S&P Lowers Outlook on KeyCorp (KEY) to Negative Following Move to Acquire First Niagara (FNFG)
Standard & Poor's Ratings Services said it revised its outlook on KeyCorp (NYSE: KEY) and its bank subsidiary, KeyBank N.A., to negative from stable. We also affirmed our ratings on the entities, including the 'BBB+/A-2' holding company issuer credit ratings on KeyCorp and the 'A-/A-2' issuer credit ratings on KeyBank.
"The negative outlook is based on our view that although the acquisition of First Niagara Financial Group Inc. will broaden KeyCorp's commercial and retail banking franchise into overlapping and adjacent markets, we believe the substantial size and scope of the acquisition introduces considerable execution and regulatory risks," said Standard & Poor's credit analyst Rian Pressman. In addition, we view First Niagara's risk profile as higher than that of KeyCorp, based on its history of aggressive growth by acquisition, inconsistent strategy and execution, and mediocre operating performance.
The acquisition is KeyCorp's largest in many years and will increase its total asset size by a substantial 41% (pro forma as of Sept. 30, 2015). The execution risk associated with a transaction this size is considerable, in our view. In addition to the large scope of the transaction, we believe other challenges include heightened regulatory expectations, including successful completion of the annual Comprehensive Capital Analysis and Review exercise, and First Niagara's history of inconsistent execution and operational stumbles. Moreover, First Niagara's financial performance is mediocre relative to KeyCorp (return on average assets of 0.63% versus just less than 1.00% for third-quarter 2015) and its tangible capitalization is weak (tangible common equity to tangible assets of 6.32% versus 9.90% at KeyCorp). We expect the transaction will close in third-quarter 2016, subject to regulatory approval.
Positively, the transaction will increase KeyCorp's deposit share in its Northeast U.S. markets, including in upstate New York, where it will rank No. 1 in Buffalo, Albany, Rochester, and Syracuse after the acquisition closes. It will also expand its presence in adjacent markets in Pennsylvania and Connecticut.
The negative outlook reflects our view of the considerable execution and regulatory risks associated with the planned acquisition of First Niagara (Nasdaq: FNFG). We will continue to monitor KeyCorp's financial and risk profile as the acquisition plans progress. If unexpected operational or execution issues were to arise, or if we believe the stand-alone creditworthiness of KeyCorp will deteriorate after the acquisition, we may lower our ratings.
Important factors in assessing the creditworthiness of the consolidated firm include:
- Management's success in managing the execution, integration, and regulatory risks inherent in the transaction;
- Our expectations for future loan performance and the sufficiency of the estimated credit mark and credit reserves;
- Management's plans for integrating and operating First Niagara's residential mortgage and indirect auto businesses, both of which have historically been outside the scope of KeyCorp's operations;
- Management's success in retaining First Niagara's deposit and other customer relationships;
- The asset-liability positioning of the institution, including its sensitivity to interest rate risk and sufficiency of liquidity;
- The earnings power of the institution and performance relative to peer institutions; and
- The management of capital, including expected future shareholder payouts.