DBRS Comments on KeyCorp’s 3Q13 Results – Senior at BBB (high) Unchanged; Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 results of KeyCorp (Key or the Company). DBRS rates the Company’s Issuer & Senior debt at BBB (high), with a Stable trend and ratings are unchanged following 3Q13 results. Key reported net income available to common shareholders of $266 million for the quarter, up from $198 million for 2Q13, and $214 million for 3Q12. Higher QoQ earnings were partially driven by $44 million of after-tax earnings from discontinued operations reflecting both the gain from the Victory divestiture which was partially offset by a fair value adjustment for an education lending trust. Also impacting result were an efficiency initiative charges including a pension settlement totaling $26 million (after-tax) and the impact from the early termination of leveraged leases which increased earnings by $15 million. For the quarter, the ROA (from continuing operations) equated to 1.12% up from 0.95% and 1.06% for the linked and year ago quarters, respectively.

Highlights for the quarter included continued loan growth, achievement of the annualized expense savings target, and improved asset quality as well as the continued maintenance of solid liquidity and capital profiles. During 3Q13, Key acquired a commercial mortgage servicing portfolio as well as a special servicing business providing additional scale and elevating the Company to the third largest servicer of commercial/multifamily loans in the country and the fifth largest special servicer of CMBS. Additionally, the acquisition added over $1.0 billion in low-cost escrow deposit balances. Finally, Key’s efficiency initiative has achieved approximately $207 million of annualized run rate expense savings as of September 30, 2013, already exceeding its targeted $200 million of annualized savings.

Total revenues from continuing operations (TE basis), increased by $28 million or 2.8% to $1.04 billion, sequentially, driven by a 7.0% increase in non-interest income to $459 million, partially offset by a slight decrease in net interest income to $584 million. Improved fee income reflected the aforementioned gain from the early termination of leveraged leases as well as an increase in gains from principal investing. Meanwhile, lower linked-quarter spread income was driven by a two basis point narrowing of the net interest margin (NIM) to 3.11% (TE basis). The NIM contraction as well as the net interest income decline was attributable to leveraged lease terminations as well as lower yields on loans, partially offset by lower funding costs.

The Company’s expenses increased a modest $5.0 million QoQ and were only up by $1.0 million excluding efficiency initiative expenses in both quarters and a pension settlement in this quarter. Increases in marketing expenses in the quarter offset savings in other areas. Key has met its targeted expense saves target and has seen progress in improving its efficiency ratio.

Key’s loan growth continued over the quarter. Specifically, average loans grew by $575 million, or 4.4% (annualized), in 3Q13. Higher 3Q13 average loans mostly reflected increased levels of C&I loans (up $384 million, or 1.6%) and home equity loans (up $230 million, or 2.2%). Supporting loan growth, average deposits increased by $0.5 billion, or 0.8%, driven by a $1.0 billion in escrow deposits added during the quarter as well as an increase in interest bearing commercial deposits partially offset by run-off in CDs and money market accounts.

Credit quality remained sound and improved, as the Company reported lower levels of linked-quarter non-performing assets (NPAs) and net charge-offs (NCOs). Specifically, Key reported a $114 million, or 16%, decline in NPAs from continuing operations, representing a manageable 1.08% of loans and OREO, at September 30, 2013, down from 1.30%, at June 30, 2013. Meanwhile, Key’s NCOs (continuing operations) decreased to a relatively modest 0.28% of average loans for 3Q13, from 0.34% for 2Q13. Finally, Key’s allowance for loan and lease losses remained adequate at 1.62% of period-end loans and 160% of non-performing loans, at September 30, 2013.

Capitalization remains solid and provides an ample buffer for unexpected losses. Despite the 3Q13 $198 million of common share repurchases under Key’s ongoing repurchase program, the Company’s estimated risk weighted capital ratios remain sound, including its Tier 1 common ratio of 11.11%, Tier 1 ratio of 11.85% and Total ratio of 14.30%. Finally, the Company estimates its Basel III Tier 1 common equity ratio to be 10.56%, which is well-above the fully phased-in minimum requirement.

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

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