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

DBRS, Inc. (DBRS) has today confirmed the ratings of Capital One Financial Corporation (Capital One or the Company), including the Company’s Issuer & Senior Debt rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Capital One, National Association (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A, while its Support Assessment remains SA3. The Company’s Support Assessment is also SA3 and its Issuer & Senior Debt rating is positioned one notch below the Bank’s IA.

The Company’s ratings reflect the strength of the Capital One franchise and its distinct business model, which includes a large scale national credit card lending platform, a significant regional banking operation and a large online direct bank, providing significant deposit funding, as well as other consumer and commercial banking products and services.

The ratings also consider the Company’s solid financial results, its strong and proven risk management, and sound balance sheet. 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 and technology, including the Company’s digitization efforts. Constraining the rating is the Company’s loan portfolio that is heavily weighted towards the consumer, including sizeable exposures to subprime borrowers in both credit cards and auto.

In 2016, Capital One reported net income of $3.8 billion, down from $4.1 billion in 2016, as a strong 9% increase in revenues was more than offset by higher provisions for credit losses, as well as higher expenses. The increased provisioning reflected higher charge-offs in credit card, taxi medallion and the oil and gas portfolios, as well as a reserve build in cards and auto. Most recently in 1Q17, Capital One reported net income of $810 million, an increase from the linked quarter as seasonally lower marketing expenses and flat revenues were partially offset by an increase in provisioning for credit losses.

Despite weakening in recent periods, DBRS continues to view Capital One’s asset quality as sound and net charge-off levels, while increasing, as remaining manageable. DBRS had previously viewed losses in the credit card portfolio as being at cyclical lows, so the increase from previous levels was not surprising. The Company did recently increase their guidance for losses in the domestic card portfolio as to be likely approaching 5.00% in 2017 and DBRS notes they were above this level in 1Q17. Importantly, DBRS sees the Company’s loan loss reserves, which stood at $7.0 billion, representing 2.89% of total loans held for investment at March 31, 2017, as sufficient, particularly given the Company’s strong ability to generate capital organically through earnings.

Capital One’s balance sheet remains sound, underpinned by ample liquidity and deposit funding, as well as a solid capital position, all of which provide support to current ratings. Additionally, Capital One’s estimated common equity Tier 1 ratio, on a transitional basis, was 10.40% at March 31, 2017, up from 10.08% at YE16. Given its current business mix, the Company’s management team views current capital levels are at its desired level.

Headquartered in McLean, Virginia, Capital One reported $348.5 billion in assets at March 31, 2017.

RATING DRIVERS
DBRS currently does not see any upwards rating pressure, however, positive rating actions could occur if the Company shows sustained levels of improved profitability, including a higher fee income contribution, while maintaining an acceptable risk profile. 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.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2017) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under 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.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date 17 November 2005
Last Rating Date: 1 April 2016

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.