Fitch Affirms Capital One's Long-Term IDR at 'A-'; Outlook Remains Stable

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and short-term IDR of Capital One Financial Corporation (NYSE: COF) and its primary operating subsidiaries at 'A-' and 'F1', respectively. A complete list of ratings is detailed at the end of this release. The Rating Outlook is Stable. Approximately $134.5 billion of deposits, corporate debt, and hybrid equity is affected by these actions.

The ratings affirmation reflects the bank's strong franchise, enhanced product diversification, reduced reliance on the capital markets for funding, and the maintenance of positive earnings, solid liquidity, and stable risk-adjusted capitalization throughout the economic and financial crisis. However, ratings are somewhat constrained by higher overall consumer exposure, relative to other top U.S. banks, given the size and earnings contribution of the credit card business.

COF's managed earnings rose 210.3% in 2010, to $2.7 billion, as a 51.7% decline in provision expense and a lower cost of funds combined to offset higher operating costs, lower non-interest income, and increased losses from discontinued operations due to higher representation and warranty reserves. The decline in provision expense included $2.7 billion of reserve releases due to a 7.9% decline in average loans outstanding and a 69 basis point improvement in the net charge-off rate, which reached 5.18% in 2010. Fitch believes further reserve releases are possible in 2011, as charge-offs in the domestic card portfolio dropped to 5.91% in February 2011, from 7.01% in December 2010. However, lower non-interest income, due to the run-rate impact of the CARD Act and the potential adoption of the Durbin amendment, in addition to higher marketing spend will remain earnings headwinds over the near term.

Deposits continued to expand as a funding source, growing 5.5% to $122.2 billion at year-end 2010. The loan-to-deposit ratio fell to 103.1% from 118.1% in 2009, which is more in-line with peer regional banks. COF did not access the wholesale markets at all in 2010, instead choosing to refinance maturing corporate and ABS debt with deposits. Fitch believes the bank will continue to focus on deposit funding in the near term, although COF is expected to remain opportunistic about its access to the capital markets in order to retain funding flexibility longer term.

COF's liquidity profile remained solid in 2010, with approximately $45.5 billion of available liquidity at year-end, consisting of cash and equivalents, FHLB borrowing capacity, un-pledged available-for-sale securities, and unused conduit capacity. Corporate debt maturities in 2011 include $884 million of parent company notes, which could be repaid with cash and equivalents on hand.

The bank's tangible common equity (TCE) ratio improved 56 basis points in 2010, to 6.68%, as higher earnings and a 7% decline in managed assets overcame a $2.9 billion retained earnings charge from the consolidation of off-balance-sheet assets in January 2010. Regulatory capital ratios remained above well-capitalized thresholds, but are expected to dip in early 2011, following the final phase-in of consolidated loans into risk-weighted assets and an increase in disallowed deferred tax assets. Management expects the tier 1 common equity ratio to fall to 8% in first quarter 2011, from 8.8% at year-end, before rebounding over the balance of the year.

The Stable Outlook reflects Fitch's expectation for consistent earnings generation, continued credit improvement, modest balance sheet expansion, and the maintenance of strong liquidity and solid capitalization ratios.

The generation of operating losses, resulting from significant credit deterioration and/or the need to add meaningful amounts to representation and warranty reserves, declines in tangible capitalization ratios and/or a deteriorating liquidity profile, relative to the size of the bank's balance sheet and risk profile, could yield negative rating action. Conversely, consistent operating performance, a stronger competitive position and earnings consistency in non-card businesses, the maintenance of significant funding flexibility, and an ability to adapt to new regulatory requirements, including the implementation of Basel III, could yield positive rating momentum.

COF is a financial holding company headquartered in McLean, VA. The company offers a diverse set of financial products and had $125.9 billion in managed receivables as of Dec. 31, 2010.

Fitch has affirmed the following ratings with a Stable Outlook:

Capital One Financial Corp.

--Long-term IDR at 'A-';

--Short-term IDR at 'F1';

--Individual at 'B/C';

--Support at '5';

--Support Floor at 'NF';

--Senior shelf at 'A-';

--Subordinated debt at 'BBB+'.

Capital One Bank (USA) National Association

--Long-term IDR at 'A-';

--Short-term IDR at 'F1';

--Individual at 'B/C';

--Senior debt at 'A-';

--Long-term deposits at 'A';

--Short-term deposits at 'F1';

--Subordinated debt at 'BBB+';

--Support at '5'; and

--Support Floor at 'NF'.

Capital One National Association

--Long-term IDR at 'A-';

--Short-term IDR at 'F1';

--Individual at 'B/C';

--Senior debt at 'A-';

--Long-term deposits at 'A';

--Short-term deposits and short-term debt at 'F1';

--Support at '5'; and

--Support Floor at 'NF'.

Chevy Chase Bank, F.S.B.

--Long-term deposits at 'A'.

Capital One Capital II, III, IV, V, and VI

--Trust Preferred at 'BBB'.

Hibernia Corporation

--Subordinated debt at 'BBB+'.

North Fork Bancorporation, Inc.

--Subordinated debt at 'BBB+'; and

--Preferred Stock at 'BBB'.

North Fork Capital Trust II

--Trust Preferred at 'BBB'.

Additional information is available at '[ www.fitchratings.com ]'

For additional credit commentary and analysis on the financial institutions sector, see Fitch's recent Global Financial Institutions Snapshot available through the link below). The report compiles Fitch's views, analysis and tools for the sector in an easily navigable format.

Applicable Criteria and Related Research:

--'Global Financial Institutions Criteria', dated Aug. 16, 2010,

--'Bank Holding Companies', dated Dec. 30, 2009,

--'Rating Hybrid Securities', dated Dec. 29, 2009,

--'Short-term Ratings Criteria for Corporate Finance', dated Nov. 2, 2010.

Applicable Criteria and Related Research:

Short-Term Ratings Criteria for Corporate Finance

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Bank Holding Companies

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493324 ]

Global Financial Institutions Snapshot

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=609947 ]

Global Financial Institutions Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685 ]

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Contributing Sources

Market Wire

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Fitch Affirms Capital One's Long-Term IDR at 'A-'; Outlook Remains Stable