DBRS: Key’s 3Q Results Sound: Lower on Capital Markets Volatility; Pension Settlement Charge

Summary:
• Key reported 3Q15 earnings attributable to common shareholders of $213 million, down 8.6% from 2Q15, yet up 18.3% from 3Q14.
• Lower quarter-on-quarter (QoQ) earnings primarily reflect a $19 million pension settlement and lower capital markets revenue. Underlying fundamentals remain sound and include higher net interest income and lower expenses absent the pension charge.
• 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) 3Q15 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. However, lower QoQ net income was mostly driven by volatility in capital markets activity, coming off of the previous quarter’s record levels of investment banking fees and the pension settlement charge.

DBRS notes that underlying earnings trends remain sound as spread income improved sequentially and expenses, absent the pension settlement charge, were lower linked-quarter. 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 66.9%, and was up from 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 remain relatively stable with 2014 levels.

Balance sheet fundamentals remain solid. During 3Q15, KeyCorp’s asset quality was sound and improved, exhibiting lower levels of non-performing loans and low net charge-offs. Finally, capital remains strong, even after $123 million of common share repurchases in 3Q15. Indeed, KeyCorp’s estimated Common Equity Tier 1 ratio was a strong 10.4% (fully phased-in), as of September 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.