DBRS Morningstar Upgrades KeyCorp to ‘A’; Trend Now Stable

DBRS, Inc. (DBRS Morningstar) upgraded most of the ratings of KeyCorp (KEY or the Company), including the Company’s Long-Term Issuer Rating to ‘A’ from A (low). At the same time, DBRS Morningstar upgraded the ratings of its primary banking subsidiary, KeyBank, N.A. (the Bank). The trend on all ratings is now Stable. The Intrinsic Assessment (IA) for the Bank was raised to A (high), 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.

KEY RATING CONSIDERATIONS
The upgrade recognizes the progress the Company has made strengthening its franchise and improving core profitability metrics, while maintaining a sound balance sheet. Specifically, KEY has delivered on its efficiency initiative, delivered positive operating leverage, while realizing the potential of recent acquisitions, including the 2016 acquisition of First Niagara Financial Group, Inc.

KEY’s ratings and Stable trend reflect its diversified banking franchise, which includes a retail banking presence in 15 states and a national corporate banking presence focused on targeted industry verticals. The ratings are also supported by KEY’s strong balance sheet, including sound asset quality, ample core deposit funding and liquidity, as well as solid capital levels. The ratings also consider a more challenging interest rate environment and expected normalizing asset quality trends within the Company’s loan portfolio.

RATING DRIVERS
Given the recent ratings upgrade, DBRS Morningstar does not see upward ratings pressure over the intermediate term. Over the longer term, a sustained better-than-peer earnings performance, including an increased contribution from fee-based businesses, while maintaining a similar risk profile, could result in positive ratings pressure. Conversely, a reversion to weaker profitability metrics, or an outsized increase in credit losses, especially as a result of weak underwriting, could have negative ratings implications.

RATING RATIONALE
KEY’s improving financial performance has been driven from both revenue growth and well-controlled expenses that have resulted in positive operating leverage over the last six years. Most recently, for 9M19, KEY reported $1.2 billion in net income, equating to a sound ROA of 1.16%. Results showed continued franchise momentum, as well as an improving efficiency ratio. However, a fraud-related loss led to significant boost in the provision for credit losses year-over-year, leading to a drop in net income. DBRS Morningstar views this fraud situation as an isolated incident and not reflective of a deterioration in asset quality or deficient controls.

Generally, asset quality remains favorable with non-performing assets remaining at manageable levels and near cyclical lows. Additionally, while spiking to 0.85% due to the fraud loss, net charge-offs for the rest of the portfolio remained at a low 0.31% of average loans for 3Q19, and below the Company’s target range of 40 to 60 basis points. Given the length of the current credit cycle, DBRS Morningstar continues to view current credit metrics as likely unsustainable. However, improvements to KEY’s risk management process, including a more diversified loan portfolio and a reduction in the level of construction loans, should enable KEY to perform better through the next downturn.

Deposits account for the bulk of KEY’s funding and provide an ample cushion to fund loan growth. The Company also holds a substantial level of on-balance sheet liquidity. Capital metrics have been relatively stable, despite ongoing capital management activities. DBRS Morningstar anticipates that KEY will manage capital levels slightly lower over time towards its targeted CET1 ratio of 9.0% to 9.5%. At September 30, 2019, the CET1 ratio was estimated to be near the top of this range at a sound 9.52%.

Cleveland-based KEY reported approximately $146.7 billion in consolidated assets as of September 30, 2019.

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

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies & Criteria.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

For more information on this credit or on this industry, visit www.dbrs.com.

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