NEW YORK, July 22 /PRNewswire/ -- Fitch IBCA assigns its 'BBB+' rating to Capital One Financial Corp.'s (COF) offering of $200 million 7.13% senior notes due August 1, 2008. The issuance is part of COF's shelf registration, which is rated 'BBB+'.

In only a few years, Capital One has emerged as one the largest issuers of credit cards in the U.S. This achievement reflects the company's growth orientation and use of sophisticated modeling techniques to identify consumer preferences, design appropriate products, and market selective offers to niche segments. Credit cards remain COF's primary focus, but management holds the view that the firm is in the business of managing information with the objective of developing business opportunities. In this context, the credit card is a superior product in that it lends itself to the application of sophisticated statistical modeling techniques. Management is also utilizing similar modeling capabilities to develop a series of products including niche credit cards, consumer loans and non-lending services.

While Capital One has achieved considerable success in recent years, it is not immune to the problems currently affecting the credit card industry, including excessive and at times irrational competition, coupled with an increasingly leveraged consumer. The former has a direct impact on industry profitability, while the latter has exaggerated the normal loss trend. Accordingly, COF has experienced erosion in asset quality and a corresponding rise in credit expense since becoming a public company. However, revenue growth has been more than sufficient to offset the drag.

As a result, return on average managed assets has remained relatively stable and return on common equity (ROCE) has stayed in the 20-24% range. In comparison to major card issuing peers, COF's earnings performance ranks quite well, despite generally higher delinquency and loss rates. Fitch IBCA attributes this relationship to the maintenance of acceptable risk adjusted spreads.

Fitch IBCA's assessment of COF takes into consideration the recency of 1) the company's position as a stand-alone company, 2) the strategic shift in market plans toward higher risk customer segments, and 3) secular changes in the credit card industry. At the same time, Fitch IBCA believes management is following a prudent course in configuring the company's funding base and capital structure. In addition, Fitch IBCA recognizes product decisions are based on a ``bottom-up'' approach that takes into account capital allocation, pricing, and loss rate assumptions. This process is further supported by extensive testing before a product is introduced and ongoing testing afterwards. Fitch IBCA also derives comfort in management's use of leading edge technology to support growth initiatives and monitor the portfolio's performance trends.