DBRS Confirms Capital One Financial Corporation at BBB (high), Trend Revised to Stable

DBRS has today confirmed the ratings for Capital One Financial Corporation and its principal subsidiaries, including Capital One Bank, (collectively, Capital One or the Company) as indicated below. Concurrently, the rating trend has been revised to Stable from Positive.

This rating action reflects DBRS’s growing concerns about the deteriorating economic outlook for the United States, which is illustrated by increasing unemployment and the intensifying weakness in the housing markets. In DBRS’s opinion, the unfavorable environment will continue to stress credit performance in the Company’s card and auto loan portfolios, as well as in the Home Equity Line Of Credit (HELOC) portfolio. DBRS anticipates that default frequency and loss severity will continue to drive higher credit costs in the near term causing Capital One to maintain provisions at elevated levels. Moreover, given the expectations of a prolonged housing downturn, a weakened consumer and subsequent higher credit costs, DBRS does not expect Capital One’s earnings and profitability metrics to return to previously strong levels, which was factored into the former Positive rating trend. As such, upward rating migration has been stalled for the near term. Nonetheless, DBRS expects that Capital One will generate earnings sufficient to support and defend its franchise.

DBRS’s ratings of Capital One reflect the strength of the overall franchise, its broad product offering, and its diverse funding sources that have been enhanced by its expanding banking franchise. Importantly, DBRS still considers Capital One’s earnings power as a fundamental strength, which is illustrated by the profitability achieved even with the charges associated with the closure of GreenPoint and increased credit charges. In DBRS’s opinion, this solid earnings power will allow Capital One to successfully manage through this difficult operating environment.

The current ratings incorporate the previously announced reduced earnings for the fourth quarter and for the full year. The fourth quarter earnings decline was driven by increased loan loss provisions and a $140 million charge related to legal expenses. The provision expense comprised approximately $1.3 billion in charge-offs and an allowance build of about $650 million. The allowance build reflects fourth quarter credit matrices and the Company’s expectation of a weaker U.S. economy. Full-year 2007 net earnings of $1.6 billion were negatively impacted by the costs associated with the shut down of GreenPoint Mortgage.

Despite the increased loan loss provisions, the U.S. Cards segment reported solid net income of nearly $522 million in the fourth quarter of 2007, a 55% increase over the prior year’s fourth quarter. Earnings in the Company’s Local Banking and Global Financial Services segments also remained healthy, however the performance in the Auto Finance segment deteriorated significantly. This segment reported a net loss of $112.4 million in the quarter, largely attributed to an increase in loan loss provisions, and, to a lesser extent, reduced revenue. Capital One continues to take steps to improve performance in this business, as the Company significantly tightened underwriting criteria and has altered its product offerings. However, it will take time for credit performance to improve. DBRS continues to monitor Capital One’s progress in stemming losses generated within this segment.

The Stable trend reflects DBRS’s expectation that the Company will continue to achieve solid consolidated earnings, despite increased credit costs. The stable trend also reflects DBRS’s expectation that the performance in the Auto Finance segment will improve in the near term as the Company realizes the benefits of the repositioning efforts. DBRS will continue to monitor the Company’s overall financial performance, its progress in navigating through the difficult environment, and its ability to continue to leverage the benefits of its solid banking franchise.

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