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Capital One's Ratings Affirmed by Moody's, Outlook Negative

Moody's Investors Service, the rating services arm of Moody's Corporation, downgraded Capital One Financial Corporation’s COF outlook from stable to negative. The company’s senior unsecured debt ratings were affirmed at Baa1. Additionally, the deposit ratings for its subsidiaries were confirmed at A1/negative/Prime-1.

Moody’s believes that exceptional loan growth over the years has led to increased charge-offs particularly in credit card and C&I portfolios, which resulted in a decline in the profitability of the company and increased risk levels.

Per Moody’s, Capital One’s ratings have been reaffirmed because of the strong credit card and deposit business. The credit card business contributes 60% to total pre-tax earnings and provides a major support to the company’s liquidity and funding. However, capital ratios are relatively weak because tangible common equity to risk-weighted assets is roughly 10%.

The affirmation is also the result of strong presence in the retail and commercial banking segment thanks to the acquisitions of three regional banking franchises. It helped Capital One to develop a branch-based retail deposit business.

According to Moody’s, Capital One’s ratings are not going to be upgraded in the near future because of mounting charge-offs and a decline in profitability. However, there are chances of the outlook returning to stable if the company is able to stay competitive with its peers in terms of profitability without increasing the level of risk.

Shares of Capital One have gained 16.6% over the past year, underperforming the industry’s rally of 20.9%. Then again, the company has been witnessing positive estimate revisions of late, reflecting analysts’ optimism about its growth prospects.

For the current year, the Zacks Consensus Estimate has been marginally revised upward in the last 30 days. As a result, the stock currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the finance space are KB Financial Group, Inc. KB, Erste Group Bank AG EBKDY and Stifel Financial Corporation SF, each sporting a Zacks #1 Rank (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Financial has witnessed an upward earnings estimate revision of 11.1% for 2017, over the past 30 days. Its share price has risen 44.4% over the past 12 months.

For Erste Group, over the past 30 days, the Zacks Consensus Estimate has been revised 16.6% upward for 2017. Its share price has increased 40.4% over the past 12 months.

Stifel Financial has witnessed an upward earnings estimate revision of 1.5% for 2017, over the past 30 days. Over the past 12 months, its share price is up 19.2%.

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