DBRS: COF Earnings Up QoQ Despite Seasonally Lower Revenues

Summary:
• Despite seasonally lower revenue, 1Q15 earnings available to common shareholders increased 14% sequentially to $1.1 billion, driven by lower expenses and a decreased provision for loan losses that reflected declining loan balances and a modest reserve build.
• Domestic credit card loans declined 5% on seasonally lower balances, while continued run-off of acquired home loans added additional headwinds for loan growth this quarter.
• On April 2, 2015, DBRS upgraded the ratings of Capital One Financial Corporation’s Issuer & Senior Debt (unsolicited) to A (low) with a Stable trend.

DBRS, Inc. (DBRS) views Capital One Financial Corporation’s (Capital One or the Company) 1Q15 results as sound. While revenues decreased quarter-on-quarter (QoQ), largely reflecting seasonally lower loan balances and a 24 basis point decrease in the net interest margin (NIM), revenues were up about 5% from a year ago on growth. Lower expenses QoQ reflected seasonally lower marketing expenses, as well as declining operating expenses.

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 execution, as being reflected in the Company’s continued solid earnings performance.

Asset quality remains sound. Company-wide net charge-offs were lower QoQ reflecting declining charge-offs in Auto, partially offset by higher charge-offs in cards. Firm-wide delinquencies were also lower on a linked quarter basis. Capital One modestly built reserves with the loan loss reserve increasing 1% to $4.4 billion.

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. The Company stated that, as of March 31, 2015, it is already above the fully-phased in Liquidity Coverage Ratio (LCR) requirements. The Federal Reserve had no objection to Capital One’s capital plan submitted under CCAR, which calls for a common stock buyback of approximately $3.125 billion through 2Q16 and a 33% increase in the dividend.

DBRS rates Capital One Financial Corporation’s Issuer & Senior Debt (unsolicited) at A (low) with a Stable trend.

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