DBRS Comments on Capital One’s 2Q Earnings, Ratings Unchanged – Senior at BBB (high), Stable

DBRS has today commented that its ratings of Capital One Financial Corporation and its principal subsidiaries, including Capital One Bank, (collectively, Capital One or the Company), remain unchanged following the Company’s announcement of 2Q10 financial results. DBRS rates Capital One Financial Corporation BBB (high). The trend on all ratings is Stable.

DBRS views Capital One’s results as illustrating the continuation of good momentum in earnings and credit performance, and the resiliency of the franchise in a challenging environment. Increasing 13% quarter-on-quarter (QoQ), Capital One reported income from continuing operations of $812 million for the quarter ending June 30, 2010, compared to a loss in the comparable period a year ago. Lower charge-offs, stable margins and reduced funding costs were key drivers of the improved QoQ and year-over-year performance.

Although earnings continue to have positive momentum, revenues declined 9%, QoQ, to $3.9 billion due to a 4.5% decline in average loan balance and lower over-limit fees resulting from the impact of the CARD Act. Profitability, however, was bolstered by a $1.0 billion loan loss allowance release, which was positively driven by improving credit performance across both the commercial and consumer loan books. Capital One continues to replace higher cost wholesale funding with lower cost retail deposits. As a result, the cost of funds decreased 7 basis points to 1.68% in the quarter; however, this was somewhat offset by a 5 basis point decline in asset yield. The net interest margin was relatively stable at 7.09%. For the quarter, purchase volume in the core Domestic Card sub-segment increased an impressive 11.5% QoQ to $24.5 billion. DBRS considers the strong growth in purchase volume during a time of deleveraging by U.S. consumers as evidencing the strength of the Capital One franchise, which is a key consideration in the rating.

Credit performance improved across all businesses despite the ongoing challenging economic environment. Quarter-on-quarter, overall net charge-offs decreased to 5.36% compared to 6.01% (managed) for the prior quarter, while 30-day plus delinquencies improved to 3.81% from 4.22%. This solid progress in delinquencies suggests that credit performance will continue the improving trend for the near term. Coverage ratios remain sound, with an allowance-to-loans ratio of 5.36% compared to 4.44% at the end of June 2009. DBRS views the improvement in asset quality metrics as confirmation that the Company’s prudent actions to remove risk from the balance sheet and its strong servicing capabilities are positively impacting performance.

Liquidity and funding continue to be well-managed. Capital One’s sizeable retail deposit franchise, totaling $117.4 billion at June 30, 2010, anchors the efficient and robust funding model. Liquidity is further buttressed by the $44.6 billion of excess cash and readily marketable securities. The Company’s tangible common equity + allowance-to-tangible managed assets ratio improved to 9.8% from 9.1% at year end 2009, on a pro-forma basis, from the impact of FAS 166 and 167.

Notes:

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

The applicable methodologies are 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.