DBRS Confirms Capital One Financial Corporation at BBB (high)

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), including Capital One Financial Corporation’s Issuer & Senior Debt at BBB (high). The rating trends remain Stable.

Today’s confirmation follows the announcement by Capital One that it has signed a definitive agreement to acquire Chevy Chase Bank FSB (Chevy Chase) for $520 million in cash and stock. The acquisition encompasses Chevy Chase’s retail and commercial banking businesses but does not include its asset management business, its trust business nor certain non-financial assets. Subject to regulatory approval, Capital One anticipates that the transaction will close in the first quarter of 2009.

Overall, DBRS views this acquisition positively as the addition of the solid Chevy Chase branch network fully complements Capital One’s existing branch footprint and provides the Company with a retail franchise in its home territory. The Chevy Chase retail franchise consists of an attractive $11.4 billion deposit base, ranking fifth in deposits in the Washington, D.C., Metropolitan Statistical Area (MSA) and first overall in the MSA, 244 branches; and approximately 1,100 ATMs. When added to Capital One’s existing $98.9 billion deposits book, the combined entity will have more than $116 billion in deposits.

Capital One is also acquiring the Chevy Chase loan portfolio, which includes some problematic housing-related assets, specifically a $4 billion option adjustable-rate mortgage (ARM) loan portfolio. The Company will take a net credit mark of $1.75 billion (pre-tax) on all of Chevy Chase’s assets, which will provide a significant cushion for loss absorption. However, DBRS is concerned that this portfolio may present certain challenges as the continued weakening in the U.S. economic environment and the ongoing deterioration in the housing market will continue to pressure asset performance and valuations.

This transaction negatively affects the Company’s tangible common equity-to-tangible managed assets (TCE) ratio, which will decline to 5.4% (pro forma at September 30, 2008) from 6.4% at September 30, 2008. However, Capital One’s capital position has benefited from the recent stock issuance and the growth in retained earnings. During the third quarter, the Company raised $720 million of new capital through an equity issuance. Additionally, Capital One received $3.55 billion of preferred stock under the U.S. government’s Troubled Assets Relief Program Capital Purchase Program. Its pro forma Tier 1 ratio stands at a solid 12.9%. Capital One’s liquidity profile remains sound, with immediate available liquidity of $32.0 billion, anchored by a growing deposit base. Furthermore, DBRS notes Capital One has a track record in acquiring regional retail deposit franchises and successfully rebranding those franchises as Capital One Bank while achieving growth in its retail deposit market share over time.

Capital One is a diversified financial services company, reporting $154.8 billion in total assets at September 30, 2008.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.