DBRS: Capital One’s 3Q Earnings Rise QoQ on Positive Operating Leverage

Summary:
• Capital One’s 3Q15 earnings available to common shareholders increased 30% sequentially to $1.1 billion driven by higher revenues, lower expenses (2Q15 results included restructuring charges), and a decreased provision for loan losses that still reflected a reserve build.
• Overall, loans increased 2% as the Company sees continuing momentum in its card business, offset by the ongoing run-off in the residential mortgage portfolio hampering 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) 3Q15 results as being solid, with revenue growth and expense discipline resulting in positive operating leverage for the quarter. Capital One continues to see strong growth in its domestic credit card portfolio, which has driven the increase in net interest income. While net income growth this quarter was strong, the previous quarter’s (2Q15) results were adversely impacted by a $147 million restructuring charge. Absent this charge, along with charges to build the U.K. payment protection insurance customer reserve fund in both 2Q15 and 3Q15, adjusted net income increased by a still very strong 17%.

Asset quality remains sound. Company-wide net charge-offs increased modestly quarter-on-quarter (QoQ) reflecting higher charge-offs in Auto, Commercial & Industrial (C&I), and Retail Banking and Credit Card, partially offset by lower charge-offs in Credit Card. However, management expects charge-off rates in the domestic credit card portfolio to rise in the near-term as the third quarter is typically the lowest of the year and as the portfolio seasons. 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 $171 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. Despite share repurchases and balance sheet growth, the Company’s regulatory capital ratios have remained fairly stable, demonstrating sound organic capital generation. At September 30, 2015, Capital One reported a Basel III common equity Tier 1 ratio of 12.1%, on the standardized approach.

The Company’s pending acquisition of GE Capital’s Healthcare Financial Services U.S. lending business, which was announced during the quarter, is expected to close by year-end and will add approximately $8.5 billion in loans to the Company’s existing healthcare specialty finance business. DBRS views this transaction as strategically aligned with Capital One’s recent purchases that boosted existing business lines through both portfolio and platform acquisitions.

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.