Capital One, the former credit card monoline turned full-service bank, has announced it will slash the company’s quarterly dividend by 87 percent from $0.375 per share to $0.05 per share from the second quarter of 2009.
Capital One estimates the dividend reduction will preserve more than $500 million in capital on an annual basis, money it badly needs as it struggles to stay afloat amid a rising wave of credit losses in the US.
Capital One has taken what is being viewed as a pre-emptive move, citing recent economic data that indicates a weakening economic outlook which is subject to a greater level of uncertainty.
However, the company stressed that overall credit trends within its own portfolio have been roughly in-line with expectations throughout February, even though it acknowledges it is in the middle of one of the most challenging economic environments for decades.
Capital One said its pro forma tangible common equity (TCE) ratio at the end of February was slightly above 4.6 percent at the end of 2008. It added that the dividend cut was equivalent to approximately 25 basis points of its TCE, which measures a bank’s financial strength.
“We are moving to reduce future dividends because in today’s unprecedented economic and market conditions, our highest priority is managing our balance sheet to maintain its considerable strength and resilience,” said Capital One chairman and CEO Richard Fairbank.
“As always, we work to anticipate and mitigate risks, and to prepare for a range of possible downside scenarios. Since the downturn intensified in 2008, we have taken additional steps to reduce the risk of our balance sheet, growing liquidity and low-risk investments and dramatically raising our allowance coverage ratios.”
Gary Perlin, Capital One’s chief financial officer, said: “We do not need to reduce our dividend in order to meet any minimum capital requirements.
“Our balance sheet remains a source of considerable strength today. Our readily-available and committed liquidity position at the end of February stood at $45 billion, reflecting the liquidity benefits of closing the Chevy Chase acquisition.”
Capital One’s move was not unexpected, given that rivals JPMorgan Chase and Wells Fargo took similar steps in recent weeks to preserve capital.
In January, Capital One posted disappointing quarterly results and forecast more credit losses in 2009 as US consumers struggle with recession and the highest unemployment rate in 25 years. Soon afterwards, it stated that annual net charge-off rates for US credit cards had risen to 7.82 percent in January from 7.71 percent in December, while the rate for loans at least 30 days delinquent had increased from 4.78 percent in December to 5.02 percent in January.
According to Moshe Orenbuch, an analyst with Credit Suisse First Boston, the dividend cut is a prudent measure and reduces the risk of a dilutive capital raise.
“At the end of February, Capital One’s pro-forma TCE ratio was slightly above the year-end level of 4.6 percent,” Orenbuch said.
“A reduced dividend coupled with a shrinking asset base should allow the company to organically increase its TCE ratios in 2009. When losses moderate, earnings should move ratios closer to the long-term targeted range of 5.5 to 6 percent.
“Credit quality remains the largest risk factor,” Orenbuch added. “We expect continued worsening of credit in all asset classes throughout 2009.
“Credit card losses are forecasted to deteriorate faster than the industry throughout 2009 as a result of implementation of minimum payment guidelines.”