DBRS: Key’s 2Q Results Solid: Revenues up on Record I-Banking and Debt Placement Fees; Solid B/S

Summary:
• Key reported 2Q15 earnings attributable to common shareholders of $233 million, up 2.6% from 1Q15, and up 8.9% from 2Q14.
• Higher quarter-on-quarter (QoQ) earnings primarily reflected record investment banking and debt placement fees, along with improved spread income, which was driven by higher earnings assets and additional days in 2Q15.
• 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) 2Q15 results as sound, supported by continued average loan growth, and the maintenance of solid balance sheet fundamentals, including sound asset quality, and a strong capital position. Both the Corporate Bank and the Community Bank contributed to higher sequential earnings during the quarter. Overall, higher QoQ net income was mostly driven by record levels of investment banking fees, due to increases in financial advisory fees and loan syndications. Specifically, within the equity business, management noted a particularly solid quarter for real estate and technology, while in the merger and acquisition space, the industrial and technology sectors were particularly good. Moreover, spread income improved sequentially, driven by an additional day in the quarter, and higher levels of average earning assets, including growth in commercial, financial and agricultural loans.

Expenses increased 6.3% sequentially, mostly due to performance-based compensation and seasonality, which included annual merit increases, and a higher day count. As with many 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 remained high at 65.1%, and was stable with the prior quarter. 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 remain solid. During 2Q15, KeyCorp’s asset quality was sound and improved, exhibiting lower levels of non-performing loans and low net charge-offs. Meanwhile, the Company’s liquidity profile reflected a high quality securities portfolio. Additionally, management noted that the Company’s Liquidity Coverage Ratio was just above 100% for 2Q15. Finally, capital remains strong, even after $129 million of common share repurchases in 2Q15. Indeed, KeyCorp’s estimated Common Equity Tier 1 ratio was a strong 10.58% (fully phased-in), as of June 30, 2015.

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

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