Fitch Affirms KEY's L-T IDR at 'A-'; Upgrades Individual Rating to 'B/C'; Outlook to Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed KeyCorp's (KEY) long-term Issuer Default Rating (IDR) at 'A-' and short-term IDR at 'F1'. In addition, Fitch has upgraded KEY's Individual Rating (IR) to 'B/C' from 'C'. The Rating Outlook has been revised to Stable from Negative. A complete list of ratings follows at the end of this release.

Fitch's affirmation of the IDR and upgrade of the IR reflects Fitch's view that the company's recently improved operating results are sustainable. Additionally, Fitch's actions acknowledge the company's improved capital and liquidity profile and reduced reliance on wholesale funding as loans are now totally deposit funded. The upgrade of the IR recognizes the efforts KEY has made to proactively address some higher-risk loan segments. Fitch considers KEY's strengths to be its middle-market and community banking franchise. Although the company has not been immune to the difficult environment, Fitch believes KEY has aggressively identified and dealt with problem assets and thus is in a position to remain profitable. KEY's results improved in recent periods and the company turned profitable in second quarter 2010 (2Q'10) and stayed profitable in 3Q'10, enabling the company to report positive earnings on a year-to-date (YTD) basis. Results had been adversely affected by elevated loan loss provisioning expense and other charges mostly associated with the economic downturn. Profitability has improved largely due to a reduction in provisioning needs as KEY's asset quality has shown improvement in recent periods with non-performing loans down 40% over the last year. Additionally, the net interest margin (NIM) has also widened, leading to growth in net interest income. KEY's earnings stream is diversified with over 40% of revenues derived from a variety of non-interest income sources. Fitch expects KEY to be able to remain profitable absent further economic weakening.

KEY previously took steps to reduce its risk profile. The company continues to exit non-relationship lending relationships including certain equipment leasing markets, retail and floor plan lending for marine and RVs, private and government-guaranteed student lending, out-of-footprint home equity and both in-footprint and out-of-footprint homebuilder lending. KEY has been aggressive in dealing with these portfolios with the decline in homebuilder exposure one example, as this portfolio is down $3 billion from 2008 to a highly manageable $643 million. As of Sept. 30, 2010, the company's exit loan portfolio totaled approximately $5.8 billion, or about 11% of total loans. This portfolio continued to represent an outsized portion of net charge-offs (NCOs) (29% for 3Q'10) and non-performing loan (NPLs) (21% as of Sept. 30, 2010).

Capitalization levels, including tangible common capital levels, have improved thanks to balance sheet shrinkage, the 2009 equity raise and the company's return to profitability. KEY still has the overhang of the U.S. Treasury's TARP capital purchase program to pay off and Fitch anticipates an additional equity raise is likely in 2011 to facilitate this transaction. KEY did access the capital markets in August 2010 raising $750 million of senior debt at the parent company, demonstrating the company's ability to access funding on an unguaranteed basis.

KEY is currently operating with a high level of on balance sheet liquidity at both the bank and the holding company. The investment securities portfolio represents over 22% of assets. Additionally, the company has reduced its reliance on wholesale funding by improving its loan-to-deposit ratio which stood at 92% at 3Q'10 from over 112% at year end 2007.

Fitch's Stable Rating Outlook is premised on the view that KEY will remain profitable, while working down elevated NPLs and its exit portfolio. In addition, capital and liquidity levels will remain sound and exceed regulatory minimums with an ample cushion. Fitch would consider changes in strategic direction, a more aggressive capital management program or reversal of improving credit metrics as potentially placing downward pressure on the company's ratings. Fitch currently views the ratings at the high end of their likely range, thus there is limited upside potential.

KEY announced the May 2011 planned retirement of CEO Henry Meyer and that Beth E. Mooney, currently Vice Chair and head of Community Banking will be his replacement. Fitch regards the recently announced change in CEO to reflect the continuation of the company's increased focus on community banking and does not portend a change in the strategic direction for the company.

KEY, with $94 billion in assets, operates over 1,000 branches in 14 diverse states in three regions - Northeast, Northwest/Rocky Mountains and Great Lakes. KEY also operates some business lines nationally.

Fitch has taken the following rating actions:

KeyCorp
--Long-term IDR affirmed at 'A-';
--Short-term IDR affirmed at 'F1';
--Individual upgraded to 'B/C' from 'C';
--Senior debt affirmed at 'A-';
--Subordinated debt affirmed at 'BBB+';
--Preferred stock affirmed at 'BBB';
--Short-term debt affirmed at 'F1';
--Commercial paper affirmed at 'F1';
--Support affirmed at '5';
--Support Floor affirmed at 'NF';
--TLGP Senior debt affirmed at 'AAA';
--TLGP Short-term debt affirmed at 'F1+';
--Outlook 'Stable'.

KeyBank NA
--Long-term IDR affirmed at 'A-';
--Short-term IDR affirmed at 'F1';
--Individual upgraded to 'B/C' from 'C';
--Long-term deposits affirmed at 'A';
--Senior debt affirmed at 'A-';
--Subordinated debt affirmed at 'BBB+';
--Short-term deposits affirmed at 'F1';
--TLGP senior debt affirmed at 'AAA';
--TLGP short-term debt affirmed at 'F1+';
--Outlook Stable

Key Corporate Capital, Inc.
Key Treasury Management Company
--Long-term IDR affirmed at 'A-';
--Short-term IDR affirmed at 'F1';
--Outlook 'Stable'.

KeyCorp Institutional Capital A
KeyCorp Institutional Capital B
KeyCorp Capital I
KeyCorp Capital II
KeyCorp Capital III
KeyCorp Capital VII
KeyCorp Capital VIII
KeyCorp Capital IX
KeyCorp Capital X
--Preferred stock affirmed at 'BBB'.

Fitch maintains the Rating Watch Negative for the following:
KeyBank NA
--Support '4';
--Support Floor 'B';

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);
--'Bank Holding Companies' (Dec. 30, 2009);
--'Equity Credit for Hybrids & Other Capital Securities-Amended' (Dec. 29, 2009);
--'Rating Hybrid Securities' (Dec. 29, 2009).

In addition to the source(s) of information identified in the Master Criteria, this action was additionally informed by information provided by the company.

Applicable Criteria and Related Research:
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Equity Credit for Hybrids & Other Capital Securities - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112
Bank Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493324
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685

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