DBRS: KeyCorp’s 2Q14 Results Reflect Improved QoQ Spread Income and Solid Loan Growth

Summary:
• Key reported 2Q14 earnings attributable to common shareholders (consolidated operations) of $214 million, down from $236 million for 1Q14.
• Credit quality continued to stabilize, resulting in sustained reserve releases.
• DBRS, Inc. rates KeyCorp’s Issuer & Senior debt at BBB (high) with a Stable trend.

Despite lower quarter-on-quarter (QoQ) earnings available to common shareholders, KeyCorp (KeyCorp or the Company) continued to strengthen its earnings drivers. Indeed, 2Q14 earnings reflected solid loan growth, both on a QoQ and year-on-year (YoY) basis. Moreover, the Company continued to gain traction with its expense reduction initiatives. Finally, KeyCorp remains focused on driving growth within its verticals, including technology, which will be supported by its just announced intent to acquire Pacific Crest Securities a technology focused investment bank and capital markets firm. Overall, DBRS considers KeyCorp’s sound and stabilizing asset quality, and solid funding and capital profiles as supportive of its rating level.

Although higher on a QoQ basis including some seasonality, adjusted expenses, excluding efficiency related charges, declined 1.3% YoY, reflecting traction with the Company’s expense reduction initiatives. Nonetheless, the Company’s cash efficiency ratio remains high at 66%, signaling more expense reductions are necessary. Overall, KeyCorp anticipates full year expenses to decline by low to mid-single digits, YoY.

Higher levels of average earning assets driven by sustained average loan growth (commercial & industrial loans) contributed to a 1.8% QoQ increase in 2Q14 spread income, despite a 2 bps narrowing of net interest margin to 2.98%. Specifically, higher spread income reflected two more days in the quarter, higher asset levels and loan fees, and lower funding costs. Meanwhile, adjusted non-interest income was relatively stable linked-quarter, reflecting higher levels of investment banking and debt placement fees, cards and payments income, and deposit service charges, offset by lower levels of mortgage servicing fees, and trust and investment services income.

Balance sheet fundamentals remain solid. Indeed, asset quality is sound and continues to improve, reflecting lower levels of non-performing assets and very low net charge-offs. Furthermore, KeyCorp’s funding position remains solid and is underpinned by a large core deposit base. Finally, capital remains strong and provides sound loss absorption capacity.

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

Note:
All figures are in U.S. Dollars unless otherwise noted.