Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and short-term IDR of Capital One Financial Corporation (COF) and its primary operating subsidiaries at 'A-' and 'F1', respectively, following the announcement of its proposed acquisition of ING Direct USA (ING Direct). The Rating Outlook is Stable. A complete list of ratings is detailed at the end of this release.
COF has agreed to purchase ING Direct for $9 billion, which will be funded with approximately $2.8 billion of equity and $6.2 billion of cash. Cash proceeds are expected to come from; $500 million of parent company liquidity, $3.7 billion of senior debt issued from the parent, and $2.0 billion of public common stock issuance. At close, ING Group will own approximately 9.8% of COF and will be afforded one board seat. The transaction, which is subject to regulatory approvals in the U.S. and the Netherlands, is expected to close in late 4Q11 or early 1Q12.
The affirmation reflects Fitch's belief that the transaction will have a modest impact on pro forma capital ratios, which will not impede eventual compliance with Basel III guidelines, will provide a good strategic fit, given the sizeable deposit base provided, and will not add to the risk profile of the bank, given the fair value marks on the acquired investment portfolio and the credit adjustment on the acquired mortgage portfolio. Additionally, Fitch does not expect the acquisition to pose significant integration risks, given COF's own sizeable direct deposit platform and its experience with the acquisitions of Hibernia, North Fork, and Chevy Chase.
Fitch had expected COF to build capital in 2011, as credit trends continued to benefit earnings and balance sheet growth remained modest. The bank's Tier I common equity ratio was 8.4% at March 31, 2011, which was in-line with peer averages. Management expects the Tier I common equity ratio to be 9.0% at year-end 2012, pro forma for the acquisition close, which, while below the standalone run rate, is still reasonable for the rating category. Still, Fitch does expect capital ratios to improve from there, in preparation for Basel III requirements. As a result, aggressive capital management, including the implementation of sizeable share repurchase programs and/or sizeable acquisitions, could result in negative rating action.
As part of the purchase, COF will acquire a mortgage portfolio of approximately $40.7 billion, consisting largely of five and seven year adjustable rate mortgages, with an average loan-to-value of 66% and average FICO of 746. A large portion of the portfolio has been originated through broker channels. The credit mark being taken is $1.7 billion, or 4.2% of loans, which Fitch believes appears reasonable given the relative performance of the portfolio. Fitch expects a large portion of this portfolio will run down over time.
COF will also inherit a sizeable investment portfolio with non-agency MBS securities. These securities have declined in value in recent years and are currently being held at fair value on ING Direct's balance sheet. The all-in mark on the portfolio, at close, is expected to be around 60% - 65%.
On the liability side, COF will inherit ING's sizeable deposit base, amounting to approximately $77.7 billion. Fitch believes this is the primary motivation for the purchase, as it provides attractive funding benefits and cross-sell opportunities for COF. The cost of funds, on a consolidated basis, should allow the bank to compete more effectively in other market sectors, particularly prime credit card, which it has yet to be a very active participant, even post CARD Act.
The Stable Outlook reflects Fitch's expectation for consistent earnings generation, continued credit improvement, and modest balance sheet expansion, on a core basis, in addition to the maintenance of strong liquidity and solid capitalization ratios, despite the sizeable acquisition.
Deterioration in the credit performance of existing or acquired portfolios and/or the need to add meaningful amounts to representation and warranty reserves, which negatively impact earnings and capital, in addition to integration issues that detract from core operating performance, could yield negative rating action. Fitch will also consider whether, over time, the ING Direct acquisition performs as expected in terms of deposit attrition expectations, cost synergies, earnings accretion, and the possibility for cross-sell benefits.
Conversely, while positive rating momentum may be limited over the near-term, the development of a strong competitive position and earnings consistency in non-card businesses, the maintenance of significant funding flexibility, and an ability to proactively adapt to new regulatory requirements, including the implementation of Basel III, could yield positive rating momentum longer-term.
COF is a financial holding company headquartered in McLean, VA. The company offers a diverse set of financial products and had $124.2 billion of managed loans at March 31, 2011.
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';
--Senior unsecured and senior shelf at 'A-';
--Subordinated debt at 'BBB+';
--Support at '5';
--Support floor at 'NF'.
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';
--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';
--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'
Applicable Criteria and Related Research:
--'Global Financial Institutions Criteria' (Aug. 16, 2010);
--'Bank Holding Companies' (Dec. 30, 2009);
--'Rating Hybrid Securities' (Dec. 29, 2009);
--'Short-term Ratings Criteria for Corporate Finance' (Nov. 2, 2010).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
Bank Holding Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493324
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Short-Term Ratings Criteria for Corporate Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726
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