DBRS: KeyCorp’s 4Q13 Earnings Pressured Yet Consistent

Summary:

• Reflecting the difficult business environment, Key’s earnings remain pressured; with 4Q13 earnings to common shareholders of $224 million, down from $266 million for 3Q13, while on a continuing operations basis, earnings totaled $229 million, level with the prior quarter
• Credit quality improvement was sustained resulting in lower provisions for loan loss reserves
• DBRS rates KeyCorp’s Issuer & Senior debt at BBB (high) with a Stable trend

DBRS, Inc. (DBRS) considers KeyCorp’s (KeyCorp or the Company) 4Q13 earnings performance as resilient, yet still pressured. Indeed, the Company’s earnings metrics are moderate with an ROAA ratio of 1.00% (1.08% from continuing operations) and ROE ratio of 8.9% (9.10%). Nonetheless, as with most banks, the Company has taken steps to bolster the bottom line including an expense reduction initiative, which has exceeded its targeted $200 million of annualized savings. DBRS considers KeyCorp’s pressured earnings, sound and stabilizing asset quality and solid funding and capital profiles as supportive of its rating level.

The Company’s solid community-focused commercial banking franchise continued to grow loans,
especially C&I, which drove a modest QoQ increase in net interest income despite a 10 bps narrowing of NIM. The NIM contraction was mostly due to higher levels of liquidity on the balance sheet. Importantly and driving the Company’s earnings resiliency, is its high level of revenue diversification. That diversification was recently improved with the purchase of a commercial mortgage servicing portfolio. Fee income was up moderately in the quarter (excluding non-core leveraged lease termination gains) and reflected the positive impact of the recent acquisition, as mortgage servicing fees increased sequentially.

Although KeyCorp’s expense base remains relatively high with an adjusted cash efficiency ratio of 65%, it is benefiting from the Company’s expense reduction initiatives. On a QoQ basis, expenses were down, due to lower efficiency initiative and pension settlement related charges. Excluding these charges, expenses were up moderately.

Asset quality from continuing operations remains relatively sound and continues to stabilize, reflecting lower levels of NPAs and flat NCOs sequentially. Improved asset quality drove lower provisions for loan loss reserves. KeyCorp’s reserve coverage remains sufficient at 1.6% of loans.

Keycorp’s funding position remains solid and is underpinned by a large core deposit base that more than amply funds net loans. Meanwhile, capital remains strong and provides sound loss absorption capacity. KeyCorp noted that its common equity Tier 1 ratio under Basel III was approximately 10.6% at 4Q13.

DBRS rates KeyCorp Issuer & Senior debt at BBB (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]