DBRS Comments on Capital One’s Q4 ‘09 Results, Senior unchanged at BBB (high), Trend Negative

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 unchanged following the Company’s recent announcement of its Q4 2009 financial results. DBRS currently rates Capital One Financial Corporation at BBB (high). The trend on all ratings is Negative.

DBRS acknowledges Capital One’s return to good levels of profitability evidenced by the solid net income from continuing operations in Q4 2009 of $403.9 million. Further, DBRS notes the Company’s balance sheet remains solid reflected in its sound capital ratios and liquidity profile. However, asset quality remains strained owed to the still weak U. S. economic environment. Total company-wide net charge-offs, at September 30, 2009, were approximately $2.2 billion or 6.33% of managed receivables, while company-wide 30-day delinquencies increased to 4.73% from 4.55% in the prior quarter. Given the uncertainties regarding the pace and sustainability of the economic recovery and the still elevated unemployment markets, DBRS maintains the Negative trend on the ratings. The Negative trend reflects DBRS’s view that households will remain under considerable pressure, thereby Capital One’s consumer books will remain stressed. Moreover, the Negative trend considers the potential income impact of additional losses in the Company’s other loan books, including the commercial loan book and its residential loan portfolio.

DBRS believes that Capital One’s continued improved financial performance remains at risk should unemployment continue to increase beyond current forecasts, which could ultimately result in further weakened asset quality measures and pressured earnings. That said, should the economic recovery in the U.S. hold and Capital One continue to illustrate solid financial performance, while improving asset quality metrics, DBRS could revise the trend to Stable. DBRS will look for sustained improvement in quarterly performance to substantiate its views on the progress the Company is making.

Profitability remains solid. Profitability was bolstered by a $386 million loan loss allowance release, which was driven by improving credit performance in the Auto finance portfolio and by the changing size and structure of the Domestic Card portfolio. Income before provisions and taxes (IBPT) declined 13% on a quarterly linked basis to $2.4 billion, but importantly remained sufficient to absorb credit costs. Given the continued headwinds facing the U.S. consumer, DBRS considers the Company’s results, especially the marked improvement in profitability in the Domestic Credit Card and International Credit Card segments, as solid.

Managed net charge-offs in the Company’s $60.4 billion domestic card book moderated to 9.59%, reflecting typical seasonal effects, the subsiding of the effects of the OCC minimum payment policy and continuing decline in asset balances. Continuing deterioration in the Commercial Banking and Consumer Banking loan portfolios resulted in reserve builds of $115 million and $54 million respectively, causing losses in these segments. However, these reserve builds were more than offset by allowance releases in the Domestic Card segment and Auto finance of $416 million and $96 million, respectively. Importantly coverage ratios remain sound.

Capital remains sound. At December 31, 2009, the Company reported a Tier 1 ratio of 13.8% and a tangible common equity plus allowance-to-tangible managed asset ratio (TCE ratio) of 8.4%. DBRS notes that Capital One estimates that the implementation of FAS 166 and 167 would reduce the Tier 1 ratio by 400 bps and the TCE ratio by 150 bps, but would still maintain a significant capital buffer and sufficient loss absorption capacity. Importantly, the actual impact to capital ratios will be gradual as Capital One has adopted the phase-in approach of FAS 166 and 167 for regulatory capital purposes.

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

The applicable methodologies are Rating Finance Companies in the United States, Global Methodology for Rating Banks and Banking Organisations and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.