Fitch: Capital One's Earnings Flattening Out
CHICAGO -- January 18, 2013
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
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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Justin Fuller, CFA, +1-312-368-5472
70 W. Madison Street
Chicago, IL 60602
Meghan Neenan, CFA, +1-212-908-0221
Brian Bertsch, +1-212-908-0549
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