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

DBRS, Inc. (DBRS) confirmed the ratings of Capital One Financial Corporation (Capital One or the Company), including its Long-Term Issuer Rating of A (low) and Short-Term Issuer Rating of R-1 (low). At the same time, DBRS confirmed the ratings of its banking subsidiaries, Capital One Bank (USA), National Association and Capital One, National Association (the Banks). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Banks is ‘A’, while the Support Assessment remains SA1. The Company’s Support Assessment is SA3 and Capital One’s Long-Term Issuer Rating is positioned one notch below the Banks’ IA.

KEY RATING CONSIDERATIONS
The Company’s ratings and Stable trend reflect the strength of the Capital One franchise and its distinct, highly profitable business model, which includes a large national credit card lending platform, a regional commercial bank and a large online direct bank that provides substantial 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 is robust and provides significant capacity to absorb credit losses, while still allowing for investment in the franchise and technology, including the Company’s ongoing digitization efforts. Constraining the ratings is the Company’s sizeable exposures to subprime borrowers in both the credit card and auto portfolios, as well as the overall outsized exposure to the U.S. consumer as compared to most large regional banks.

RATING DRIVERS
A more balanced loan mix or an increased diversification in the sources of revenues could have positive rating implications. Conversely, a substantial decline in earnings, reflecting a permanent weakening of revenue generation ability, or a sustained deterioration in asset quality metrics could lead to negative rating actions.

RATING RATIONALE
Capital One continues to invest in and build its franchise. This includes investments to digitize its operation and its product offerings. Additionally, the Company has also recently added a new long-term relationship with Walmart. While the Walmart relationship will require some additional investments from Capital One, losses are capped through the life of the agreement.

For 1Q19, Capital One reported net income of $1.4 billion, up both linked quarter and year over year by 15% and 5%, respectively. Higher linked quarter results reflect seasonally lower operating expenses, including a significant drop in marketing expenses. This was partially offset by an increase in the provision for credit losses which included a reserve build. Results equated to solid returns, including a 1.52% ROAA.

DBRS continues to view Capital One’s asset quality as sound. Specifically, net charge-off levels, which have been relatively stable, remain manageable and reflective of the credit card heavy loan mix. Additionally, DBRS sees the Company’s loan loss reserves, which stood at $7.3 billion, representing 3.04% of total loans held for investment at March 31, 2019, as sufficient, particularly given the Company’s strong earnings generation. As compared to its regional banking peers, the Company is expected to be more adversely impacted by the implementation of CECL because if its credit card heavy loan mix. However, DBRS expects the impact from CECL to be manageable and will not affect the Company’s overall credit profile.

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 common equity Tier 1 ratio was 11.9% at March 31, 2019, up from 11.2% at YE18. The Company’s recently released DFAST results showed a significant drop in capital levels under severe stress, however capital levels remained above regulatory thresholds. The Company reported that as of March 31, 2019, that it fully exceeded the fully phased-in Liquidity Coverage Ratio requirement.

Headquartered in McLean, Virginia, Capital One reported $373.2 billion in assets at March 31, 2019.

The Grid Summary Grades for Capital One are as follows: Franchise Strength – Strong/Good; Earnings Power – Strong/Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This is an unsolicited credit rating.

For more information on this credit or on this industry, visit www.dbrs.com.

DBRS, Inc.
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