Following the successful completion of the acquisition of
HSBC Holdings Plc
) U.S. credit card operations, Fitch Ratings affirmed all the
Capital One Financial Corp.
). In addition, the rating agency removed the company as well as
all its subsidiaries from Rating Watch Negative and maintained a
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
The abovementioned deal was partially supported by Capital One's
prior acquisition of ING Direct, the online banking unit of
ING Groep NV
) 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
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
), 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
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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