DBRS: COF Earnings Dip QoQ on Higher Provision and Expenses

Summary:
• Despite modestly higher revenues, 2Q15 earnings available to common shareholders decreased 21% sequentially to $830 million, driven by higher expenses, including restructuring charges, and an increased provision for loan losses that reflected a reserve build.
• Domestic credit card loans increased 7% on seasonally higher balances, while overall loans increased 3%. Ongoing run-off of acquired home loans continue to add headwinds for more robust loan growth.
• DBRS rates Capital One Financial Corporation’s Issuer & Senior Debt (unsolicited) A (low) with a Stable trend.

DBRS, Inc. (DBRS) views Capital One Financial Corporation’s (Capital One or the Company) 2Q15 results as being generally sound although adversely impacted by restructuring charges, a higher loan loss provision and increased operating expenses. During the quarter, Capital One had a restructuring charge of $147 million and built the U.K. payment protection insurance customer reserve fund by $78 million. Absent the charges, net income available to common shareholders would have been $985 million compared to $1.1 billion in 1Q15. The restructuring charge includes a workforce realignment as the Company works to lower expenses to help fund its investment in digital. On an adjusted basis, revenues were up quarter-on-quarter (QoQ) although offset by higher marketing and operating expenses.

Asset quality remains sound. Company-wide net charge-offs were lower QoQ reflecting declining charge-offs in Auto and Credit Card, partially offset by higher charge-offs in C&I and retail banking. Credit card delinquencies were also lower on a linked quarter basis. Largely reflecting growth in the card portfolio, as well as exposure to taxi medallions and energy, Capital One built reserves with the loan loss reserve increasing by $271 million.

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 reports that it remains above the fully phased-in Liquidity Coverage Ratio (LCR) requirements.

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.