DBRS Confirms KeyCorp at A (low); Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of KeyCorp (KEY or the Company), including the Company’s Long-Term Issuer Rating of A (low) and Short-Term Issuer Rating of R-1 (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, KeyBank, N.A. (the Bank). With the exception of KEY’s short-term ratings, the trend on all other ratings have been revised to Positive from 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 RATING CONSIDERATIONS
The confirmation and Positive trend recognize the ongoing progress the Company has made building its franchise, improving profitability metrics, and controlling expenses, while maintaining a sound balance sheet. Additionally, the successful integration of the (August 1, 2016) acquisition of First Niagara Financial Group, Inc. (FNFG) realized more in expense savings than originally anticipated, and now has the potential for additional revenue synergies. The ratings also consider an eventual shift in the current credit cycle and accompanying normalizing asset quality trends within the Company’s loan portfolio.

RATING DRIVERS
Ongoing better than peer financial performance, including positive operating leverage, while maintaining a sound balance sheet and without a perceived increase in risk appetite could result in a ratings upgrade. Conversely, a reversion to weaker profitability metrics, or an outsized increase in credit losses, especially as a result of weak underwriting, could have negative rating implications.

RATING RATIONALE
KEY’s ratings reflect its diversified banking franchise, which includes a retail banking presence in 15 states and a national corporate banking presence focused on targeted industry verticals. KEY operates with competitive positions in many markets, some of which have been augmented by the FNFG acquisition. The ratings are also supported by the Company’s substantial levels of fee income, sound asset quality, ample core deposit funding and liquidity, as well as solid capital levels.

KEY’s improving financial performance has been driven from both revenue growth and well controlled expenses that have resulted in positive operating leverage. Recent results also highlight the positive aspects of the FNFG acquisition, as well as the impact of Federal Reserve rate hikes, and the lower tax rate following U.S. tax reform. For 1H18, KEY reported $871 million in net income attributable to common shareholders, equating to a solid ROA of 1.33%. Results showed continued franchise momentum, as well as an improving efficiency ratio.

Asset quality remains favorable with non-performing assets remaining at highly manageable levels and at or near a cyclical low. Additionally, net charge-offs, at 27 basis points of average loans for 2Q18, remain low and below the Company’s target range of 40 to 60 basis points. Given the length of the current credit cycle, DBRS continues to view current credit metrics as likely unsustainable. However, improvements to KEY’s risk management process, including a more diversified loan portfolio and a reduction in the level of construction loans, should enable KEY to perform better through the next downturn.

Deposits account for the bulk of KEY’s funding and provide an ample cushion to fund future loan growth. The Company also holds a substantial level of on-balance sheet liquidity. Capital metrics have been relatively stable, despite ongoing capital management activities. DBRS notes that the Company received no objection from the Federal Reserve to its 2018 capital plan, which includes the repurchase of approximately $1.2 billion common shares, as well as a 42% increase in the common stock dividend. DBRS anticipates that KEY will manage capital levels slightly lower than current levels over time towards its targeted CET1 ratio of 9.0% to 9.5%.

Cleveland-based KEY reported approximately $137.8 billion in consolidated assets as of June 30, 2018.

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 applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll – Managing Director, Head of NA FIG - Global FIG
Initial Rating Date: 25 April 2003
Last Rating Date: 11 October 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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