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Fitch: Lower Costs Drive Capital One's Earnings Improvement
April 19, 2013 / 3:32 PM / 4 years ago

Fitch: Lower Costs Drive Capital One's Earnings Improvement

(The following statement was released by the rating agency) CHICAGO, April 19 (Fitch) Capital One Financial's (COF) first quarter 2013 (1Q'13) earnings improved to $1.05 billion, up from $825 million in 4Q'12. This was largely driven by a reduction in expenses from the prior quarter, helping COF deliver a strong 1.51% return on average assets (ROAA) in the quarter. Fitch Ratings would expect continued earnings momentum to be more challenging going forward as it will be dependent on loan growth, which Fitch notes was down this quarter. Loans were down 7%, or $14.6 billion, from the sequential quarter half of which was due to the pending sale of the Best Buy card portfolio. The remainder of the decline primarily came from COF's domestic card portfolio and the continued planned run-off of acquired mortgage loans partially offset by 3% growth in auto loans and very modest growth in commercial loans. As such, COF's total revenue was down 1% from the sequential quarter primarily driven by lower loan balances and lower purchase volumes, partially offset by higher net interest margin (NIM). COF's NIM was 6.71% which despite the lower loan levels noted above, benefited from the redemption of high cost trust preferred securities which helped drive the company's cost of funds down. The bigger benefit to earnings, however, came from a reduction in provision expense from the sequential quarter of $266 million, driven by $261 million of allowance release, as well as a reduction in non-interest expense of $227 million, or 7%, due in part to lower marketing expenses as well as lower acquisition related expenses. Given that COF is a relatively efficient company with an efficiency ratio of 54.55%, which compares favorably with some peer institutions, Fitch notes that further earnings improvement will be heavily predicated on loan growth, which Fitch believes could remain challenging over a near-to-intermediate term time horizon. Overall credit metrics continue to be strong with overall net charge-off rates (NCO), 30 day plus performing delinquency rates, and non-performing asset rates all declining from the sequential quarter. While there was a very modest up-tick in credit card NCO rates, Fitch believes this was largely due to some seasonality as well as the continued seasoning of some of the HSBC acquired loans. On balance, Fitch continues to view credit metrics across most of COF's lending categories as near a cyclical low, and Fitch would expect metrics to deteriorate over an intermediate to long term time horizon. Fitch notes that COF's capital position remains good, with the company's Tier 1 common ratio increasing to 11.8% in 1Q'13 up from 11% in the sequential quarter. Given this, as well as the company's earnings generation, Fitch expects the expected increase in the dividend to $0.30 per share from $0.05 per share to be easily absorbable within the context of earnings. Contact: Justin Fuller, CFA Director +1-312-368-5472 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Meghan Neenan, CFA Senior Director +1-212-908-0221 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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