DBRS: Key 3Q14 - Fundamentals still solid; sustained loan growth, but Non-core Items impact results

Summary:
• Key reported 3Q14 earnings attributable to common shareholders of $204 million, down 4.7% from $214 million for 2Q14.
• Fundamentals remained solid; decrease in linked-quarter earnings mostly reflected non-core items.
• DBRS, Inc. (DBRS) rates KeyCorp’s Issuer & Senior debt at BBB (high) with a Stable trend.

KeyCorp’s (KeyCorp or the Company) lower linked-quarter earnings mostly reflected non-core items including lower gains from principal investments, the non-recurrence of a sizable 2Q14 net gain on leased equipment and efficiency-related and pension settlement charges. Excluding these items, KeyCorp’s core earnings, or income before provisions and taxes was down 1.6% (DBRS calculated), due to a slight decline in adjusted fee income and a modest increase in adjusted expenses (including expenses related to the acquisition of Pacific Crest), partially offset by a modest increase in spread income. Despite the Company’s pressured earnings, KeyCorp’s balance sheet fundamentals remained solid in 3Q14, including sustained loan growth, stabilizing asset quality, and solid funding and capital profiles.

Despite a 2 bps narrowing of the net interest margin to 2.96%, spread income improved 0.3% linked-quarter, driven by higher levels of average assets and more days in the quarter. Although sustained, loan growth slowed linked-quarter and was attributed to seasonality, customers choosing attractive capital markets alternatives, and the Company’s strategic exits, including Key Equipment Finance International. DBRS anticipates sustained loan growth in 4Q14, as KeyCorp’s pipelines remain solid.

Excluding non-core items, including gains on principal investments and leased equipment, the Company’s adjusted non-interest income was down slightly, quarter-on-quarter (QoQ). Lower levels of adjusted fee income generally reflected declines in investment banking and debt placement fees, mostly offset by higher trust and investment services income and deposit service charges.

Overall, KeyCorp’s expenses remain elevated. Excluding efficiency-related and pension settlement charges, KeyCorp’s expenses were up modestly, QoQ, due to the addition of Pacific Crest. DBRS notes that the Company’s 3Q14 cash efficiency ratio remains high at 66% (excluding efficiency and pension charges), signaling more expense reductions are necessary. Overall, KeyCorp’s goal is to drive down its cash efficiency ratio to 60% over the next two to three years.

The Company’s balance sheet fundamentals remain solid. Indeed, asset quality is sound, reflecting stabilizing levels of non-performing assets and 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 notes that during 3Q14, the Company repurchased $119 million in common shares.

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

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