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

NEW YORK--()--Fitch Ratings has affirmed KeyCorp (KEY) ratings at 'A-/F1'. The Rating Outlook remains Stable.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUFG), PNC Financial Services Group, Inc. (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, VRs AND SENIOR DEBT

Fitch's affirmation of KEY's IDR and Stable Outlook is supported by the company's strong capital position, solid asset quality performance, diversified revenue mix, and reduced risk profile. Offsetting, the company's earnings measures are considered weaker than most large regional banks as it consistently reports financial returns that are below large regional peer averages.

Ratings incorporate KEY's strong capital position, which is amongst the highest of its peer group with a TCE of 10.08% at 2Q14 and estimated Tier 1 Common ratio under Basel III of 10.73%. Additionally, given the company's reduced risk profile over the years, credit performance continues to be better than peers with an average of NCOs of 0.25% and NPAs of 1.28% over the last five quarters.

Fitch also notes that the company's diversified revenue base is also viewed positively evidenced by noninterest income contributing roughly 44% of total revenues, consistently above the peer group average.

As mentioned earlier, profitability tends to fall on the lower-end of the peer averages for the large regional group. 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. ROA and PPNR continues to be below large regional peers averages. However, an adjust ROA, which excludes reserve releases, is much more in-line with peer performance. NIM is also modest, albeit improving compared to the previous year.

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 also notes that KEY still has about $4.2 billion in its exit and discontinued operations portfolio (of which $2 billion relates to 10 securitization trusts) in student loans. Given the heightened political sensitivity to student lending, there may be potential risks that arise which are not quantifiable at this time.

The company also has a sizeable home equity book totaling $10.7 billion, of which 97% is within foot-print, at 2Q14. Although to date, credit performance has been stable, Fitch believes this loan book could be negatively impacted by higher interest rates. Fitch will monitor the home equity portfolio's credit trends and the impact it may have on future operating results under more stressful conditions.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Current ratings are at the high-end of rating potential given that financial performance is marginally in-line with similarly rated financial institutions.

Negative rating action could ensue should the company take a more aggressive approach to capital management such as a rapid decline of capital within a relatively short-time frame and/or a total payout ratio exceeding 100%. Additionally, unexpected changes to current business strategy or key executive management, a declining trend in operating performance would also be viewed negatively.

KEY RATING DRIVERS - HOLDING COMPANY

KEY's IDR and VR are equalized with those of its operating companies and banks, 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 default probabilities.

RATING SENSITIVITIES - 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. This is viewed as unlikely though for KEY given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that KEY may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - 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 SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

KEY's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by KEY and by various issuing vehicles are all notched down from KEY or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by KEY and its subsidiaries are primarily sensitive to any change in KEY's VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of KEY's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of KeyBank N.A. is equalized with the holding company.

The IDRs and VRs of KEY's other major rated operating subsidiaries are equalized with KEY's IDR reflecting Fitch's view that these entities are core to KEY's business strategy and financial profile. These entities include: KeyCorp Capital Inc. whose IDRs would be sensitive to the same factors that might drive a change in KEY's IDR.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of KEY to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in KEY's IDRs.

To the extent that one of KEY's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from KEY's IDR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

KEY's uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by KEY and its subsidiaries are primarily sensitive to any change in KEY's long- and short-term IDRs.

Fitch has affirmed the following ratings:

KeyCorp

--Long-term IDR at 'A-'; Outlook Stable;

--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 Stable;

--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 Stable;

--Short-term IDR at 'F1'.

KeyCorp Capital I - III

--Preferred stock at 'BB+'

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 1Q14' (April 1, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891975

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Contacts

Fitch Ratings
Primary Analyst
Doriana Gamboa
Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Doriana Gamboa
Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Julie Solar
Senior Director
+1-312-368-5472
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com