Key’s 1Q Results Sound; Revenues Down on Lower Investment Banking Fees; Solid B/S Fundamentals

Summary:
• Key reported 1Q15 earnings attributable to common shareholders of $227 million, down 8.5% from 4Q14.
• Lower QoQ earnings primarily reflected a decline in investment banking revenues and to a lesser extent lower spread income.
• 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) 1Q15 results as sound supported by solid loan growth, good asset quality and strong capital. The decline in linked-quarter earnings was mostly driven by lower investment banking fees, reflecting a decrease in loan syndication and financial advisory fees. DBRS notes that these fees were down from a record high in 4Q14. Meanwhile, spread income was pressured by two fewer days quarter-on-quarter (QoQ). For the year, management anticipates non-interest income growth to be in the mid-single digit percentage range, and spread income growth to be in the low to mid-single digit percentage range, given a 25 bps rise in rates towards the end of the year.

Expenses were well managed and down QoQ, mostly due to lower personnel expense and marketing costs. Lower personnel expense, mostly reflected a decrease in incentive compensation costs. As with most banks, the Company continues to seek further expense saves through its continuous improvement efforts. It is expected that some of these cost saves will be invested back into the Company. Overall, the Company’s cash efficiency ratio remains high at 65.1% for 1Q15, signaling room for improvement in both expenses and revenues. DBRS notes that the Company remains committed to driving this ratio down to less than 60% over the long term. Overall, management anticipates full year expenses to be relatively stable with 2014 levels.

Balance sheet fundamentals are sound. Despite the continuing run-off of the exit loan portfolio, KeyCorp generated sound loan growth in 1Q15, mostly reflecting higher levels of commercial and industrial loans. Management anticipates average loan growth to be in the mid-single digit percentage range for the year, driven by its commercial business. Meanwhile, DBRS views asset quality to be sound and net charge-offs very low.

The Company’s liquidity position is solid and reflects a high quality securities portfolio with a growing GNMA component. Management noted that the Company’s Liquidity Coverage Ratio (LCR) was in the high 80% range as of 4Q14. Meanwhile capital remains strong, even after $208 million of common share repurchases in 1Q15. DBRS notes that in March 2015, The Federal Reserve did not object to KeyCorp’s capital plan which includes common share repurchases of up to $725 million and, subject to board approval, a 15% increase in the quarterly common share dividend.

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

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