DBRS: COF Earnings Dip QoQ; Higher Expenses and Reserve Build Mask Revenue Growth

Summary:
• Despite revenue growth, 4Q14 earnings available to common shareholders decreased 7.8% sequentially to $974 million, driven by higher expenses and an increased provision for loan losses that reflected loan growth and asset quality trends normalizing.
• Loan growth was broad-based including domestic cards, commercial, and auto loans offsetting the continued and planned run-off in the home loan portfolio.
• DBRS rates Capital One Financial Corporation’s Issuer & Senior Debt (unsolicited) at BBB (high) with a Positive trend.

DBRS, Inc. (DBRS) views Capital One Financial Corporation’s (Capital One or the Company) 4Q14 results as representing sound performance even with the $171 million loan allowance build. While revenues increased quarter-on-quarter (QoQ), largely reflecting growth in the loan portfolio and a 12 basis point increase in the net interest margin (NIM), overall earnings declined on higher expenses and an increase in the provision for credit losses. Expense growth QoQ reflected seasonally higher marketing expenses, as well as elevated costs for technology initiatives and regulatory build.

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. DBRS views the Company’s underlying fundamentals of its business, along with its successful strategy implementation, as being reflected in the Company’s solid earnings performance.

Asset quality remains sound, although Company-wide net charge-offs were higher QoQ reflecting seasonality, as well as seasoning of the loan portfolio. As a result of loan growth and asset quality trends, Capital One built reserves with the loan loss reserve increasing 4% to $4.4 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 modestly lower reflecting 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.