DBRS Confirms Capital One at BBB (high), Revises Trend to Stable Following 1Q10 Results

DBRS has today confirmed the ratings for Capital One Financial Corporation and its principal subsidiaries, including Capital One Bank, (collectively, Capital One or the Bank), including its Issuer & Senior Debt rating of BBB (high). Concurrently, the trend has been revised to Stable from Negative. Today’s ratings confirmation reflects Capital One’s overall solid and resilient franchise, its strong liquidity and funding profile, and solid capital base, despite the impact of FAS 166/167.

In revising the trend to Stable, DBRS recognizes the progress the Bank has made in restoring profitability and reducing balance sheet risk, while defending its franchise. Earnings have rebounded and illustrate good momentum. Capital One reported net income of $636.3 million for 1Q10, which is significantly better than the net income of $375.6 million generated in 4Q09, and a loss in the comparable period a year ago. Profitability was bolstered by a $566 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. Solid growth in net interest margins further buttressed earnings. Revenues declined slightly, by 1.8%, quarter-on-quarter to $4.3 billion due to lower fee income resulting from the impact of the CARD Act and lower receivables balance. DBRS considers the Company’s marked improvement in profitability as demonstrating the solid underlying earnings ability; however, DBRS expects a level of weakness in pre-provision earnings (IBPT) largely owed to lower revenue margins, higher marketing expenses and a smaller receivable book.

Despite the continuing challenging environment for U.S. households, credit metrics evidenced stabilization. Companywide, managed net charge-offs moderated to 6.01% compared to 6.33% for the prior quarter, while 30-day plus delinquencies improved to 4.22% from 4.73%. DBRS views the improvement in asset quality metrics, especially the reduction in early-stage delinquencies as an early indicator of further improvement in asset performance going forward. While DBRS sees losses continuing to increase in some of the Bank’s portfolios, such as commercial real estate, DBRS expects ongoing improvement in the Bank’s larger consumer portfolios.

The Bank was able to absorb the implementation of FAS 166/167, and still report a Tier 1 capital ratio of 9.6% at 1Q10. Importantly, for regulatory purposes, Capital One has adopted the phase-in approach of FAS 166/167, allowing the Bank, for regulatory purposes, to consolidate risk-weighted assets over a 12 month period at six month intervals. At quarter end, the tangible common equity + allowance-to-tangible managed assets ratio (TCE ratio) improved to 9.7% from 9.1%, on a pro-forma basis for the impact of FAS 166/167, at year end 2009. Removing allowances, the TCE ratio fell to 5.53% down from 6.30% in 4Q09, reflecting the consolidation of the securitized assets. Given expectations of continued solid earnings, DBRS anticipates this ratio to improve in 2010.

Capital One continues to benefit from its expanding retail deposit franchise. Funding and liquidity remain well-managed and sound. At March 31, 2009, the Company maintained $49.1 billion of excess cash and readily marketable securities. Further, deposits continue to increase totaling $117.8 billion, a 2% increase in the quarter.

Notwithstanding the revision in trend, uncertainties associated with regulatory changes and the unsettled labor markets in the U.S. remain. However, DBRS views Capital One as well-poised to manage through these challenges and return to growth as the economic recovery takes hold.

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 Bank Holding Companies Operating in the United States, 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.