DBRS Morningstar Confirms KeyCorp at ‘A’; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of KeyCorp (KEY or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, KeyBank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is 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
KEY’s ratings and Stable trend reflect its diversified and strong 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 ample core deposit funding and liquidity, as well as sound capital levels. The ratings also consider strong pre-provision profitability metrics, which includes a high level of non-interest income.

The economic disruption resulting from the Coronavirus Disease (COVID-19) pandemic, as well as low interest rates may pressure KEY’s revenues and has already adversely affected asset quality. However, we view KEY as able to manage through this period given its mix of businesses and steps it had previously taken to reduce its risk profile. Additionally, support measures including monetary and fiscal stimulus, as well as relaxed criteria from regulators, should also mitigate some of the negative impact of the crisis. However, should the crisis be prolonged, or if the recovery is muted, ratings pressure is likely.

RATING DRIVERS
Given the current operating environment, DBRS Morningstar does not see upward ratings pressure over the intermediate term. Over the longer term, a sustained better-than-peer earnings performance, while maintaining a similar risk profile, would result in an upgrade of the ratings. Conversely, a sustained weakening of profitability metrics, or an outsized increase in credit losses, would result in a ratings downgrade.

RATING RATIONALE
KEY’s financial performance has been fairly resilient, despite the highly adverse operating environment. While earnings have been negatively impacted by reserve building during the first half of the year and higher expenses, revenues were higher driven by volume growth and a good performance from KEY’s varied sources of non-interest income. In 3Q20, KEY reported $428 billion in net income, equating to a relatively sound ROA of 1.00%.

Generally, asset quality remains solid, with non-performing assets still low and net charge-offs at highly manageable levels. We expect that asset quality will likely worsen from this point, although stimulus measures and forbearance will slow loss recognition. Net charge-offs were 0.49% of average loans for 3Q20, within the Company’s target range of 40 to 60 basis points. Additionally, improvements to KEY’s risk management process, including strengthened risk management practices, a more diversified loan portfolio and a reduction in the level of construction loans, should lead to a better performance during this downturn versus the financial crisis.

Deposits account for the bulk of KEY’s funding and deposit growth which has been strong in recent periods, reflecting customers maintaining higher levels of liquidity. The Company also holds a substantial level of on-balance sheet liquidity. Capital metrics have improved, despite balance sheet growth, as the Company has curtailed buybacks like the rest of the industry. At September 30, 2020, the CET1 ratio was at the top of KEY’s targeted range at 9.50%, up 40 basis points from the linked quarter.

Cleveland-based KEY reported approximately $170.5 billion in consolidated assets as of September 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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