DBRS Upgrades Capital One Financial Corp. to A (low); Trend now Stable

DBRS, Inc. (DBRS) has today upgraded all long-term ratings of Capital One Financial Corporation (Capital One, the Company) and its principal subsidiaries, including the Company’s Issuer & Senior Debt rating to A (low) from BBB (high). At the same time, DBRS upgraded the Company’s Short-Term Instruments rating to R-1 (low) from R-2 (high) and confirmed the bank subsidiaries’ Short-Term Instruments rating at R-1 (low). The trend on all ratings is now Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The ratings upgrade reflects the strength of the Capital One franchise, its solid risk management capabilities, and strong balance sheet. The Capital One franchise is underpinned by the substantial scale of its national credit card lending platform, where it ranks fourth nationally based on outstanding balances at year-end 2014. From DBRS’s perspective, Capital One’s franchise is further enhanced by the Company’s regional banking operations, which complements the credit card operations by offering other consumer and commercial banking products and services including the ability to attract ample deposit funding.

The upgrade also incorporates DBRS’s view that the franchise has been strengthened following the 2012 acquisitions of ING Direct USA (ING) and HSBC’s U.S. card and retail services business, with the benefits of these acquisitions now being reflected in the Company’s improved earnings performance. Further, Capital One continues to make progress shifting the loan book from lower-yielding mortgage loans to higher-yielding auto and commercial assets benefiting earnings. This revenue expansion along with decent expense control and the maintenance of an acceptable risk profile were all contributing factors to the upgrade.

Capital One’s underlying earnings generation remains solid and resilient. Moreover, earnings benefit from a strong net interest margin and a well-managed expense base, which provides significant earnings capacity to absorb credit losses, while still providing for investment in the franchise. Indeed, the Company reported top tier levels of profitability in 2014 with a return on assets of 1.48%, which has steadily improved the past several years.

Demonstrating Capital One’s sound underwriting and servicing capabilities, credit performance continues to be favorable. Specifically, net charge-offs (NCOs) and early stage delinquencies remain very manageable across all asset classes. To this end, within the Domestic Card book, NCOs are below pre-recession levels and could potentially be reaching cyclical lows. At YE14, loan loss reserves were $4.4 billion, representing 2.10% of total loans held for investment, which DBRS sees as sufficient, especially given the Company’s strong ability to generate capital through earnings. Conversely, while DBRS has tolerance for a further normalization in credit from cyclical lows, an increased risk profile or deterioration of performance metrics beyond DBRS’s expectations could lead to negative ratings pressure.

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. Liquidity is further enhanced by the Company’s sizable cash and securities position representing about one quarter of assets at YE14. Meanwhile, capital remains sound. Specifically, at YE14, Capital One’s Tier 1 common capital ratio was 12.46%, a 27 basis point improvement from YE13, reflecting both earnings retention and balance sheet shrinkage. In March 2015, DBRS notes that the Federal Reserve did not object to the Company’s 2015 capital plan, which included a $3.125 billion common stock buyback and a 33% increase in its common stock dividend (pending board approval).

Headquartered in McLean, Virginia, Capital One reported $308.9 billion in assets at YE14.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer and did not include participation by the issuer or any related third party.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: 17 November 2005
Most Recent Rating Update: 4 April 2014

For additional information on this rating, please refer to the linking document under Related Research.