STT State Street Corporation

On Monday, Fitch Ratings announced that it has maintained its investment grade ratings on Capital One Financial Corp. (COF) and its core operating subsidiaries. The rating agency stated the company’s significant earnings growth and improving asset quality as the main reasons for the affirmation.

Fitch reiterated Capital One’s long-term issuer default rating (IDR) at “A-” and its short term IDR at “F1”. Fitch also confirmed the company’s subordinated debt rating at “BBB+”. Additionally, the rating agency maintained a “Stable” outlook on the company.

The rating agency commented that its credit ratings reflect Capital One’s improved product diversifications, less dependence on capital markets for funding, along with strong and stable liquidity levels. Furthermore, the rating agency stated that the company’s positive earnings throughout the financial crisis also factored into the credit ratings.

Fitch also stated that “Stable” outlook on Capital One is based on its consistent earnings growth, further enhancement of credit quality, maintenance of strong capital ratios as well as marginal balance sheet expansion.

Fitch anticipates that Capital One would continue to focus on deposit growth as a source of funding in the near term. But, over the longer term, the company is likely to remain opportunistic regarding its access to capital markets in order to keep funding flexible.

However, Fitch has cautioned that Capital One’s ratings are rather inhibited by its credit card business, which is a major contributor to the company’s profit. The credit card business makes the company more dependent on consumers as compared with any other large U.S. banks.

Furthermore, the rating agency believes that the impact of the CARD Act and the impending effects of the Durbin Amendment will likely lead to lower non-interest income in the near term. This, along with higher operating expenses, would remain near-term earnings headwinds for Capital One.

Along with some U.S. banks such as State Street Corp. (STT) and BB & T Corp. (BBT), Capital One is also expected to announce its first quarter 2011 results on April 21.

Over the last 30 days, 12 of the 20 analysts covering Capital One have raised their first quarter 2011 estimates, while two have downgraded their estimates. In these 30 days, the Zacks Consensus Estimate for Capital One’s first quarter 2011 earnings has increased from $1.14 per share to $1.48 per share.

Currently, Capital One retains a Zacks # 2 Rank, which translates into a short term ‘Buy’ rating. However, considering the fundamentals, we maintain our long-term “Neutral” recommendation on the stock.

 
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