DBRS: Capital One’s Ratings Unaffected Following Fourth Quarter Results, Senior at BBB (high)

DBRS has today commented that the ratings for Capital One Financial Corporation and its principal subsidiaries, including Capital One Bank (collectively, Capital One or the Company) are unaffected by the Company’s reported Q4 2008 loss. DBRS currently rates Capital One Financial Corporation BBB (high), with a Stable trend.

This comment follows Capital One’s earnings release, which indicated a net loss of $1.4 billion for the fourth quarter of 2008. Capital One’s loss for the quarter was the result of a sizeable build in allowance for loan losses due to the ongoing deterioration in employment in the United States, a one-time goodwill impairment charge, and continued pressure on net interest margin.

Capital One’s credit performance weakened notably during the quarter, reflecting the rapidly deteriorating economic environment. Managed charge-offs increased by 0.68% this quarter to 4.98%, while managed 30-day plus delinquencies also rose, ending the quarter at 4.49%. Given the continuing deterioration in the global economy, DBRS anticipates that the Company’s asset quality measures will weaken further in 2009, adding pressure to earnings in the near term. Although DBRS has factored in a level of deterioration in asset quality metrics, continued increasing credit costs could pressure ratings, especially should increasing levels of provisions reduce the Company’s ability to protect its franchise.

The rapid deterioration in the U.S. economy, especially in the labor market, during the fourth quarter led Capital One to prudently build its loan loss reserve by $1.0 billion, totaling $4.5 billion at year-end. As a result of the reserve build, Capital One’s loan loss reserve as a percentage of reported loans stood at 4.5% at December 31, 2008, up from 2.9% a year ago. Also driving the loss was a pre-tax non-cash impairment of goodwill of $810.9 million associated with Capital One’s strategic decision to reduce the footprint of its Auto Finance business. While DBRS views the quarterly loss for Capital One as sizeable, DBRS considers the Company’s earnings from continuing operations before impairments of $895.4 million for the full year 2008 as an illustration of its core earnings generation ability. However, DBRS is concerned that the deteriorating trends revealed in the fourth quarter, if sustained into 2009, will stress Capital One’s ability to absorb credit losses out of current earnings.

Capital One continues to maintain sound capital ratios. At December 31, 2008, Capital One reported a Tier 1 leverage ratio of 11.1% and a Tier 1 risk-based capital ratio of 13.6% up from year ago. The Company further bolstered its capital position during the quarter by selling $3.55 billion of perpetual preferred stock and related warrants to the U.S. Treasury as a participant in the federal government’s Capital Purchase Program.

DBRS considers Capital One’s liquidity profile as solid. Despite turbulent market conditions, the Company was able to increase overall available liquidity by $8 billion to $40 billion at year-end. Moreover, Capital One continues to demonstrate solid deposit growth, with total deposits increasing by almost $10 billion during the quarter to $108.6 billion. DBRS also notes that Capital One will gain an additional $11.6 billion in deposits with its acquisition of Chevy Chase Bank FSB, which is anticipated to close in the first quarter of 2009.

The current ratings and trend reflect the strength of the overall Capital One franchise, its diversified product offering, and its solid funding profile gained from its Capital One Bank franchise. DBRS expects credit costs to increase through 2009 for all financial institutions with exposure to the U.S. consumer, as the unemployment rate continues to rise and consumer spending remains depressed. However, Capital One’s sizeable exposure to the U.S. consumer does add to its vulnerability in this economic downturn, the depth and duration of which remain uncertain.

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

The applicable methodology is Rating Finance Companies in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.