DBRS: COF’s 2Q14 Earnings Up on Higher Interchange Fees and Lower Loan Loss Provision

Summary:
• 2Q14 earnings available to common shareholders increased 4% sequentially to $1.18 billion, reflecting revenue growth and lower provision for loan losses.
• The Company reached an inflection point this quarter, as the domestic credit card business reported higher ending loan balances despite the ongoing run-off of certain card types, as it focuses on cards providing strong risk-adjusted and sustainable returns.
• During the quarter, DBRS affirmed Capital One Financial Corporation Issuer & Senior Debt (unsolicited) at BBB (high) and revised the trend to Positive.

DBRS, Inc. (DBRS) views Capital One Financial Corporation’s (Capital One or the Company) 2Q14 results as representing solid performance augmented by a $100 million allowance release. While net interest income was down modestly quarter-on-quarter (QoQ), total revenues increased largely reflecting higher interchange fees driven in part by increased purchase volumes. Expenses were also up modestly for the quarter, although at a slightly lower rate than revenues, resulting in positive operating leverage. Capital One continues to make progress shifting the loan portfolio from lower-yielding mortgage loans to higher-yielding auto and commercial assets. For 2Q14, Capital One earnings equated to a strong 1.63% return on average assets. DBRS views the Company’s underlying solid fundamentals of its business, along with its successful strategy implementation, as being reflected in the Company’s improved earnings performance.

Asset quality remains sound. Company-wide net charge-offs were lower QoQ, and delinquency levels were roughly in line with the linked quarter. Reflecting reserve releases, the loan loss reserves declined 2% to $4.0 billion. However, DBRS sees reserve coverage ratios as acceptable, at 2.01% 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 decreased reflecting the common stock buyback of approximately $1.0 billion, as the Company executes on its 2014 capital plan, which included a buyback of up to $2.5 billion of shares through 1Q15.

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

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