Moody's Upgrades Capital One, Downgrades North Fork Long-Term Ratings
New York, November 28, 2006 -- Moody's Investors Service today upgraded the debt and deposit ratings
of Capital One Financial Corporation (COF) and its subsidiaries (parent
company senior unsecured to A3 from Baa1, bank debt and deposits
to A2/Prime-1 from A3/Prime-2). Moody's simultaneously
downgraded the subordinated debt rating of North Fork Bancorporation to
Baa1 from A3, the Issuer Rating from A2 to A3, and the long-term
deposit ratings of North Fork Bank to A2 from A1, and confirmed
North Fork Bank's short-term deposit ratings at Prime-1.
(Note: the A2 Issuer Rating of North Fork Bancorporation will be
withdrawn, as this entity will be dissolved in conjunction with
the acquisition by COF).
The rating agency also took the following actions related to the bank
financial strength ratings (BFSR) of COF's banking subsidiaries:
Capital One Bank, BFSR confirmed at C; Capital One FSB,
BFSR confirmed at C; Capital One N.A. (CONA,
formerly Hibernia National Bank), BFSR upgraded to C+ from
C. Moody's simultaneously downgraded the BFSR of North Fork
Bank to C+ from B-.
The rating outlook is stable.
The rating action concludes a review which began on March 13, 2006,
and was taken in conjunction with the closing of COF's acquisition
of North Fork Bancorporation on December 1, 2006.
The upgrade of COF is supported by Moody's belief that the potential
benefits to COF's financial profile from the North Fork acquisition
outweigh the potential credit challenges inherent in the acquisition.
In Moody's view the potential benefits include: 1) the acquisition's
consistency with COF's strategic goal to expand its retail banking
business, 2) a significant addition to COF's growing earnings
diversification, and 3) a further diversification of COF's
asset and funding profile and a further reduction in its reliance on securitization
as a percent of total managed funding. Potential credit challenges
include: 1) integration risks related to COF's largest acquisition
to date, 2) an aggressive financial strategy -- including a
significant cash component to the acquisition combined with planned large
share repurchases -- and resulting diminished capital ratios,
and 3) corporate governance aspects including management succession,
director and executive compensation, and board independence.
With the November 2005 acquisition of Hibernia Corp. (Louisiana)
and the acquisition of North Fork (New York), COF's banking
operations are significantly enhanced via the addition of two separate
banking franchises, each with substantial local scale. Moody's
believes these acquisitions enhance COF's customer access,
provide significant new platforms to lever COF's information-based
strategies and brand development initiatives, and strengthen COF's
core consumer and small business franchises.
The addition of North Fork also significantly enhances COF's earnings
diversification via a strong regional banking franchise in the metropolitan
New York area and a solid and significantly uncorrelated earnings stream.
COF forecasts acquisition-related synergies of ~ $275 million
pre-tax coming mainly from systems integration and revenue opportunities
in complementary businesses, to be achieved by 2008 Moody's
believes that such synergies should essentially offset acquisition-related
costs, restoring core profitability (pre-tax pre-provision
income minus preferred dividends minus consumer net chargeoffs as a percentage
of BIS risk-weighted assets plus securitized assets) to historic
levels. COF's ability to generate solid earnings will be
a key rating driver because this will be indicative of the success of
the firm's strategy and integration plans, as well as provide
needed capital to rebuild its equity base.
The acquisition also substantially increases COF's funding diversification
through the addition of North Fork's large retail deposit base,
and reduces COF's reliance on securitization as a funding source.
On a pro forma basis, securitization drops from ~ 46% of
managed funding to ~33%, while deposits increase from 33%
to 42% (and core retail branch deposits from ~ 16% to ~
31%).
These positives are balanced, in Moody's view, by substantial
integration risks, mainly related to key man risks and management
retention issues. North Fork's top two executives have signed
3-year employment agreements, and other key talent is being
provided incentives to remain via an equity retention program.
Given COF's lack of experience in operating regional retail banking
franchises in Louisiana and New York, these key man and other management
retention initiatives will be vitally important.
Regarding financial strategy and capital, COF has stated its intention
to undertake $3 billion of share repurchases in H2 '07 and
H1 '08. If carried out, this, in combination
with the sizable cash component and substantial goodwill generated by
the North Fork acquisition, would diminish COF's capital ratios
significantly. In Moody's view, this is indicative
of an aggressive financial strategy. Management has stated its
intention to rebuild capital ratios over the '07-'08
timeframe (albeit not to pre-existing levels). Moody's
will monitor COF's progress in this regard closely. Given
the risk factors noted above, Moody's believes the maintenance
of a capital cushion is critical, particularly for an active acquirer
such as COF.
Regarding corporate governance, Moody's has been critical
of corporate governance at both COF and North Fork, in the past,
seeing the quality of governance as a potential constraint on both ratings.
COF has made progress in its governance practices in recent years,
particularly around executive (other than CEO) and director pay and control
and risk management structures, but opportunities for further improvements
remain and the merger provides an opportunity for COF to further address
its governance weaknesses.
Particular areas of focus are management succession planning (in Moody's
view, exacerbated by weak succession planning at North Fork) and
board independence (again, in Moody's view, exacerbated
by the North Fork acquisition via the addition of John Kanas to COF's
board). Positively, the board has started to add independent
directors that bring large company experience, which is a sign that
director recruitment practices are improving. The board's
success in pushing for improvements to CEO succession planning,
and in addressing the high and options-heavy pay of CEO Richard
Fairbank, may provide indications of whether the board has,
in fact, become more independent.
CONA and North Fork Bank will remain as separate legal entities post-closing,
and Moody's believes that the credit profile of Capital One Bank
and Capital One FSB will benefit from the statutory cross-guarantee
provisions covering affiliated depositories in the U.S.,
as well as the ability of such affiliates to provide funding to each other
without restrictions. Therefore, Moody's concluded
that the debt and deposit ratings of COF's four deposit-taking
subsidiaries should be at the same level.
Regarding the bank financial strength ratings of the individual entities:
in the case of CONA and North Fork Bank, the two banks are under
a common holding company and are engaged in essentially the same businesses
(i.e. both are substantial regional banking franchises with
a combination of retail and commercial banking operations). Given
this, the planned re-branding of the North Fork franchise,
planned synergies from integration of non-customer contact areas,
a commonality of risk related to management succession (e.g.
a new head of retail banking for COF's banking division is being
sought), and a contemplated restructuring of COF's banking
organization pursuant to which the two entities may become even more closely
aligned, Moody's concluded that the BFSR of the two entities
should be at the same level of C+. The confirmation of the
C BFSR for Capital One Bank and Capital One FSB reflects the distinctness
of their operations and the limited overlap between them and sister companies
CONA and North Fork Bank. Moody's also believes that the
relatively narrow nature of their operations (e.g. Capital
One Bank remains a monoline credit card bank) and less favorable funding
profile (e.g. lack of branch-based deposit funding)
are suggestive of a lesser degree of intrinsic financial strength.
The following is a partial listing of the major rating actions taken by
Moody's.
Ratings upgraded include the following:
Capital One Financial Corporation --
-senior debt to A3 from Baa1
Capital One Bank --
-short-term deposits to Prime-1 from Prime-2
-long-term deposits to A2 from A3
Capital One Bank FSB --
-short-term deposits to Prime-1 from Prime-2
-long-term deposits to A2 from A3
Capital One, N.A. --
-short-term deposits to Prime-1 from Prime-2
-long-term deposits to A2 from A3
-bank financial strength rating to C+ from C
Capital One Capital I --
-preferred stock to Baa1 from Baa2
Capital One Capital II --
-junior subordinated debt to Baa1 from Baa2
Capital One Capital III --
-junior subordinated debt to Baa2 from Baa3
The following ratings were confirmed:
Capital One Bank --
-bank financial strength rating at C
Capital One FSB --
-bank financial strength rating at C
North Fork Bank --
-short-term deposits at Prime-1
The following ratings were downgraded:
North Fork Bancorporation --
-issuer rating from A2 to A3
-subordinated debt to Baa1 from A3
North Fork Bank --
-long-term deposits to A2 from A1
-bank financial strength rating to C+ from B-
North Fork Capital Trust I --
-preferred stock to Baa1 from A3
COF, headquartered in McLean, VA, is a bank holding
company and the fourth largest U.S. bank credit card issuer.
COF reported $143.5 billion in managed assets (including
securitized receivables) at September 30, 2006.
New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Curt Beaudouin
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
