DBRS: COF’s 1Q14 Earnings Up, Reflecting Positive Operating Leverage and Lower Loan Loss Provision

Summary:
• 1Q14 earnings available to common shareholders increased 36% sequentially to $1.14 billion, reflecting positive operating leverage and lower provision for loan losses.
• The Company continues to successfully execute on its strategy to run off certain business lines and focus on strong risk-adjusted and sustainable returns.
• Earlier this month, DBRS affirmed Capital One Financial Corporation Issuer & Senior Debt at BBB (high) and revised the trend to Positive.

In DBRS, Inc.’s (DBRS) view, Capital One Financial Corporation’s (Capital One or the Company) 1Q14 results represent solid performance augmented by a $208 million allowance release. While revenues were down 3% quarter-on-quarter (QoQ), partially reflecting the lower day count in the quarter and lower seasonal credit card volumes, this was more than offset by a 9% decline in expenses. Capital One continues to make progress shifting the loan book from lower-yielding mortgage loans to higher-yielding auto and commercial assets. For 1Q14, Capital One earnings equated to a strong 1.61% return on average assets.

Asset quality remains sound. Company-wide net charge-offs, as well as delinquencies were lower QoQ reflecting some seasonality. Reflecting reserve releases, the loan loss reserves declined 5% to $4.1 billion. However, DBRS sees reserve coverage ratios as acceptable, at 2.12% of total loans held for investment, 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. During the quarter, capital levels increased reflecting balance sheet shrinkage, as well as earnings retention. Following the regulatory Comprehensive Capital Analysis and Review, the Federal Reserve did not object to the Company’s capital plan, including a buyback of up to $2.5 billion of shares through 1Q15.

Capital One’s ratings reflect the strength of its franchise, solid risk management capabilities and overall, strong balance sheet. Capital One continues to face certain challenges, which include managing its significant exposure to the U.S. consumer in an improved but still challenging environment, regulatory changes and heightened scrutiny, and the highly competitive banking landscape. However, DBRS views the underlying fundamentals of the business as positive, and believes the Company’s franchise is strengthened following the 2012 acquisitions of ING Direct USA (ING) and HSBC’s U.S. card and retail services business. Positively, the benefits of these acquisitions are beginning to be reflected in the Company’s improved earnings performance.

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

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

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