DBRS Confirms Capital One Financial Corp. at A (low); Stable Trend

DBRS, Inc. (DBRS) has today confirmed the ratings of Capital One Financial Corporation (Capital One, or the Company) and its principal subsidiaries, including the Company’s Issuer & Senior Debt rating of A (low). The trend on all ratings remains Stable. The rating action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

The Company’s ratings reflect the strength of the Capital One franchise and its distinct business model, featuring a large scale national credit card lending platform that ranked fourth nationally based on outstanding balances at year-end 2015, complemented by a significant regional banking operation and the country’s largest online direct bank, which provides ample deposit funding as well as other consumer and commercial banking products and services.

The ratings also consider the Company’s continued favorable financial results, its solid risk management capabilities, and sound balance sheet. DBRS notes that sustaining strong levels of profitability and improving fee income contribution, while maintaining an acceptable risk profile could lead to positive rating actions. Conversely, a substantial decline in earnings, reflecting a permanent weakening of revenue generation ability, or significant amount of asset quality deterioration could lead to negative rating actions.

With a peer-leading net interest margin and disciplined expense management, Capital One’s earnings generation remains robust and provides significant capacity to absorb credit losses, while still allowing for investment in the franchise. Indeed, the Company once again reported top tier levels of profitability, with a return on assets of 1.29% in 2015.

Reflecting Capital One’s sound underwriting and servicing capabilities, credit quality metrics continue to be favorable with net charge-offs (NCOs) and early stage delinquencies remaining very manageable across all asset classes. Moreover, within the Domestic Card book, NCOs are still below pre-recession levels, though they may have already reached cyclical lows. Importantly, DBRS sees the Company’s loan loss reserves, which stood at $5.1 billion and represented 2.23% of total loans held for investment at YE15, as sufficient, particularly due to the Company’s strong ability to generate capital through earnings.

Capital One’s balance sheet remains sound, underpinned by ample liquidity and deposit funding, as well as solid capital position, all of which help support the rating. In this regard, the Company exceeded the fully phased-in LCR requirement at December 31, 2015. Additionally, Capital One’s common equity Tier 1 ratio, on a transitional basis, was 11.12% at YE15, down 134 basis points from the prior year-end as a result of continued capital management activity and balance sheet growth, but remains well-above regulatory requirements, and higher than the similarly-rated peer median.

Headquartered in McLean, Virginia, Capital One reported $334.0 billion in assets at YE15.

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 (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: Michael Driscoll
Initial Rating Date: 17 November 2005
Most Recent Rating Update: 2 April 2015

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