COF's Outlook Reiterated by Fitch - Analyst Blog

Following the successful completion of the acquisition of HSBC Holdings Plc’s (HBC) U.S. credit card operations, Fitch Ratings affirmed all the ratings for Capital One Financial Corp. (COF). In addition, the rating agency removed the company as well as all its subsidiaries from Rating Watch Negative and maintained a “Stable” outlook.

Moreover, Fitch reiterated Capital One’s long-term Issuer Default Ratings (IDRs) at “A-“ and subordinated debt at “BBB+”.

Capital One wrapped up the HSBC credit card unit deal earlier this month. The company  paid $31.3 billion in cash, including $2.5 billion premium for credit card receivables acquired, to HSBC. The company assumed $28.2 billion of credit card receivables and $0.6 billion in other net assets from this acquisition. According to Fitch, the premium paid for credit card receivables was reasonable.

The abovementioned deal was partially supported by Capital One’s prior acquisition of ING Direct, the online banking unit of Amsterdam-based ING Groep NV (ING) and partly by $2.5 billion of common stock and senior unsecured debt issuance. The company expects its Tier 1 common equity ratio to decline to about 9% from 11.9% at the end of March quarter.

According to Fitch, with the addition of nearly $80 billion of deposits from the ING Direct deal, Capital One would be able to fund the acquired HSBC credit card receivables. Further, the rating agency anticipates the company’s capital ratios to improve through 2012, thereby supporting Fitch’s affirmation of ratings.

Fitch also expects Capital One’s earnings to improve over time. However, there would be downward pressure on the company’s net interest margin (NIM) given the low-yielding mortgage loans from ING Direct’s acquisition. These would be more-than-offset by higher yielding credit card receivables from HSBC’s credit card division, leading to an overall improvement in NIM in the upcoming quarters.

Capital One’s ratings and outlook affirmations by Fitch are just not based on the recently closed acquisitions. The company’s asset quality has been showing significant improvement. In the first quarter 2012, net charge-off (NCO) ratio was 2.04%, improving from 3.66% in the prior-year quarter. Similarly, allowance for loan losses also declined during the quarter to 2.23%. For the next couple of quarters, Fitch expects Capital One’s NCO rate to rise slightly due to the addition of HSBC’s receivables. 

Fitch further stated that unless Capital One announces another large deal or faces integration risk, there would be no change in the company’s outlook and ratings. Also, any large capital deployment (dividend hikes or share repurchases) or increases in nonperforming assets, which would negatively impact the company’s capital ratios, might affect its ratings and outlook.

As of April 30, 2012, Moody’s, the rating arm of Moody's Corp. (MCO), had a “Stable” outlook, while S&P provided a “Negative” outlook on Capital One. The company with its diversified revenue base and stable capital ratios is well positioned to grow organically as well as through acquisitions. Moreover, this rating affirmation would boost investors’ confidence on the stock.

Currently, Capital One retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.

CAPITAL ONE FIN (COF): Free Stock Analysis Report

HSBC HOLDINGS (HBC): Free Stock Analysis Report

ING GROEP-ADR (ING): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

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