Reuters logo
Fitch Affirms KeyCorp L-T IDR at 'A-' Following Large Regional Bank Review; Outlook Remains Negative
October 4, 2016 / 6:46 PM / a year ago

Fitch Affirms KeyCorp L-T IDR at 'A-' Following Large Regional Bank Review; Outlook Remains Negative

(The following statement was released by the rating agency) NEW YORK, October 04 (Fitch) Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Defaut Ratings (IDRs) of KeyCorp (Key), and Key Bank, N.A. The Rating Outlook is Negative. The affirmation reflects the strong earnings profile, stable and diverse business model, and its consistency of performance through time. 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), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION). 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 strong capital position, solid asset quality performance, diversified revenue mix, and reduced risk profile. Although gradually improving, the company's earnings measures fall on the lower end of most large regional banks. Ratings incorporate KEY's strong capital position, which is amongst the highest of its peer group with a TCE of 9.60% and CET1 ratio of 11.10% for second quarter 2016 (2Q16). KEY received no objection to its capital plan this year, and quantitatively, projected loan losses for 2016 CCAR were slightly below peer averages, which importantly included the First Niagara Financial Group acquisition, which closed in August 2016 and received OCC approval in September 2016. Post-closing of FNFG, KEY has estimated a pro forma CET1 ratio of 9.5%. Additionally, given the company's reduced risk profile over the years, credit performance continues to be better than peers with an average of net charge-offs (NCOs) of 0.27% and nonperforming assets (NPAs) of 1.18% over the last five quarters. KEY estimates that its through-the-cycle loan losses are expected to fall between 40 basis points (bps) and 60bps. Given current NCOs levels at 28bps for 2Q16, Fitch expects some credit deterioration for KEY, as well as the industry, as credit losses are likely at unsustainably low levels. Further, KEY's securities portfolio has virtually no credit risk with approximately 99.7% of its holdings related to agency securities, the highest levels among the large regional banks. KEY's exposure to the energy sector is very manageable. At June 30, 2016, KEY reported $3.1 billion of oil and gas commitments, which represents about 2% of total loans outstanding. Although KEY has reported a rise in commercial NPAs, absolute NPA levels continue to reflect solid credit quality. Fitch also considers the company's diversified revenue base as a rating strength evidenced by noninterest 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. KEY's profitability measures tend to fall on the lower-end of peer averages such as return on assets (ROA) and net interest margin (NIM) for the large regional group, although the gap to the peer group averages is closing. Some of this may be attributed to the company's above average operating costs and lower loan yields given large component of commercial and industrial (C&I) loans tied to LIBOR rates. KEY's NIM is also modest, although, positively, the company has experienced less NIM compression than some of peers. Incorporated in the affirmation is that profitability will trend positively and pull to peer-averages over time. Further, the company's cost savings initiatives should also lead to improvements in profitability. Fitch's affirmation of KEY also reflects our view that the FNFG transaction will strengthen KEY's franchise in key markets. Post-closing, KEY would have an improved and strong market position in upstate NY as well as other key markets. Additionally, the FNFG franchise has a strong retail deposit base which is currently undervalued given the low rate environment and excess liquidity in the market. KEY's projected improvements to its efficiency ratio and pre-tax-cost saves of $400 million are also viewed positively. Further, KEY's pro forma CET1 ratio of 9.5% is considered appropriate given the risk profile of the combined entity. The company has also identified $300 million of revenue synergies that are not included in the model of the acquisition. The Negative Outlook reflects Fitch's view that integration and execution risks are high given that FNFG has been an acquisitive bank and has undertaken significant investment to improve its infrastructure. Thus, Fitch views integration risk to be higher as KEY assesses and transitions FNFG's technology and infrastructure to its own platform. Fitch also believes execution risks are higher given the size of this acquisition and KEY's limited experience. Although FNFG's balance sheet is modest in complexity, KEY lacks a proven track record of successful acquisitions. Of note, KEY has identified 40% of the targeted costs saves will come from technology and third party vendors, which seems achievable. Further, in Fitch's view, FNFG's commercial real estate (CRE) business and residential mortgage portfolio (roughly about $12 billion) should continue to experience steady credit performance. However, Fitch has noted concerns with FNFG's risk profile given aggressive growth. Further, the company also entered relatively new business lines such as indirect auto, leveraged lending, and asset-based lending at a time when competition for loans is fierce. Despite continued stable asset quality measures, we believe FNFG's historical credit metrics may not be indicative of future performance. Mitigating factors are KEY's estimated credit mark of 3% on the loan portfolio which combined with the projected capital position should support credit potential deterioration. 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 thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of KeyBank, N.A. 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. 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. RATING SENSITIVITIES VR, IDRs, AND SENIOR DEBT KEY's ratings are primarily sensitive to its ability to successfully integrate FNFG. In assessing this, Fitch will consider KEY's ability to integrate and/or consolidate information technology systems, while demonstrating progress towards achieving key financial objectives of the transaction, such as internal rate of return and expected cost savings. Positively, KEY received regulatory approval to close the transaction and has indicated that it is on track to achieve its targeted $400 million of cost saves. Although not expected, KEY ratings would be sensitive if the credit mark on FNFG's loans or securities proved to be insufficient. 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. 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. The rating actions are as follows: Fitch affirms the following: KeyCorp --Long-Term IDR at 'A-'; Outlook 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 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'. Key Corporate Capital, Inc. --Long-Term IDR at 'A-'; Outlook Negative; --Short-Term IDR at 'F1'. 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 Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Christopher Wolfe Managing Director +1-212-908-0771 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 15 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012645 Solicitation Status here Endorsement Policy here ail=31 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below