Fitch Affirms Capital One at 'A-/F1' Following Large Regional Bank Review; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Capital One Financial Corporation's (COF) ratings at 'A-/F1'. The Rating Outlook remains Stable.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), UnionBanCal Corporation (UBC), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately. 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, VRs AND SENIOR DEBT

COF's ratings continue to be supported by good earnings performance which has remained above the average of its large regional peer group. This is largely due to COF's comparatively higher net interest margin (NIM) given the company's higher yielding asset mix compared to peer banks. Fitch believes COF's good cost structure has also helped to support earnings.

This strength in earnings has, in part, been also boosted by modest quarterly reserve releases. Fitch would also note that COF's earnings have been noisy given merger costs and purchase accounting adjustments impacting results over the last couple of years. Nevertheless, earnings remain above peer banks and are a rating strength of COF.

Fitch also views favourably the continued evolution of COF's funding profile, which over the last several years has moved from one almost entirely reliant on wholesale borrowings to now being almost entirely reliant on core deposit funding. This evolution has been achieved primarily via acquisition, with the latest having been the ING Direct USA acquisition in 2011.

Additionally, this evolution of COF's funding profile is one of the reasons ratings have remained largely stable through the credit crisis and subsequently.

While Fitch would note that COF's capital ratios are near the average of its large regional peer group. This is given COF's ability to accrete capital via growth in retained earnings more quickly than peers due to its earnings power noted above helps to offset the lower capital ratios.

Given the challenging growth environment for COF--and the rest of the banking industry--COF has been returning a significant portion of earnings to shareholders via constant dividends and higher buybacks. Fitch expects this to continue over a near-term time horizon.

COF's credit quality metrics--as well as those for the rest of the industry--have continued to improve. Fitch believes they are likely at or near a cyclical trough. As such, Fitch would expect some deterioration in credit metrics going forward particularly as competition in auto lending and commercial & industrial (C&I) lending--two of COF's main businesses--continues to intensify.

Today's rating action encompasses this potential and expected credit deterioration. Additionally, Fitch would expect COF's credit metrics to be above industry averages given its asset and customer mix, which is partially offset in Fitch's mind by the higher yield (discussed above) earned on those assets.

Finally, Fitch notes that COF's interest rate risk positioning is relatively neutral, which Fitch views positively from a credit perspective. That said, it remains to be seen if banks such as COF with large online banking platforms experience materially higher deposit repricing (deposit beta) pressures than those banks with checking and savings deposits originated out of branches.

Should the deposit repricing pressure be higher than forecast, it could diminish the company's asset sensitivity in a rising short-term rate environment should that ever occur. While this is a risk that is slightly unclear right now, Fitch does not believe it is a ratings factor at this juncture.

RATING SENSITIVITIES - IDRS, VRs AND SENIOR DEBT

Fitch's ratings on COF have remained largely stable through the credit crisis and subsequently. Fitch continues to believe that COF's ratings are well situated relative to the company's large regional peer group.

Fitch believes there is likely only modest upwards rating potential for COF's ratings.

From a creditor's perspective, given COF's concentrated loan portfolio in credit cards relative to higher rated peers, Fitch would expect capital ratios to be higher than peer group averages. While the superior earnings generation noted above helps to offset this at COF's current rating level, for upwards rating momentum COF would need to have a consistently more diversified loan portfolio or to run a higher capital ratios.

Alternatively, should COF's asset quality metrics deteriorate faster than industry averages or should funding costs (discussed above) accelerate at a rate faster than industry averages, there could be some negative pressure on ratings or the Rating Outlook over a medium-to-longer term time horizon.

KEY RATING DRIVERS - HOLDING COMPANY

COF's IDR and VR are 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 default probabilities.

RATING SENSITIVITIES - 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 the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. That said, Fitch views this as unlikely though for COF given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that COF may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

COF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, COF is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

COF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by COF and by various issuing vehicles are all notched down from COF or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by COF and its subsidiaries are primarily sensitive to any change in COF's VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of COF's bank subsidiaries benefit from the cross-guarantee mechanism in the U.S. under FIRREA, and therefore the IDRs and VRs of the subsidiary banks are equalized across the group.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of the subsidiaries are equalised with those of COF to reflect support from their ultimate parent. As such, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in COF's IDRs.

To the extent that one of COF's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from COF's IDR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

COF's uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by COF and its subsidiaries are primarily sensitive to any change in COF's long- and short-term IDRs.

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'.

North Fork Bancorporation, Inc.

--Subordinated debt at 'BBB+'

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria (Jan. 31, 2014');

--'Rating FI Subsidiaries and Holding Companies (Aug. 10, 2012');

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria (Jan. 31, 2014');

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014');

--'U.S. Banking Quarterly Comment: 2Q14 (July 23, 2014');

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral) (July 15, 2014');

--'Risk Radar Global 1Q14 (April 1, 2014').

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 1Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742560

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891937

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Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-0221
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Justin Fuller, CFA
Senior Director
+1-312-368-2057
Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
or
Secondary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-0221
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com