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Weighing Capital One’s Capital Greatest Strengths after 4Q15

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Capital One’s capital ratios

Since the financial crisis of 2009, there has been intense pressure on US Banks (VFH) to raise capital levels to meet minimum requirements. Since then, most major banks have worked hard to reduce leverage and fortify their balance sheets.

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Understanding leverage ratios

Leverage ratios are measures of the quality of a bank’s assets. Leverage ratios are defined as the proportion of a bank’s Tier 1 capital ratio against its total assets. Basel III provides the internationally agreed-upon standard, although a number of national authorities have opted for even stricter rules over the years. The Basel III Capital Adequacy framework has thus introduced a new ratio for controlling excess leverage among major banks, and this measure expects banks to maintain a leverage ratio of at least 3% at all times.

Capital One Financial Corporation (COF) continued to work on maintaining strong capital ratios and liquidity during the fourth quarter of 2015. For the period ending December 31, the bank’s standardized Common Equity Tier 1 ratio computed (according to Basel III norms) was 11.1%. Meanwhile, the Tier 1 risk-based capital ratio was 12.3% compared to 13.4% at the end of the previous quarter. The firm’s Tier 1 leverage ratio was 10.6%, which has helped to make the bank’s assets less vulnerable to global downturns.

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Capital One’s liquidity coverage ratio

As of December 31, the bank was well above the fully phased-in liquidity coverage ratio (LCR) requirements. Liquidity coverage ratio rules are designed to ensure that financial institutions have necessary liquid assets to meet short-term liquidity requirements. Major banks’ liquidity coverage ratios started to be regulated and measured in 2011, but the full 100% minimum wasn’t enforced until 2015.

ETF exposure of Capital One

Investors seeking diversified exposure to the US Banking sector might consider investing in the Financial Select Sector SPDR ETF (XLF) or the Vanguard Financial ETF (VFH). Capital One Financial makes up 0.85% of the total holdings of XLF. Peers like Bank of America Corporation (BAC), American Express Company (AXP), Mastercard (MA), and Visa (V) are well represented in these ETFs as well.

Continue to the next and final part of this series for a look at Capital One’s share price performance and valuation after 4Q15.

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