DBRS Confirms KeyBank N.A. at A (high), KeyCorp at “A”

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of KeyCorp (KeyCorp or the Company) and related entities as follows: Key Bank N.A.’s Short-Term Instruments at R-1 (middle) and Deposits & Senior Debt at A (high), KeyCorp’s Issuer & Senior Debt at “A” and Key Nova Scotia Funding Company’s Commercial Paper at R-1 (middle). At the same time, DBRS assigned new ratings to related entities or debt instruments heretofore not rated as follows: KeyCorp’s Subordinated Debt at A (low) and Short-Term Instruments at R-1 (low), Key Bank N.A.’s Subordinated Debt at “A” and the Trust Preferred Securities of KeyCorp Institutional Capital A, KeyCorp Institutional Capital B and KeyCorp Capital I, II, III, V, VI and VII at A (low). The rating actions followed a detailed review by DBRS of the Company’s operating results and financial fundamentals. All trends are Stable.

DBRS notes that over the past year, KeyCorp has continued to make good progress on its strategic priorities of fine-tuning its business model, sustaining profitable revenue growth, maintaining a strong credit culture and further improving operating leverage. At the same time, the Company has forcefully addressed the perceived weaknesses in its anti-money laundering and other compliance controls noted by the U.S. Federal Reserve Bank and the Comptroller of the Currency.

The positive structural changes achieved to date include a strengthened senior management team and progress in realigning KeyCorp’s loan portfolio through further reductions in non-core assets (such as sub-prime and prime auto loans and leases, and brokered home equity loans). Several small acquisitions to build out the product mix have also been completed. The Company has announced the sale of its McDonald & Company branch network and is currently exploring the sale of its Champion Mortgage subsidiary.

In spite of management’s focus on these strategic issues and a challenging operating environment, KeyCorp has been able to achieve stable loan and core deposit growth during the past four quarters, which has translated into relatively stable revenue and earnings growth. Loan loss provisions continued to decline during this period, while the Company’s return on assets and net interest margin widened modestly. As a result of these developments and improvements, KeyCorp’s profitability, liquidity and asset quality metrics have all strengthened in both absolute terms and in relation to the respective medians of banks similarly rated by DBRS. Whereas for several years KeyCorp has lagged the peer group medians, the Company is now generally in the middle of its rating range.

KeyCorp’s ratings are supported by a diversified community banking-focused franchise, materially improved asset quality and the expectation that the ongoing initiatives and accomplishments will sustain the Company’s operating performance and risk profile commensurate with those of similarly rated banks. DBRS believes that further improvement in profitability is largely dependent on achieving higher operating efficiency and deepening client relationships. Although progress in gaining a larger share of customers’ business has been made, the Company’s operating efficiency still lags the median for its peer group.

The ratings also consider KeyCorp’s moderately high – albeit declining – reliance on less stable and more expensive wholesale funding, and the continuing challenge to create an effective and homogenous sales culture throughout its far-flung network. The holding company’s standalone risk profile is sound: double-leverage is low and unencumbered liquidity to meet all operating expenses and debt service obligations is ample without taking into account dividend income from the regulated bank subsidiary.

KeyCorp, a bank-based financial services company headquartered in Cleveland, Ohio, reported $95 billion in balance sheet assets at June 30, 2006.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The Trust Preferred Securities may contain certain unique covenants that give them some equity-like characteristics.
Key Nova Scotia Funding Company is guaranteed by Key Bank, N.A.