TEXT-Fitch comments on Capital One Financial

(The following statement was released by the rating agency)

April 20 - Capital One Financial's (COF) first quarter 2012 (1Q'12) earnings benefited from the company's recently closed acquisition of ING Direct, according to Fitch Ratings. Excluding the effects of the ING Direct deal, COF's 1Q'12 earnings were $868 million, up from $407 million in 4Q'11, but down slightly from $1 billion in 1Q'11. Fitch views COF's operating earnings as good. The biggest driver of COF's earnings was largely due to higher revenue, both including the ING Direct acquisition and from growth in the company's legacy businesses. Overall revenue expanded 22% from the sequential quarter due to $40.4 billion of loans attributable to the ING Direct acquisition which helped boost COF's net interest income for the quarter. Even excluding this impact, however, COF's total revenue from its legacy portfolio grew 5.2% from the sequential quarter thanks to strong growth in auto loans as well as strong auto finance originations during the quarter. Fitch notes that auto lending continues to be a strong area of growth for COF. COF's 1Q'12 net interest margin (NIM) declined to 6.20% from 7.22% in 4Q'11. This was due to the inclusion of ING Direct's lower yielding assets onto the balance sheet, as well as higher cash balances from COF's capital raising activities towards the end of the quarter. As the ING Direct assets begin to run-off, and COF brings additional higher yielding card loans onto the balance from the closing of the HSBC card acquisition at some point in 2Q'12, Fitch would expect COF's overall NIM to expand in 2012. While these results were generally positive, Fitch does note that COF continues to increase its reserve for mortgage representation and warranty claims. The company provisioned an additional $169 million for these claims in 1Q'12, which brought the total reserve to $1.1 billion at March 31, 2012. Fitch expects this to continue to be a drag on earnings in 2012. Fitch notes that COF's credit quality metrics continue to be good. Overall net charge-offs (NCOs) during the quarter were 2.04%, down from 2.69% in 4Q'11. Additionally, 30+ day delinquency rates declined in both the card and consumer banking segments. Overall non-performing assets (NPAs) have also remained good, though Fitch would note there was a very modest uptick in NPAs in the commercial banking segment, primarily related to commercial real estate loans. Nonetheless, the total level of NPAs remains very manageable, in Fitch's opinion. As COF prepares to close its acquisition of the HSBC credit card portfolio in 2Q'12, in late 1Q'12 COF raised $1.25 billion of common stock as well as $1.25 billion of senior unsecured debt at the holding company. These actions, as well as strong retained earnings growth, boosted COF's Tier 1 common ratio to a solid 11.9% at 1Q'12. (Caryn Trokie, New York Ratings Unit)