Morningstar DBRS Downgrades KeyCorp's Long-Term Issuer Rating to "A (low)"; Trend Now Stable

DBRS, Inc (Morningstar DBRS) downgraded the credit ratings of KeyCorp (KEY or the Company), including the Company's Long-Term Issuer Rating to A (low) from 'A'. At the same time, Morningstar DBRS downgraded the credit ratings of its primary banking subsidiary, KeyBank N.A. (the Bank), including its Long-Term Issuer Rating to A from A (high) and Short-term Instruments credit rating to R-1 (low) from R-1 (middle). The trend for all credit ratings is now Stable. The Intrinsic Assessment (IA) for the Bank is 'A', 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 CREDIT RATING CONSIDERATIONS
The credit ratings downgrade reflects KeyCorp's sustained weakening of its operating earnings performance, driven by its balance sheet positioning and hedging strategies during the most recent interest rate hike cycle. While KEY has taken steps to mitigate the effects of its previous positioning, we expect earnings to remain pressured and not commensurate with their previous higher credit rating as the Company's swaps and Treasuries portfolio continue to roll off. The downgrade also considers KEY's securities portfolio's large unrealized loss that is the primary contributor to the $5.3 billion loss in AOCI that is currently excluded from their CET1 ratio. Including the unrealized securities and pensions losses, KEY's CET1 ratio would decline to 7.1%, near its 7.0% minimum (4.5% regulatory minimum plus 2.5% SCB).

The credit ratings and Stable trends also recognizes KEY's diversified and strong franchise, which includes a retail banking presence in 15 states, a focused national consumer business and a corporate banking presence targeting specific industry verticals. Overall, the business mix results in diversified earnings, including a higher than peer level of non-interest income.

CREDIT RATING DRIVERS
KEY's credit ratings would be upgraded if it improves its operating profitability and continues to build upon its tangible capital levels, while maintaining a similar risk profile.

Further deterioration in operating profitability or an outsized increase in credit losses would result in a credit ratings downgrade. Additionally, a significant reduction in capital levels would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong / Good
Headquartered in Cleveland, Ohio, KEY is a regional bank with total assets of $187 billion (at 1Q24). The Company provides a wide range of retail and commercial banking, commercial leasing, investment management, consumer finance, student loan refinancing, commercial mortgage servicing/special servicing, and IB products/services to individual, corporate and institutional clients. Morningstar DBRS views KEY's capital markets capabilities as differentiating the Company from many regional bank competitors and providing a strong source of fee income.

Earnings Combined Building Block (BB) Assessment: Good
KEY's earnings are highly diversified by geography and segment, with a large percentage of revenues derived from non-interest income. Nonetheless, earnings in both 2023 and 1Q24 were weaker than peers, as the Company's balance sheet positioning has significantly pressured net interest income primarily through net interest margin contraction. Although KEY has recently taken actions to rectify its previous positioning, it still expects a decline in net interest income in 2024 (vs. 2023) as maturing Treasuries and swaps continue to roll-off into next year.

Risk Combined Building Block (BB) Assessment: Strong / Good
KEY's asset quality remains sound, and the loan portfolio is fairly granular and well-diversified. While Morningstar DBRS expects some worsening in asset quality metrics from the current low levels, previous steps to reduce exposure to some riskier segments (such as CRE and construction) should help KEY perform relatively well through the credit cycle.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong / Good
KEY has ample core deposit funding, which readily funds the loan portfolio. Additionally, KEY has access to other sources of funding and maintains strong levels of on balance sheet liquidity. Although KEY believes its deposit beta is now close to peak levels, there may be some additional pressure on funding costs in the near term as the Company's CD book continues to mature/ get repriced at current market rates.

Capitalization Combined Building Block (BB) Assessment: Good
KEY has continued to build its capital position. The Company's CET1 ratio was at 10.3% at 1Q24, above its target operating range of 9.0%-9.5%, and 330 bps above its current regulatory minimum of 7.0%. Given uncertainty regarding where required capital levels will fall post finalization of current capital proposals, KEY continues to pause on share repurchases and aims to maintain its CET1 ratio north of 10% in the near future.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/433883.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The principal methodology is the Global Methodology for Rating Global Methodology for Rating Banks and Banking Organisations https://dbrs.morningstar.com/research/431155/global-methodology-for-rating-banks-and-banking-organisations (April 15, 2024). In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. Morningstar DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rating was not initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

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

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

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277