpinned by a loan to deposit ratio of 81%. During 1Q13, deposits (period-end) contracted by 2.0%, reflecting declines in non-interest bearing deposits and other time deposits.

Capitalization remains ample, as evidenced by Key’s strong regulatory and tangible capital ratios including its estimated Tier 1 common ratio of 11.39% and tangible common equity ratio of 10.24%. Utilizing some of its excess capital, Key repurchased $65 million of common shares during the quarter. The Company estimates its Basel III Tier 1 common equity ratio under the Federal Reserve’s NPR to be approximately 10.3%, which is above the minimum requirement. Finally, the Federal Reserve did not object to the Company’s capital plan submitted for CCAR. The plan includes a stock repurchase program of up to $426 million and a 10% increase in the quarterly stock dividend.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]