Oct 19 - Standard & Poor's Ratings Services today said the ratings and
outlook on Capital One Financial Corp. (COF; BBB/Negative/--) are
unchanged following our review of the company's good third-quarter 2012
earnings, which were within our expectations.
The company posted pretax earnings of $1.72 billion, up from $236 million in
the previous quarter and $1.24 billion in third-quarter 2011. Total net
revenue rose 14.4% from the second quarter and 39.2% year over year,
reflecting the full quarter's impact of the HSBC U.S. credit card acquisition.
The higher-yielding HSBC card assets also pushed the net interest margin
higher, by 93 bps to 6.97%.
Average loans, excluding acquired loans, increased $12 billion to $163
billion, led by growth in the domestic credit card business. Net charge-offs
(NCOs) increased 20.2% from the second quarter because of a lower proportion
of charge-offs on HSBC U.S. credit card loans that were absorbed by the credit
mark compared with the previous quarter, seasonally higher charge-offs in
automobiles, and the impact of newly issued regulatory guidance related to the
treatment of consumer loans in cases where the borrower has gone through
Chapter 7 bankruptcy. NCOs were 1.75% for the third quarter, compared with
1.53% in the second quarter and 2.52% in third-quarter 2011. COF added $127
million in reserves, compared with an addition of $938 million last quarter as
the company continued to build its allowance toward the recently acquired HSBC
loans. Early delinquencies (30 days past due) for the card business, excluding
acquired loans, increased 68 basis points to 3.67%. The coverage ratio of
allowance to loans rose 7 bps to 2.54% because of the reserve build-up. Per
the company's guidance, we expect NCOs to increase next quarter as the HSBC
U.S. credit mark has largely run its course in terms of absorbing NCOs.
COF's Basel I Tier 1 common ratio was 10.7% at the end of the third quarter,
up 80 bps from the previous quarter, reflecting stronger revenue generation
following the HSBC Card acquisition.
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 these two acquisitions, which have now been closed. In
addition, we will monitor the impact on capital ratios of COF's total payout
ratio (dividends and buybacks) and the company's plans to retire hybrid
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