DBRS: Capital One’s 4Q13 Earnings Weaker on Seasonality, Portfolio Sale

Summary

• 4Q13 Earnings available to common shareholders declined 23% sequentially to $842 million, reflecting seasonally higher marketing expenses and provision expenses and lower revenues.
• While lower, DBRS views Capital One’s earnings as acceptable as the Company continues to execute on its strategy to run off certain business lines and focus on strong risk adjusted and sustainable returns.
• DBRS rates Capital One Financial Corporation Issuer & Senior Debt at BBB (high) with a Stable trend.

In DBRS, Inc.’s (DBRS) view, 4Q13 Capital One Financial Corporation (Capital One or the Company) results represent steady performance impacted by some seasonality and the full quarter impact of the 3Q13 sale of the Best Buy private label and co-branded loan portfolio. Capital One continues to make progress shifting the loan book from lower-yielding mortgage loans to higher-yielding auto and commercial assets. However, for this quarter, the Best Buy portfolio sale contributed to a reduction in average interest earning assets as well as the 16 bps QoQ drop in the net interest margin driving the decline in revenues. Seasonally higher marketing expenses as well as provision expense (reflecting seasonally higher net charge-offs) also contributed to the weaker results. For 4Q13, Capital One reported net income available to common shareholders of $842 million, equating to a solid 1.20% ROAA.

Asset quality remains sound. While 4Q13 Company-wide NCOs, as well as delinquencies were seasonally higher, they both remain lower than the year ago period. With loan loss reserves steady at approximately $4.3 billion, or 2.19% of total loans held for investment, DBRS sees reserve coverage ratios as acceptable; especially given the Company’s strong ability to generate and retain earnings.

Capital One’s balance sheet strength reflects ample liquidity and deposit funding, as well as a solid capital position, all of which help support the rating. However, capital levels declined modestly QoQ reflecting balance sheet growth, as well as the completion of the Company’s buyback program. DBRS notes that additional capital distributions are expected in 2014 following the regulatory CCAR review.

DBRS considers Capital One as having a leading national consumer lending franchise combined with a growing regional bank. Moreover, the Company has maintained solid asset quality metrics, especially given its significant exposure to the U.S. consumer. Given the current state of the economy and Capital One’s efforts to refocus its business, DBRSs views the underlying trends in the business favorably. However, Capital One continues to face certain challenges, which include managing the impact of the regulatory environment, and mortgage rep and warranty exposure.

DBRS rates Capital One Financial Corporation Issuer & Senior Debt at BBB (high) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]