DBRS Confirms KeyCorp at BBB (high) Following FNFG Acquisition Announcement; Maintains Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of KeyCorp (KEY or the Company) and its related entities, including KEY’s Issuer & Senior Debt rating of BBB (high). The trend for all ratings remains Stable. The ratings action follows the announcement of the Company’s definitive agreement to acquire First Niagara Financial Group, Inc. (FNFG) in a stock and cash transaction valued at approximately $4.1 billion. The transaction is expected to close in 3Q16 subject to regulatory approvals and contingent on shareholder approval by both KEY and FNFG shareholders.

DBRS’s confirmation is based on the strategic fit of the transaction, which adds scale and core deposits in existing, as well as adjacent markets. Although KEY has not completed a large acquisition since 1994, the Company has outlined detailed integration plans for a largely in-market transaction, which should help mitigate significant integration risks. KEY anticipates approximately $400 million of cost savings, representing 40% of FNFG’s cost base, which DBRS views as achievable since KEY can further leverage its technology platform and that over 30% of FNFG branches are within two miles of a KEY branch. Positively, KEY expects the transaction to be earnings per share (EPS) accretive in the first year absent one-time charges, and further revenue synergies are anticipated as KEY rolls out its more robust product capabilities across the FNFG footprint.

The Stable trend reflects DBRS’s expectations that the FNFG acquisition is integrated without material customer disruptions. If the acquisition integration is executed poorly, or KEY is unable to achieve the desired cost savings or revenue enhancements, the ratings would likely come under pressure. Conversely, DBRS views this transaction as a good addition to the KEY franchise and evidence that the combined entity enhances financial performance could have positive ratings implications.

Besides taking a credit mark of approximately 3%, KEY is expected to reposition the investment securities portfolio. While the transaction will impact capital metrics, pro forma capital remains sufficient for the rating. Indeed, KEY’s Basel III CET1 ratio is expected to decline approximately 100 basis points to a still sound 9.5%.

The acquisition of Buffalo-based FNFG adds approximately $39.4 billion in assets, $28.8 billion in deposits and 394 branches in four states including New York, Pennsylvania, Connecticut and Massachusetts, both new and existing markets for KEY. On a pro forma basis, the combined company would have $135 billion in assets, $100 billion in deposits, 1,366 branches in 15 states and be the 13th largest U.S. commercial bank.

KEY, a diversified financial services corporation headquartered in Cleveland, reported approximately $95.4 billion in consolidated assets as of September 30, 2015.

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 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).

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: John Mackerey
Rating Committee Chair: William Schwartz
Initial Rating Date: 25 April 2003
Most Recent Rating Update: November 25, 2014

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