April 20 - Standard & Poor's Ratings Services today said its ratings and
outlook on Capital One Financial Corp. (COF; BBB/Negative/--) are
unchanged following its review of the company's good first-quarter 2012
earnings, which were within our expectations.
The company posted Standard & Poor's-adjusted pretax earnings of $1.26
billion, up from $571 million the previous quarter but down from $1.39 billion
in first-quarter 2011.
Excluding the recently closed acquisition of ING Direct USA (INGD), revenue
rose 5.3% from the fourth quarter and 4.5% year over year as a result of a
higher average loan balance and favorable margins. The net interest margin
(NIM) declined roughly 100 basis points versus the fourth quarter, reflecting
INGD's lower-yielding assets and higher cash balances in preparation for the
purchase of HSBC's U.S. card portfolio (expected to close in the second
quarter). We expect the NIM to increase once COF completes the HSBC
Average loans, excluding INGD, rose $2 billion as growth in commercial and
auto lending more than offset seasonal paydowns. Expenses declined from the
fourth quarter, largely because of seasonally lower marketing costs.
Net charge-offs declined 11.8% from the previous quarter, and COF released
$190 million of reserves, versus $30 million the previous quarter, reflecting
improving credit quality. Early delinquencies (30 days past due), excluding
acquired loans, declined 51 basis points to 2.96%. The coverage ratio of
allowance to loans fell 79 basis points to 2.34%, mainly as a result of INGD's
higher-quality loan book.
COF's Tier 1 common ratio was 11.9% at the end of the first quarter, up 220
basis points from the previous quarter, reflecting earnings growth and capital
action related to the financing of acquisitions. Management expects its Tier 1
common ratio to decline to the mid-9.0% area after it closes on HSBC's U.S.
Our outlook on COF is negative, reflecting the potential for an increase in
loan losses stemming from the company's higher concentration in credit cards
and mortgages following its acquisitions of ING Direct and HSBC's U.S. credit
card portfolio. The negative outlook also reflects the integration risk
associated with the ING Direct acquisition given its size. In addition, we
will monitor COF's total payout ratio and the company's plans to retire hybrid
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