DBRS Confirms KeyCorp at BBB (high); Revises Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the Issuer & Senior Debt rating of KeyCorp (Key or the Company) at BBB (high), as well as the A (low) Deposits & Senior Debt rating for Key’s bank subsidiary, KeyBank, N.A. (the Bank). DBRS has also confirmed the Short-Term Instruments rating of Key at R-2 (high). The trend on all ratings at the Company and the long-term ratings at the Bank have been revised to Positive. The Bank’s Short-Term Instruments rating has been confirmed with a Stable trend. The rating actions follow a detailed review of the Company’s operating performance, financial fundamentals, and future prospects.

Key’s ratings reflect its well-established, diversified banking franchise, which includes a retail banking presence in 15 states and a corporate banking presence in 10 additional states. Key operates with competitive positions in many markets, some of which have been augmented by the recently completed (August 1, 2016) acquisition of First Niagara Financial Group, Inc. (FNFG). Positively, FNFG added scale and core deposits in existing, as well as adjacent markets and new product capabilities. In addition, FNFG is projected to provide Key with significant cost saving opportunities as well as the potential for revenue synergies. When the transaction was announced, DBRS viewed it as a good addition to the KEY franchise.

The ratings are also supported by the Company’s sound asset quality, ample funding and liquidity, as well as solid capitalization. The Positive trend reflects the progress the Company has made improving profitability and reviving growth. Indeed, Key has reported positive operating leverage in nine of the last eleven quarters. DBRS will look for Key to successfully integrate the FNFG acquisition and achieve sustained positive credit fundamentals, which would likely lead to a positive rating action.

Results in recent quarters have benefited from revenue generation and well controlled core expenses that has resulted in positive operating leverage. Most recently, 3Q16 results reflect the acquisition of FNFG and included merger-related charges totaling $207 million. Exclusive of these charges, Key would have reported $303 million of net income, equating to a relatively solid ROA of 0.98%, as the core franchise demonstrated continued momentum, including C&I loan growth. Additionally, Key successfully completed FNFG’s client and systems conversion over Columbus Day weekend. DBRS notes that Key’s balance sheet is asset sensitive and expects earnings to benefit from any potential increase in short-term interest rates.

Core asset quality trends remained favorable, including declining nonperforming asset levels, although energy related credits had caused an increase in nonperforming loans earlier in the year, and low net charge-offs (NCOs). DBRS views Key’s energy exposure, representing just 1% of the loan book, as manageable. Meanwhile, NCOs remained a low 0.22% of average loans and leases in 3Q16. However, DBRS sees this as likely at, or near, the cyclical low, and that credit metrics will likely begin to normalize at this point in the credit cycle.

Key’s balance sheet remains solid. The Company’s deposit franchise anchors the funding profile. As expected, capital metrics declined significantly as a result of the FNFG acquisition and the Company resumed its share repurchase program subsequent to the completion of the deal. Specifically, CET1 declined to 9.55% from 11.10% in 2Q16.

Key, a diversified financial services corporation headquartered in Cleveland, reported approximately $135.8 billion in consolidated assets as of September 30, 2016.

RATING DRIVERS
A successful integration of the FNFG franchise and continued momentum in sustaining improving profitability metrics while maintaining a sound balance sheet could lead to a positive rating action. Conversely, a reversion to weaker profitability metrics, or an increase in credit losses that exceed normalized levels; especially should they result from an increase in Key’s risk appetite, could have negative rating implications. Additionally, 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), which can be found on our website under Methodologies.

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.

Lead Analyst: John Mackerey
Rating Committee Chair: Michael Driscoll
Initial Rating Date: 25 April 2003
Most Recent Rating Update: 30 October 2015

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.