DBRS Morningstar Revises KeyCorp’s Trend to Negative; Confirms Long-Term Issuer Rating at ‘A’

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 long-term ratings at the holding company and all ratings at the Bank have been revised to Negative from 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
The Negative trend considers the increasingly challenging operating environment, including a more costly and competitive funding environment, and the expectation that funding costs and asset quality metrics will likely worsen from their current levels, pressuring earnings. However, previous steps KEY has taken to de-risk the loan portfolio may help mitigate some expected asset quality challenges. Additionally, unrealized losses have weakened the Company’s tangible capital position to the low-end of peers.

The ratings confirmation reflects KEY’s 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 diversified earnings, including a high level of non-interest income.

RATING DRIVERS
An inability to improve tangible capital levels, sustained weakening of profitability metrics, or an outsized increase in credit losses, would result in a ratings downgrade.
Given the Negative trend and upgrade of the ratings is unlikely. The trend would return to Stable if tangible capital levels improve and asset quality and operating earnings performance remain in an acceptable range for the rating category.

RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong / Good
Cleveland-based KeyCorp provides consumer, private, business and commercial banking services within the Company’s 15 state regional footprint. Additionally, the Company operates some businesses nationally, including some consumer lending businesses, Real Estate Capital, Corporate Banking Services, Equipment Finance, Institutional Asset Services and Capital Markets. DBRS Morningstar views KEY’s capital markets capabilities as differentiating the Company from many regional banking competitors and providing a strong source of fee income. Additionally, KEY’s wealth and investment management unit has approximately $50 billion in assets under management.

Earnings Combined Building Block (BB) Assessment: Strong/Good
KEY’s earnings are highly diversified by geography and segment with a large percentage of revenues derived from non-interest income. Earnings in 1Q23 were weaker than peers as hedging activities tempered the net interest margin (NIM). The Company is expecting a decline in net interest income (NII) in 2023. For 1Q23, earnings equated to a 0.66% ROA and a 9.85% return on average common equity. While these are acceptable returns, they will likely be further pressured given a slowing economy and the expectation of higher funding costs that will further pressure the NIM and NII.

Risk Combined Building Block (BB) Assessment: Strong/Good
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/Good
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. Funding costs are expected to rise giving the current rate environment although deposit levels have been relatively stable.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
Capital levels are sound and the Company usually generates solid 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 March 31, 2023. However, tangible capital levels have decreased reflecting large unrealized losses in its available-for-sale securities portfolio.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/415673

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 credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 purpose of providing this rating was of satisfactory quality.

The rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.

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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