DBRS Downgrades KeyCorp to BBB (high); Trend now Stable - 2010-03-26T13:25:00.000Z | Morningstar DBRS (2024)

DBRS has today downgraded the Long and Short-Term ratings of KeyCorp (Key or the Company) and its operating subsidiaries, including Key’s Issuer & Senior Debt rating to BBB (high) from A (low), and the Long and Short-Term ratings of its operating bank subsidiary, KeyBank N.A. to A (low) from "A". At the same time, the trend for all long and short-term ratings is now Stable. DBRS also confirmed all FDIC-Guaranteed AAA debt ratings with a Stable Trend.

Today’s rating action concludes a Review with Negative Implications initiated by DBRS in November 2009. The assignation of a Stable trend on Key’s ratings reflects DBRS’s perception that the Company has built substantial balance sheet protection in its reserves, writedowns and augmented capital levels. Moreover, Key has only a modest amount of restructured loans.

The downgrade reflects Key’s continuing struggle with steep asset quality deterioration for more than two years with total 4Q09 net charge-offs at 4.63% of average loans and nonaccruals 3.51% of total assets. Furthermore, constrained earnings driven by asset quality deterioration and the economic downturn have contributed to seven consecutive quarterly net income losses. Credit losses on the Company’s commercial real estate construction loans, commercial loans related to real estate and consumer loans in exit portfolios have produced the highest credit costs this year.

Importantly, the $3.2 billion in loan loss provisions taken over the past four quarters was roughly 3.5 times the Company’s annual adjusted income before provisions and taxes (IBPT) of roughly $900 million. The provision to IBPT ratio was over 5 times in the fourth quarter highlighting the significant level of losses being absorbed and the long road to recovery.

DBRS notes that Key has been active in managing its credit issues including building its work-out infrastructure and moving to exit underperforming loan categories commencing near the beginning of the crisis. Although signs of credit quality improvement are evident, the Company has been unable to reverse its credit losses and has been building capital and reserves.

The Company has significantly tightened its lending criteria, however, DBRS expects credit costs and provisions to remain elevated and will likely exceed IBPT in fiscal year 2010. DBRS believes that the organizational attention to managing credit and decline in net revenues reduce available resources to enhance their franchise. DBRS therefore sees Key in a weakened position relative to competitors who have better weathered the financial crisis and have been able to more fully focus their resources on customers.

The Company’s revenues, IBPT and earnings are also likely to be subdued throughout 2010 according to DBRS due to soft loan demand, paydowns, still elevated credit costs and runoff in the Company's exit portfolios. Indeed, the total loan portfolio shrank over 19% to $58.8 billion over the year (excluding $3.5 billion of education loans), as Key evolves its business mix by exiting some commercial business lines, while focusing efforts on its core retail businesses. Reflecting those efforts, the exit loan portfolio declined nearly 28% (again excluding the education loans), but still remains significant at $7.6 billion, or approximately 8% of assets. DBRS also stated that it will take time to rebuild the Company's loan portfolio with credits that fit its more focused business mix, which may also constrain emerging profitability.

KeyCorp’s ratings are supported by a community banking-focused commercial banking franchise with historically diverse yet stable revenues. In addition to its national commercial banking businesses, the Company is also geographically diverse with over 1,000 branches in 14 states in the Northeast, Great Lakes, Northwest and Rocky Mountain regions.

DBRS does consider the reserve coverage at 116% of non-performing loans as sufficient to address current losses and notes that NPLs are being carried at 76% of face value. Moreover, DBRS believes that Key's substantial capitalization levels both on a tangible and regulatory basis should enable the Company to absorb additional losses.

Despite absorbing significant losses, capital ratios remained solid due to Key’s successful efforts to enhance its capital through a combination of $1 billion in common equity issuance as well as preferred stock and trust preferred security exchanges for common equity that collectively raised $2.38 billion in Tier 1 common equity. DBRS notes that this amount far exceeded the $1.8 billion SCAP requirement. The Company’s Tier 1 common capital ratio of 7.50%, Tier 1 capital of 12.75% and Total Capital of 16.95% would be deemed satisfactory even after the redemption of $2.5 billion in TARP capital. Meanwhile, tangible common equity to tangible assets ratio (TCE) increased 158 basis points over the year to a much stronger 7.56% at December 31, 2009 from the common equity capital issuance and exchanges.

KeyCorp, a diversified financial services corporation headquartered in Cleveland, Ohio, reported $93 billion in consolidated assets as of December 31, 2009.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.