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Fitch Affirms KeyCorp's L-T IDR at 'A-' Following Large Regional Bank Review; Outlook to Stable
October 3, 2017 / 8:50 PM / 2 months ago

Fitch Affirms KeyCorp's L-T IDR at 'A-' Following Large Regional Bank Review; Outlook to Stable

(The following statement was released by the rating agency) NEW YORK, October 03 (Fitch) Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of KeyCorp (Key), and Key Bank, N.A. to 'A-'/'F1'. The Rating Outlook has been revised to Stable from Negative. The affirmation reflects the strong earnings profile, stable and diverse business model, and consistency of performance through time. A full list of rating actions follows at the end of this release. The rating action follows a periodic review of the large regional banking group, which includes Keycorp (KEY), BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), and Wells Fargo & Company (WFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled "Large Regional Bank Periodic Review," to be published shortly. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch's affirmation of KEY's IDRs is supported by the company's sound financial profile, solid asset quality performance, diversified revenue mix, and reduced risk profile. While KEY's earnings measures have been lower than most large regional banks, KEY's financial metrics for the first-half of 2017 were more in line peer averages and what Fitch believes would be KEY's long run performance. Additionally, identified revenue synergies should further improve KEY's profit measures to remain in-line with its peer group. The revision of the Outlook to Stable from Negative reflects Fitch's view that KEY has demonstrated successful progress in its First Niagara Financial Group (FNFG) integration, including the targeted branch closures, the exit of FNFG's sizeable third party vendor relationships, and integrating FNFG into KEY's platforms. KEY had identified 40% of the targeted costs saves would come from technology and the elimination of third party vendors. KEY remains on track to execute on its financial targets announced at the acquisition and should benefit from revenue synergies. To date, KEY has already achieved its initial cost save target of $400 million and, more recently, expects an additional $50 million to be achieved by early 2018. The $450 million cost save figure represents 46% of FNFG's expense base prior to acquisition. Further, management estimates $300 million of revenue synergies to come through over the next two to three years from areas including residential mortgage, commercial payments, private banking and commercial bank and capital market offerings. Positively, the company continues to deliver improving financial performance. Fitch views 2Q17 results as emblematic of KEY's longer-run performance and supportive of the current ratings. KEY has been successful in driving positive operating leverage. The company reported cash efficiency ratio of 59.4% from 69% the same period a year ago, which is in line with its long-term target of below 60%. ROTE stood at 12.9%, in-line with long-term targeted range of 13% to 15%. Fitch also considers the company's diversified revenue base as a rating strength evidenced by non-interest income contributing roughly 44% of total revenues, consistently above the peer group average. The company has benefited from its solid commercial platform that reflects its middle-market focused capital markets business. Incorporated in the affirmation is that profitability will trend positively and pull consistently to peer-averages over time. Given the company's reduced risk profile over the years, credit performance continues to be better than peers with average net charge-offs (NCOs) of 0.29% over the last five quarters. Further, for 2Q17, Fitch calculated non-performing assets (NPAs) stood at 1.01% compared to 2.04% on average for the peer group. KEY estimates its through-the-cycle loan losses should fall between 40 basis points (bps) and 60bps. Given current NCOs levels at 29bps for 2Q17, Fitch expects some credit deterioration for KEY, as well as the industry, as credit losses are likely at unsustainably low levels. Although concerns exist with the quality of FNFG's acquired loans, given FNFG's aggressive growth, particularly in new business lines, KEY's estimated credit mark of 3% on the loan portfolio combined with its capital position should cushion any potential credit deterioration. Given the FNFG acquisition and continued capital deployment actions, KEY's capital measures are in-line with the peer average. Although Fitch had expected capital to decline, the company has historically operated with above peer average capital levels. Fitch believes the company's improving earnings profile, enhanced risk profile and solid asset quality performance helps offset the company's reduced capital position. SUPPORT RATING AND SUPPORT RATING FLOOR KEY has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, KEY is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES KEY's subordinated debt is notched one level below its VR for loss severity. KEY's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while KEY's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS KeyBank, N.A.'s uninsured deposit ratings are rated one notch higher than KEY's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY KEY's IDR and VR are equalized with those of its operating companies and bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Fitch believes that KEY's current ratings are at the high-end of its rating potential given that financial performance is similar to rated large regional peers. Negative rating action could ensue should the company take a more aggressive approach to capital management such has a high total pay-out ratio versus peers, resulting in a rapid capital decline that is not offset with improved earnings generation and retention. Additionally, unexpected changes to current business strategy or key executive management, and/or a declining trend in operating performance would also be viewed negatively. Should KEY consider future acquisition activity of material size and/or appear to be out of line with current strategies, ratings would be reviewed. SUPPORT RATING AND SUPPORT RATING FLOOR Since KEY's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for KEY and its operating companies' subordinated debt and preferred stock are sensitive to any change to KEY's VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long-and short-term deposit ratings are sensitive to any change to KEY's Long- and Short-term IDR. HOLDING COMPANY Should KEY's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. Fitch has affirms the following ratings and has revised Ratings Outlooks as indicated: KeyCorp --Long-Term IDR at 'A-'; Outlook to Stable from Negative; --Short-Term IDR at 'F1'; --Viability at 'a-'; --Senior debt at 'A-'; --Subordinated debt at 'BBB+'; --Preferred stock at 'BB'; --Short-term debt at 'F1'; --Support at '5'; --Support Floor at 'NF'. KeyBank NA --Long-Term IDR at 'A-'; Outlook to Stable from Negative; --Short-Term IDR at 'F1'; --Viability at 'a-'; --Long-term deposits at 'A'; --Senior debt at 'A-'; --Subordinated debt at 'BBB+'; --Short-term deposits at 'F1'; --Support at '5'; --Support Floor at 'NF'. KeyCorp Capital I - III --Preferred stock at 'BB+'. Contact: Primary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Bain Rumohr Director +1-312-368-3153 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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