DBRS Upgrades KeyCorp to A (low); Revises Trend to Stable

DBRS, Inc. (DBRS) upgraded most of the ratings for KeyCorp (KEY or the Company), and its related entities, including the Company’s Long-Term Issuer Rating to A (low) from BBB (high). The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for KeyBank N.A. (the Bank) was raised one notch, to ‘A’ from A (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

The ratings upgrade recognizes the sustained progress the Company has made improving profitability metrics and reviving revenue growth, while maintaining a sound balance sheet. Additionally, the integration of the (August 1, 2016) acquisition of First Niagara Financial Group, Inc. (FNFG) is on-track to achieve more than the initially outlined expense savings, as well as expected revenue synergies. The FNFG acquisition enhanced KEY’s franchise by increasing scale and its market presence and core deposits in existing, as well as adjacent new markets. Additionally, the transaction added new product capabilities to KEY and affords the opportunity to introduce KEY’s deeper commercial banking product set to FNFG’s customer base.

KEY’s ratings also reflect its well-established, diversified banking franchise, which includes a retail banking presence in 15 states and a corporate banking presence focused on targeted industry verticals in additional states. KEY operates with competitive positions in many markets, some of which have been augmented by the FNFG acquisition. The ratings are also supported by the Company’s substantial levels of fee income, sound asset quality, ample core deposit funding and liquidity, as well as solid capital levels.

The Company’s results in recent periods have shown an improving financial performance driven from both revenue generation and well controlled core expenses that have resulted in positive operating leverage. Recent results also highlight the positive aspects of the FNFG acquisition, as well as the impact of Federal Reserve rate hikes that helped bolster the net interest margin. For 1H17, KEY reported $694 million in net income attributable to common shareholders, equating to a solid ROA of 1.11%. Results exhibit continued core franchise momentum, as well as an improving efficiency ratio.

As with much of the industry, asset quality remains favorable. At just 59 basis points of loans, nonperforming loan levels at June 30, 2017 remain highly manageable and declined 12% from March 31, 2017. Additionally, net charge-offs (NCOs), at 31 basis points of average loans for 2Q17, remain low and below the Company’s target range of 40 to 60 basis points. However, given the length of the current benign credit cycle, DBRS continues to view credit metrics as near cyclical lows.

The Company’s deposit franchise anchors the funding profile with an 84% loan to deposit ratio providing ample cushion to fund future loan growth. As expected, capital metrics declined significantly as a result of the FNFG acquisition. Subsequently, capital ratios have been building modestly with a solid CET1 ratio of 9.91% at June 30, 2017. DBRS notes that the Company received no objection from the Federal Reserve to its 2017 capital plan, which includes the repurchase of approximately $800 million common shares, as well as the potential for two dividend increases. DBRS anticipates that KEY will manage capital levels slightly lower than current levels over time.

KEY, a diversified financial services corporation headquartered in Cleveland, reported approximately $135.8 billion in consolidated assets as of June 30, 2017.

The Grid Summary Scores for KEY are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Good.

RATING DRIVERS
Given the ratings upgrade, upwards rating momentum over the intermediate term is unlikely. However, a sustained better than peer financial performance while maintaining a sound balance sheet and without an increase in risk appetite could lead to further positive rating actions. Conversely, a reversion to weaker profitability metrics, or an increase in credit losses that exceed normalized levels could have negative rating implications.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (May 2017), 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, Vice President – Global FIG
Rating Committee Chair: Lisa Kwasnowski, Senior Vice President – Global FIG
Initial Rating Date: 25 April 2003
Most Recent Rating Update: 02 August 2017

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.