DBRS: KeyCorp’s 1Q14 Earnings Improved QoQ, Reflecting Lower Expenses and Provisions For Loan Losses

Summary:
• Key reported 1Q14 earnings attributable to common shareholders (consolidated operations) of $236 million, up from $224 million in 4Q13, and $199 million in 1Q13.
• Credit quality continued to stabilize, resulting in lower provisions for loan losses, and sustained reserve releases.
• DBRS, Inc. rates KeyCorp’s Issuer & Senior debt at BBB (high) with a Stable trend.

Reflecting the success of KeyCorp’s (KeyCorp or the Company) expense reduction initiative, as well as lower provisions for loan loss reserves, 1Q14 earnings improved moderately, quarter-on-quarter (QoQ). Specifically, the decline in linked quarter expenses outpaced the decline in revenues. Overall, DBRS considers KeyCorp’s sound and stabilizing asset quality, and solid funding and capital profiles as supportive of its rating level.

Although KeyCorp’s expense base remains relatively high, with an adjusted cash efficiency ratio of 64.9%, it is improving, down from 67.4% for 4Q13 and within the Company’s target range of 60% - 65% for 2014. Overall, the Company’s adjusted expenses were down 5.2%, QoQ, due to lower marketing and personnel expense. For 2014, KeyCorp anticipates full year expenses to decline by low to mid-single digits, year-on-year.

As with most banks, revenue generation remains a key challenge. Despite sequential loan growth, most of which was commercial & industrial exposures, KeyCorp’s 1Q14 spread income declined by 3.4%, QoQ, driven by fewer days in the quarter, and lower asset yields. Meanwhile, adjusted non-interest income, excluding net gains from principal investing and gains on leased equipment, decreased by 4.2%, primarily reflecting lower levels of corporate-owned life insurance, mortgage servicing fees, and deposit service charges.

Asset quality from continuing operations remains sound and continues to stabilize, reflecting lower QoQ levels of non-performing assets and net charge-offs. Improved asset quality drove sustained reserve releases, which benefited earnings. KeyCorp’s reserve coverage remains sufficient at 1.5% of loans (continuing operations).

KeyCorp’s funding position remains solid and is underpinned by a large core deposit base. Meanwhile, capital remains strong and provides sound loss absorption capacity. DBRS notes that the Federal Reserve did not object to the Company’s capital plan, submitted as part of the Comprehensive Capital Analysis and Review process, which included potential common share repurchases of up to $542 million, as well as the potential to increase the quarterly common stock dividend by 18%, subject to Board approval.

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.]