DBRS Morningstar Confirms KeyCorp at ‘A’; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of KeyCorp (KEY or the Company), including the Company’s Long-Term Issuer Rating of ‘A’. At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, KeyBank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (high), 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
KEY’s ratings and Stable trend reflect its diversified and strong banking 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 strong pre-provision profitability, including a high level of non-interest income. The ratings are also supported by KEY’s strong balance sheet, including ample core deposit funding and liquidity, as well as sound capital levels.

The ratings also consider the current operating environment and the expectation that asset quality metrics will likely worsen from their current unsustainably low levels. However, we expect previous steps to de-risk the loan portfolio will serve KEY well in future economic downturns.

RATING DRIVERS
Over the longer term, further strengthening of the franchise, and a sustained improvement in operating earnings performance, while maintaining a similar risk profile, would result in an upgrade of the ratings. Conversely, a sustained weakening of profitability metrics, or an outsized increase in credit losses, would result in a ratings downgrade.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong / Good
KEY ranks as the 16th largest U.S. depository (by deposits) and holds strong deposit market shares in a number of markets across its franchise. Beyond traditional banking products, KEY also has a strong investment banking franchise, a differentiator compared to many regional bank competitors.

Earnings Combined Building Block (BB) Assessment: Strong / Good
KEY’s earnings are highly diversified by geography and segment with approximately 38% of revenues derived from non-interest income. Earnings YTD 2022 have benefitted from loan growth and higher interest rates which has helped to boost net interest income. This, combined with flat expenses, has led to positive operating leverage, an achievement that KEY has consistently reported in recent periods. KEY reported net income of approximately $1.5 billion for 9M2022, equating to a solid 1.10% ROAA, and 14.48% ROACE.

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

Funding and Liquidity Combined Building Block (BB) Assessment: Strong
KEY has ample core deposit funding, which readily funds the loan portfolio. Additionally, KEY has access to other funding sources and maintains strong levels of on balance sheet liquidity.

Capitalization Combined Building Block (BB) Assessment: Good
Capital levels are sound and the Company generates strong levels of capital through earnings. The Company is expected to manage capital within its targeted CET1 range of 9.0% to 9.5%. The CET1 ratio was 9.1% at September 30, 2022.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/404584.

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 DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations
(June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)

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

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

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

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

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