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Fitch Affirms Capital One at 'A-/F2'; Outlook Stable
October 3, 2017 / 8:50 PM / 18 days ago

Fitch Affirms Capital One at 'A-/F2'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has today affirmed Capital One Financial's (COF) Long-Term Issuer Default Rating (LT IDR) and Viability Rating (VR) at 'A-/a-'. The Outlook remains Stable. At the same time, Fitch affirmed COF's Short-Term IDR at 'F2'. A full list of rating actions follows at the end of this release. The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), and Wells Fargo & Company (WFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT COF's rating reflects its strong banking franchise, its solid funding position and reasonable capital levels relative to its rating level. COF's ratings also reflect its efficient, scalable business model that has supported its earnings performance as credit quality reverts toward longer-term norms. Offsetting these rating strengths is COF's high proportion of consumer-related assets and more specifically its exposure to the near-and-subprime lending space. Fitch views this exposure as a rating constraint for COF and limits its upward rating potential over time. Today's affirmation is supported by good earnings performance and cost controls. COF has generally outperformed its peer group, largely driven by COF's comparatively higher net interest margin, given its proportionately larger mix of higher yielding credit card receivables and auto loans. Further supporting earnings performance is COF's strong efficiency ratio relative to peer banks. Going forward Fitch expects COF to continue to have a strong efficiency ratio given its significant investments in becoming digital in its operations and customer interfaces. Fitch continues to believe these investments have the potential to more meaningfully increase scale benefits for COF relative to peer institutions over time. Still, COF's earnings outperformance on a return on average assets (ROA) basis relative to peers has shrunk over recent periods primarily due to credit card asset quality deterioration. Consistent with industry trends, COF's level of credit card net charge-offs (NCOs) has increased over the last year. Much of the deterioration is related to COF's more recent origination vintages continuing to season within its domestic card book. Today's action reflects Fitch's expectation that credit deterioration within COF's consumer-focused portfolio will be manageable over the rating time horizon. NCOs within domestic credit cards increased to 5.1% through the first half of 2017 versus 4.1% in the first half of 2016. The company has indicated that the NCO rate within domestic cards would be around 5% for the full year 2017, pointing to moderating credit losses during the second half of the year. Monthly data disclosed by COF support its guidance as NCOs during July and August 2017 were both below 4.8%. Meanwhile, asset quality within COF's growing auto book remains solid. While NCOs have ticked up modestly, trends are consistent with the industry and in-line with Fitch's expectations. COFs auto loan portfolio has a higher proportion of loans to non-prime customers compared to auto portfolios of other peer institutions. As a result, Fitch believes COF's auto loan portfolio will exhibit higher delinquency trends and loss rates on a going forward relative to most other peer banks that have been more focused on originating only prime auto loans. Fitch generally expects the potential auto loan credit deterioration to be manageable through COF's quarterly earnings, but credit performance is expected to be slightly worse than its peers. This expectation is incorporated into today's rating affirmation and the Outlook Stable. Fitch views COF's capital ratios as supportive to its rating, particularly when taken in context of the company's ability to accrete capital via growth in retained earnings more quickly than some peers. However, Fitch continues to believe the strength of COF's capital position is partially offset by its higher concentration in consumer lending assets which carry higher loss ratios through credit cycles. COF's common equity tier 1 (CET1) ratio was 10.6% on a standardized, fully phased-in basis, down 20bps on a year-over-year basis. Given the uptick in consumer-related credit costs, Fitch expects COF to keep CET1 levels at or above peer median levels over the rating time horizon. During 2Q17, the Fed released the results of its annual Comprehensive Capital Adequacy Review. COF received a conditional non-objection for qualitative reasons and will have to resubmit its capital plan by the end of the year. Today's affirmation reflects Fitch's expectation that COF will meet the requirements the Fed laid out and that COF will resubmit its capital plan within the required timeframe. While funding remains solid, Fitch believes COF's rating is constrained by its deposit profile over the long term. COF has grown its deposit base significantly coming out of the crisis and is much less dependent on wholesale funding relative to its past. However, the company is still heavily reliant on internet-based deposits relative to peers and has a loan-to-deposit ratio that hovers around 100%. These deposits have yet to go through a true rate tightening period. Although deposit betas have been relatively modest to date, Fitch expects additional rate hikes by the Fed to result in more significant increases in deposit rates for online banks, including COF. However, this should be at least partially offset by increasing asset yields. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES COF's subordinated debt is notched one level below its VR for loss severity. COF's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of Capital One Bank (USA), National Association (COBNA) and Capital One National Association (CONA) and Chevy Chase Bank, FSB are rated one notch higher than the bank's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY COF's VR is equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR COF has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. COF's IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDR VR, IDRs, AND SENIOR DEBT Fitch sees limited upside to COF's rating over the near-to-medium term given its exposure to the near-and-subprime consumer sector and its funding profile. Moreover, COF's limited revenue diversity relative to its peers is viewed as a rating constraint over time. In 2Q18, COF along with its peers will be required to disclose its full Liquidity Coverage Ratio (LCR). Fitch expects most banks tied to the full LCR to operate with a ratio well-above the regulatory minimum of 100%. Given COF's deposit and funding profile, Fitch expects the company to manage its LCR ratio at-or-above peer median levels. Pressure could be placed on COF's ratings should it manage LCR consistently below the peer median. COF's ratings are also sensitive its asset quality metrics. To be clear, Fitch expects that there will be modest credit quality mean reversion over the rating time horizon. However if credit quality, particularly in the credit card and auto book (those asset classes that have grown notably over recent years), deteriorates faster than industry averages and is not manageable within the context of quarterly earnings COF's ratings or Outlook could be adversely impacted. Fitch would view well-below-median earnings performance due to elevated credit costs over the course of multiple quarters as a credit negative and a rating sensitivity. Finally, as noted above, Fitch expects COF to manage regulatory capital at or above peer median levels given its business model and loan mix. Although not expected, accelerated capital distributions or loan growth in excess of capital generation such that COF's CET1 ratio falls meaningfully below current levels would be viewed negatively and could result in negative rating action. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for COF and its operating companies' subordinated debt, trust preferred securities, and preferred stock are sensitive to any change to the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to COF's long- and short-term IDR. HOLDING COMPANY Should COF's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since COF's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings: Capital One Financial Corporation --Long-term IDR at 'A-'; Outlook Stable; --Short-term IDR at 'F1'; --Viability at 'a-'; --Senior unsecured debt at 'A-'; --Senior Shelf at 'A-' --Subordinated debt at 'BBB+'; --Preferred stock at 'BB'; --Support at '5'; --Support Floor at 'NF'. Capital One Bank (USA), National Association --Long-term IDR at 'A-'; Outlook Stable; --Short-term IDR at 'F1'; --Viability at 'a-'; --Senior unsecured debt at 'A-'; --Subordinated debt at 'BBB+'; --Short-term debt at 'F1'; --Long-term deposits at 'A'; --Short-term deposit at 'F1'; --Support at '5'; --Support Floor at 'NF'. Capital One National Association --Long-term IDR at 'A-'; Outlook Stable; --Short-term IDR at 'F1'; --Viability at 'a-'; --Senior unsecured debt at 'A-'; --Subordinated debt at 'BBB+'; --Short-term debt at 'F1'; --Long-term deposits at 'A'; --Short-term deposit at 'F1'; --Support at '5'; --Support Floor at 'NF'. Chevy Chase Bank, F.S.B --Long-term deposits at 'A'. Fitch has withdrawn the 'BBB+ 'subordinated debt rating of North Fork Bancorporation as the bonds have been repaid and entity is no longer issuing debt. Contact: Primary Analyst Bain K. Rumohr, CFA Director +1-312-368-3153 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Michael Taiano Director +1-646-582-4956 Committee Chairperson Joo-Yung Lee Managing Director +1 212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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