Fitch Affirms Capital One Financial at 'A-/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Capital One Financial Corporation's (COF) ratings at 'A-/F1'. The Rating Outlook is Stable. The affirmation and Stable Outlook are driven by COF's continued solid earnings performance, still good credit performance, and satisfactory capital ratios for its business model.

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), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

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

The affirmation of COF's ratings continues to be supported by good earnings performance, which over time has remained above the average of its large regional peer group. In Fitch's view, this is largely driven by COF's comparatively higher net interest margin, given its proportionately larger mix of higher yielding credit card receivables in its loan portfolio relative to peer institutions.

COF also continues to drive a strong efficiency ratio relative to peer banks which has also helped to support its earnings performance and therefore its ratings. 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 believes these investments have the potential to more meaningfully increase scale benefits for COF relative to peer institutions over time.

Fitch continues to believe the long-term evolution of COF's funding profile is supportive of today's rating action. Over the last several years, COF has moved away from a business model almost entirely reliant on wholesale borrowings and securitizations to one being more fully reliant on deposit funding via a mix of organic deposit growth and acquisitions.

While Fitch views this movement positively, COF's loan-to-deposit ratio remains on the high-end of peer averages, routinely hovering around 100% relative to a mid-70% average for many other peers.

Fitch views COF's capital ratios as supportive to the 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 believes the strength of this capital position is partially offset by the company's higher concentration in consumer lending assets, which encompass credit card loans, auto loans, and some installment loans. These asset classes tend to carry higher yields but also have higher loss ratios.

While COF has worked to further balance its loan portfolio, most notably with the acquisition of General Electric's healthcare lending business in 2015, it still remains more concentrated than some peers. To the extent that COF continues to prudently diversify its loan portfolio this could lead to longer-term upside to the ratings (discussed in the ratings sensitivities section below).

Credit quality for COF (as well as the rest of the industry) has generally continued to be good, but there is some evidence of the beginnings of a modest reversion in certain asset classes. This reversion has already occurred in COF's energy loan portfolio, though at $3 billion energy loans only represent 1.3% of total company loans. Additionally, there has been some credit deterioration in COF's relatively small taxi medallion lending portfolio, as pressure from ride hailing applications, particularly in the Chicago market, has impacted collateral values in this business by about 60%. However, the taxi medallion portfolio is only approximately $854 million or 0.36% of total loans. This deterioration has been manageable for the company in the context of its good quarterly earnings generation.

Fitch believes that some credit deterioration is likely in the company's auto loan portfolio. Across the auto lending industry Fitch has become cautious about the extension of loan terms as well as the potential for declines in used car prices (e.g collateral values) over the next couple of years.

COFs auto loan portfolio has a higher proportion of loans to non-prime customers than the 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.

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.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

COF's subordinated debt is notched one level below its VR of 'a-' 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 instrument's non-performance and loss severity risk profiles and have thus been affirmed based on the affirmation of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of Capital One Bank (USA), National Association (COBNA), Capital One National Association (CONA), and Chevy Chase Bank, F.S.B. are rated one-notch higher than COF'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 IDR and VR are equalized with those of its operating companies and bank, 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. The ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUBSIDIARY AND AFFILIATED COMPANY

The VRs of COBNA and CONA are equalized with COF's VR, reflecting Fitch's view that it is core to COF's business strategy and financial profile.

RATING SENSITIVITIES

IDRS, VRs AND SENIOR DEBT

Fitch believes there may be some incremental upward rating potential for COF's ratings over the long term if COF continues to prudently diversify its loan portfolio to achieve a more balanced mix between consumer and commercial assets.

Further, the ratings could be upgraded one notch over time if COF achieves loan portfolio diversification with solid asset quality performance and improved funding more consistent with peer banks and also maintains current capital levels.

Alternatively, should COF's asset quality metrics deteriorate faster than industry averages and not be manageable within the context of quarterly earnings this could pressure the ratings or Outlook. Additionally, should COF's funding costs accelerate at a rate significantly faster than industry averages this could also potentially result in negative ratings pressure.

Fitch views very favorably management's strategy of transforming COF into an even more digitally driven enterprise as it should help the company maintain its efficiency ratio at better than peer averages. However, to the extent that this also makes the company more reliant on technology than some peers, it could potentially increase some elements of operational risk.

While not anticipated, if a large operational loss were to occur, Fitch would review COF's ratings at that time to determine if a negative action were appropriate.

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.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for COF and its operating companies' subordinated debt and preferred stock are sensitive to any change to COF's 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 IDRs.

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.

SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of COF to reflect support from their ultimate parent, 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.

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

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

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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
Bain Ruhmor, CFA
Director
+1-312-368-3153
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations
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hannah.james@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
Bain Ruhmor, CFA
Director
+1-312-368-3153
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com