DBRS Places KeyCorp’s Ratings Under Review with Negative Implications

DBRS has today placed the long and short-term ratings of KeyCorp (Key or the Company) including Key’s Issuer & Senior Debt rating of A (low), and the long-term ratings of its rated operating subsidiaries, Under Review with Negative Implications. At the same time, KeyBank N.A. and Key Nova Scotia Funding Company’s R-1 (low) Short-Term Instruments and AAA FDIC-guaranteed debt ratings are confirmed with a Stable trend.

The review reflects DBRS’s concerns that Key continues to struggle with asset quality deterioration and credit costs that are weighing on its performance and have generated net losses for six consecutive quarters. DBRS remains concerned at Key’s weakening level of adjusted income before provisions and taxes (IBPT) and importantly, the widening gap between IBPT and loan loss provisions, which currently measures 5.4x and suggests continued future losses. Credit losses on the Company’s commercial real estate construction loans, commercial loans related to real estate and consumer loans in exit portfolios have produced the highest credit costs this year. Key’s loan costs track closely to the large bank median, however its deposit costs are elevated relative to the median reflecting higher yielding time deposits booked last year that may provide net interest margin gains as they roll off. DBRS also characterizes the Company’s deposit market shares as generally substantial but not robust or dominant.

The $2.8 billion of non-performing assets (NPAs) in the third quarter reflected a 25% increase in CRE balances but Key did see modest decreases in the CRE construction and commercial NPAs. While Key has already charged-off a substantial amount of loans in this credit cycle, DBRS believes that some potential losses likely remain embedded in the Company’s loan portfolios, as signalled by the nearly 10% quarterly increase in non-performing assets, but notes that the pace of deterioration has slowed. DBRS does consider the reserve coverage at 109% of non-performing loans as sufficient to address current losses, and notes that NPLs are being carried at 76% of face value. Moreover, Key has substantial capitalization levels both on a tangible and regulatory basis that should enable it to absorb additional losses.

DBRS’s review will focus on Key’s financial performance and asset quality. Additionally, the review will also consider the Company’s plans and projections for IBPT, credit costs and reserve build for the near- to medium-term.

DBRS notes that the review could potentially result in a one notch downgrade, if the review of current performance and near- to medium-term trends reveals performance and metrics more appropriate for the next lower rating range: BBB (high). Conversely, confirmation of the current ratings could result, if the performance is expected to stabilize and return to profitability in the near- term. DBRS expects to conclude the review within 90 days.

KeyCorp, a diversified financial services corporation headquartered in Cleveland, Ohio, reported $97 billion in consolidated assets as of September 30, 2009.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.