Morningstar DBRS Comments on KeyCorp Receiving a Strategic Investment from Scotiabank; Sees No Immediate Impact on Credit Ratings

DBRS, Inc. (Morningstar DBRS) commented that KeyCorp's (KEY or the Company; rated A (low) with a Stable trend) announcement of receiving a strategic investment from The Bank of Nova Scotia (Scotiabank; rated AA with a Stable trend) will have no impact on KEY's credit ratings or trends. On August 12, 2024, the Company announced that it had reached an agreement under which Scotiabank will make a strategic minority investment in KEY of approximately $2.8 billion, which would represent an approximate pro-forma ownership stake of 14.9%. The transaction will be completed in two stages, with an initial investment of $0.8 billion (4.9% ownership) to be completed by the end of August. The second step would follow the expiration of the antitrust waiting period under the Hart-Scott-Rodino Act and approval from the Federal Reserve when an additional $2 billion investment will be made, which is expected to be completed in 1Q25. Once Scotiabank's ownership exceeds 10%, it will have the right to designate two individuals to serve on KEY's Board of Directors, including one Scotiabank senior officer and a third party reasonably acceptable to KEY.

Morningstar DBRS views this investment positively, as it should help accelerate KEY's ability and timeline to improve its earnings and capital positions. Indeed, the investment is expected to add 195 basis points (bps) to KEY's 2Q24 CET 1 ratio bringing it to 12.4%. KEY also indicated it is evaluating a securities portfolio repositioning that would bolster earnings and liquidity while still improving capital metrics. Specifically, the contemplated repositioning and capital raise is estimated to result in a CET1 capital ratio in the range of 11.3% to 11.6% and be accretive to earnings. If AOCI is included, the CET 1 ratio range would decline to 9.1% to 9.4%, an increase of at least 185 bps from June 30, 2024 positioning KEY well to meet likely stricter capital rules. In its June 3, 2024 press release, Morningstar DBRS did note that 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.

The contemplated securities repositioning would sell lower yielding, higher duration securities and reinvest the proceeds into higher yielding securities that are more liquid. The expected loss of selling these securities would be approximately half of the capital raise, or $1.4 billion. The move would pull forward an additional ~$400 million of net interest income.

The investment will likely open up other opportunities for the two banks to work together to better serve their respective client bases and provided capital to organically grow other areas of KEY's businesses.

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

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