January 18, 2013 / 5:11 PM / 5 years ago

TEXT - Fitch says Capital One Financial earnings flattening out

Jan 18 - Capital One Financial's (COF) earnings for 4Q'12 started to
flatten out in 4Q'12 after a year that included two large acquisitions and
associated charges, according to Fitch Ratings. As such, Fitch expects COF's
4Q'12 net income of $825 million, which equates to a return on average assets
(ROAA) of 1.10%, to be more representative of the company's quarterly earnings
potential in 2013.

COF's net interest margin (NIM) of 6.52% remained satisfactory, though lower 
than the sequential quarter due to higher balances of low yielding cash and 
investment securities weighing on asset yields as well as some revenue 
suppression in COF's domestic card business. Fitch would expect some margin 
improvement for COF in 2013 as lower yielding home loans inherited with the ING 
Direct acquisition continue to run-off and there is some improvement in interest
expense given that COF called its higher cost trust preferred securities in 
early January 2013.

COF's 4Q'12 earnings were also impacted by higher non-interest expense, 
particularly in professional services and marketing. Fitch notes that the rise 
in marketing costs is not entirely unexpected given the intense competition for 
new loans. As such, Fitch believes COF's marketing expense will likely remain 
higher over a near-to-intermediate term time horizon.

Given the strong competition, COF's ending loans in its domestic card business 
increased only 3.05% from the sequential quarter. While Fitch does note that 
this includes expected run-off primarily from the HSBC domestic card business 
acquisition, domestic card grew approximately 4.1%, which is still slightly 
lower than some peers. Auto loans grew 2.6% sequentially and total commercial 
loans grew 4.3% sequentially. Given the economic and elevated competitive 
environment, Fitch expects meaningful loan growth to remain challenging for COF 
over the next year.

COF's credit costs, as measure by net charge offs (NCOs) and early stage 
delinquencies, increased across most lending categories. Fitch notes that some 
of this is largely due to seasonality in credit trends as well as the full 
impact of the acquired HSBC card receivables which in the private label space 
tend to run at higher NCO rates. Additionally, Fitch believes that credit costs 
had been hovering around a cyclical low, so Fitch would also expect increases in
NCO and delinquency rates over time.

COF's Tier 1 common ratio increased to 11% in 4Q'12 up from 10.7% in the 
sequential quarter. Under current Basel III proposals, COF's Tier 1 common ratio
would be close to 8%, which is an improvement but is also on the lower side 
compared to some peer institutions.

However, given that COF is a strong generator of capital, Fitch would expect the
company's capital ratios to increase over the course of the year, even including
any potential balance sheet growth or capital that gets returned to 
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