DBRS: KeyCorp’s 4Q Lift on Higher Revenues; Strong Investment Banking Results

Summary:
• Key reported 4Q14 earnings attributable to common shareholders of $248 million, up 37.8% from 3Q14, primarily reflecting higher revenues, and the non-recurrence of a moderate 3Q14 loss on discontinued operations due to the sale of Key’s education lending securitization trusts. Meanwhile expenses were flat QoQ.
• Average loans grew 1.3% in the quarter, mostly due to higher levels of commercial and industrial loans. In the meantime, average deposits were up 2.0%, driven by a solid increase in non-interest bearing deposits.
• DBRS, Inc. (DBRS) rates KeyCorp’s Issuer & Senior debt at BBB (high) with a Stable trend.

DBRS, Inc. (DBRS) views KeyCorp’s (KeyCorp or the Company) 4Q14 results as solid, supported by good loan and deposit growth. Overall, strong revenue growth, which included a record quarter for investment banking and debt placement fees, drove higher earnings, QoQ. Additionally, provisions for loan losses were stable, QoQ, as asset quality remained sound and continued to stabilize.

Improved revenues, QoQ, were mostly driven by higher non-interest income, which reflected the Company benefitting from investments in its businesses. Indeed, the record level of investment banking and debt placement fees in the quarter, in part, was due to the positive impact of the Company’s 2014 hiring of twenty five senior bankers within the Corporate Bank. Moreover, levels of trust and investment services income improved, due to the full-quarter impact of the Pacific Capital acquisition, which closed on September 3, 2014. Meanwhile, despite a 2 bps narrowing of the net interest margin to 2.94%, spread income was moderately up, driven by higher levels of average loans.

Although well managed in 4Q14, KeyCorp’s expenses remain elevated, as evidenced by its cash efficiency ratio of 64.4%, reflecting room for improvement in both expenses and revenues. DBRS notes that KeyCorp remains focused on driving this ratio down to 60% over the next two to three years.

Overall, balance sheet fundamentals remain solid. Asset quality is sound, reflecting stabilizing levels of non-performing assets and very low net charge-offs. The Company’s funding position remains solid and is underpinned by a large core deposit base. Meanwhile, capital remains strong, even after $496 million of common share repurchases in 2014.

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

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