DBRS Confirms KeyCorp’s Senior Debt at BBB (high); Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of KeyCorp (Key or the Company), including its Issuer & Senior Debt rating of BBB (high) and Short-Term Instruments rating of R-2 (high). The trend on all ratings remains Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

KeyCorp’s ratings reflect its solid community focused commercial banking franchise and good balance sheet fundamentals, including sound and stabilizing credit quality, a strong capital profile, and a solid funding position. Ratings also consider the Company’s primary challenge of generating higher sustained levels of revenue and operating leverage. DBRS notes that sustained improvement in core earnings, while maintaining sound asset quality, could result in positive rating actions. Conversely, a sustained decline in core profitability, and/or a weakening of its risk profile, coupled with signs of franchise weakening, could lead to ratings pressure.

Ratings consider KeyCorp’s deeply entrenched, geographically diverse, commercial banking franchise with 997 branches located in 12 states across the Northeast, Great Lakes, Rocky Mountain and Northwest regions. The Company maintains a defensible and well-established deposit franchise with top five market shares in six states. On a more granular level, KeyCorp has strong market shares in several large metropolitan statistical areas, including the number one position in Cleveland, Ohio and Albany, New York, the number two market share in Syracuse, New York and number three position in Buffalo, New York. Overall, KeyCorp offers a broad-based set of products and services, both in-footprint and on a national basis.

Overall, KeyCorp’s core earnings generation remains pressured by the difficult operating environment, which continues to reflect low interest rates and slow economic growth. As with many banks, spread income remains pressured by a moderating net interest margin (NIM), despite sustained loan growth. Specifically, KeyCorp’s NIM for 9M14 narrowed by 18 bps YoY to 2.98%, pressured by lower earning asset yields. The Company continues to have success in growing loans, especially commercial & industrial loans, despite continued run-off from its exit and discontinued operations portfolios. With a high level of variable rate loans, KeyCorp maintains a moderately asset sensitive balance sheet that will benefit from rising short term interest rates.

Adjusted fee income for 9M14, primarily generated by trust/investment services income, investment banking/debt placement income, and deposit service charges, was down modestly YoY, and continues to represent over 40% of total revenues, providing some stability to earnings. Meanwhile, the Company’s 9M14 DBRS calculated adjusted efficiency ratio was a high 68%, reflecting room for improvement in both revenues and expenses.

Credit quality remains sound and continues to stabilize, as non-performing assets (NPAs) have declined during the year and net charge-offs (NCOs) remain very low. Specifically, NPAs from continuing operations represented a sound 0.74% of loans and OREO, at September 30, 2014, down from 1.08% at September 30, 2013. Meanwhile, NCOs (continuing operations), which have likely reached a floor, were a very low 0.22% of average loans for 3Q14, down from 0.28% for 3Q13. Finally, KeyCorp’s allowance for loan and lease losses remains adequate at 1.43% of period-end loans and 200% of non-performing loans.

The Company’s regulatory capital ratios remained strong despite the repurchase of $368 million of common stock under its capital plan authorizations and were well above the minimum required regulatory benchmarks. Specifically, at the end of 3Q14, KeyCorp had a Tier 1 risk-based capital ratio of 12.01%, a Tier 1 Common equity ratio of 11.26%, and a Total Risk-based capital ratio of 14.10%. Moreover, the Company’s Basel III Tier 1 Common Equity ratio on a fully phased-in basis was approximately 10.8%, well above the minimum requirement. Meanwhile, funding remains ample, as reflected by the Company’s loans to deposits ratio of 81% (DBRS calculated), at September 30, 2014.

KeyCorp, a diversified financial services corporation headquartered in Cleveland, Ohio, reported approximately $89.8 billion in consolidated assets as of September 30, 2014.

Notes:

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 25 April 2003
Most Recent Rating Update: August 23, 2013

For additional information on this rating, please refer to the linking document under Related Research.