DBRS: COF 3Q14 Earnings Down; Pos Operating Leverage, but LLP up with Loan Growth and Delinquencies

Summary:
• Despite positive operating leverage, 3Q14 earnings available to common shareholders decreased 10% sequentially to $1.06 billion, driven by a higher provision for loan losses that reflected loan growth and increased delinquencies.
• The domestic credit card business reported higher ending loan balances as the Company continues focusing on growing cards that provide strong risk-adjusted and sustainable returns. Commercial banking and auto lending also reported solid loan growth this quarter.
• During 2Q14, DBRS confirmed Capital One Financial Corporation’s 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) 3Q14 results as representing solid performance even with the $214 million loan allowance build. While noninterest income was down modestly quarter-on-quarter (QoQ) total revenues increased, largely reflecting growth in the loan portfolio and a 14 basis point increase in the net interest margin (NIM). With expenses essentially flat for the quarter, the Company was able to generate positive operating leverage.

DBRS notes that Capital One continues to make progress shifting the loan portfolio from lower-yielding mortgage loans to higher-yielding auto and commercial assets. For 3Q14, Capital One earnings equated to a strong 1.50% 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, although delinquency levels increased during the quarter from low levels. As a result of loan growth and higher delinquencies, Capital One built reserves with the loan loss reserve increasing 5% to $4.2 billion. Meanwhile, reserve coverage ratios remain sound at 2.09% 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, including a strong deposit base and a solid capital position, both of which help support the rating. During the quarter, capital levels were relatively flat despite balance sheet growth and ongoing stock repurchase activity 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’s Issuer & Senior Debt (unsolicited) at BBB (high) with a Positive trend.

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