Capital One Financial's (COF) third quarter 2012 (3Q'12) earnings remained
somewhat noisy in the wake of the company's acquisitions this year, which
included the ING Direct purchase closing in the beginning of 2012 and the
purchase of HSBC's domestic card business closing in mid-2012, according to
Fitch Ratings. Nevertheless, due primarily to significantly less of an allowance
build from the sequential quarter related to onboarding the HSBC deal, COF's
return on assets expanded to a stated 1.60% in 3Q'12, up from a stated 0.26% in
Fitch believes that after sifting through the various merger related effects,
one-time charges, and noisy sequential quarter comparisons, COF's core earnings
have modestly improved given that 3Q'12 included a full quarter of the acquired
HSBC receivables in the company's overall results.
Fitch expects earnings to remain noisy as COF continues to absorb these two
large transactions into its operations, but that over time as this noise abates,
COF's earning power should be stronger due to lower funding costs and improved
COF's loan growth was relatively flat from the sequential quarter as continued
growth in auto loans, and some modest growth in commercial and commercial real
estate loans, was offset by the continued planned run-off of mortgage loans that
COF inherited with the ING Direct acquisition as well as the run-off of some
card loans acquired from HSBC. Given some of the remaining loan run-off still to
occur, Fitch would expect overall loans to be flat to modestly down by the end
of the year.
On balance, COF's credit quality remains reasonably good. However, both overall
net charge offs (NCO) and 30 day plus delinquencies increased in COF's domestic
card portfolio and in its auto portfolio.
On the former, given that the private-label HSBC card portfolio typically runs
at higher yields and therefore also higher NCO rates, this uptick was expected.
Fitch notes, however, that card NCO rates remain near cyclical lows, so
notwithstanding the mix shift including more private label, Fitch would still
expect overall card NCO rates to increase over time. The auto portfolio saw an
uptick in both categories, primarily related to seasonal factors. Fitch notes
that credit in auto also remains below historical averages.
COF's Tier 1 common ratio improved to 10.7% in 3Q'12, up from 9.9% in 2Q'12.
This improvement was better than Fitch's expectations. That said, Fitch would
still expect COF to continue to build capital over the remainder of the year.
In 3Q'12, COF disclosed that its Tier 1 common ratio under proposed Basel 3
capital standards would be in the high 7% range, which is on the lower side
compared to some peer institutions. However, given COF's strong capital
generation Fitch would expect the company to be above their assumed Basel 3
target of 8% in the next year.
Additional information is available at www.fitchratings.com.