DBRS Confirms KeyCorp – Sr. Debt at BBB (high); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of KeyCorp (Key or the Company), including its Issuer & Senior Debt rating of BBB (high) and Short-Term Instruments rating of R-2 (high). The trend on all ratings remains Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

KeyCorp’s ratings consider its solid community focused commercial banking franchise, diverse revenue streams, sound and stabilizing credit quality, strong capital and funding profile, and solid liquidity position. Ratings also reflect the Company’s primary challenges, which include generating higher sustained levels of operating revenues and profitability. DBRS expects positive rating pressure if the Company is able to exhibit sustained improvement in core revenues and profitability, while maintaining a sound risk profile.

KeyCorp maintains a deeply entrenched, geographically diverse commercial and retail banking franchise with over 1,000 branches located in 13 states across the Northeast, Great Lakes, and Rocky Mountain and Northwest regions. In addition to its in-footprint businesses, the Company also has several national businesses, including equipment finance and institutional/capital markets. Moreover, KeyCorp maintains a deposit franchise that is defensible in many of its markets. Indeed, the Company has a top 5 market position in 6 of the 13 states where it operates community bank branches. On a more granular basis, KeyCorp has the number one deposit market share in several large metropolitan statistical areas (MSAs), including Cleveland Ohio, and Albany and Poughkeepsie, New York. The Company also has the number two market share in Syracuse, New York.

As with most banks, KeyCorp’s revenues remain pressured by the difficult operating environment. Indeed, the slowly improving U.S. economy as well as continued amortization of the Company’s exit loan portfolio continues to pressure average loan growth. Importantly, the exit portfolio is becoming less a factor, totaling just $2.6 billion at June 30, 2013, down 24% from the end of 2Q12. Moreover, competition for quality loans continues to pressure net interest margin (NIM), as loan yields remain moderate. Although, KeyCorp maintains an asset sensitive balance sheet, its structure is such that it would benefit more from rising short term rates. Finally, driving stability in revenues, fee income continues to represent better than 40% of total revenues.

Although still somewhat elevated, DBRS views favorably the Company’s success to date in reducing its operating costs which should contribute to improved profitability. Specifically, KeyCorp has attained approximately $171 million of its targeted $200 million in annualized expense savings, which it expects to achieve by YE13. Despite the progress on expenses, KeyCorp’s calculated efficiency ratio from continuing operations was a high 69% in 2Q13. Excluding efficiency initiative charges, the Company’s calculated efficiency ratio was 65%.

Credit quality remains sound and continues to stabilize. Over the past eighteen months, credit risk related to KeyCorp’s continuing loan portfolio has moderated. Specifically, non-performing assets from continuing operations represented a manageable 1.30% of loans and OREO, at June 30, 2013, down from 1.39%, at December 31, 2012 and 1.73% at December 31, 2011. Meanwhile, net charge-offs (continuing operations) decreased to a moderate 0.34% of average loans for 2Q13, from 0.44% for 4Q12 and 0.86% for 4Q11. Finally, KeyCorp’s allowance for loan and lease losses remains adequate at 1.65% of period-end loans and 134% of non-performing loans.

Capitalization remains strong and provides an ample buffer for unexpected losses. Despite the 2Q13 $112 million of common share repurchases under Key’s $426 million repurchase program, the Company’s risk weighted capital ratios remain sound, including its Tier 1 common ratio of 11.18%, Tier 1 ratio of 11.93% and Total ratio of 14.65%. Furthermore, the Company estimates its Basel III Tier 1 common equity ratio to be 10.8%, which is well-above the minimum requirement. KeyCorp received no objection from the Federal Reserve to utilize the proceeds from its 3Q13 sale of Victory Capital Management and its broker-dealer affiliate Victory Capital Advisor to buy-back additional common stock. Meanwhile, funding remains ample, as reflected by the Company’s loans (excluding education loans in securitization trusts) to deposits (excluding deposits in foreign office) ratio of 84%, at June 30, 2013.

KeyCorp, a diversified financial services corporation headquartered in Cleveland, Ohio, reported approximately $91 billion in consolidated assets as of June 30, 2013.

Notes:

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments, DBRS Criteria: Bank and Bank Holding Company Trust Preferred Securities, DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Capital Instruments with Discretionary Payments, and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the company documents, the Federal Reserve, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

[Amended on August 25, 2014, to reflect actual methodologies used]

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 25 April 2003
Most Recent Rating Update: 4 April 2012

For additional information on this rating, please refer to the linking document under Related Research.