By Juan Lagorio

Capital One, whose shares were up 7 percent, is reducing its quarterly dividend to 5 cents a share from 37.5 cents beginning in the second quarter -- only one year after a 14-fold increase in the payout.

Analysts and investors had expected the move after bigger rivals JPMorgan Chase & Co and Wells Fargo & Co took similar actions in recent weeks to preserve capital.

"It makes sense for these companies (banks) to preserve as much capital as possible until we understand very clearly that the trends are positive, not negative. In general, the markets perceive this as positive," said Anton Schutz, president of Mendon Capital. "At the end of the day, their capital ratios look reasonably strong."

Capital One said its pro forma tangible common equity ratio -- which measures a bank's financial strength -- at the end of February was slightly above the 4.6 percent at the end of 2008.

The bank and credit card company, one of the largest U.S. issuers of MasterCard and Visa credit cards, said the dividend cut could increase its TCE ratio by a quarter percentage point.

"We work to anticipate and mitigate risks and to prepare for a range of possible downside scenarios," Chief Executive Richard Fairbank said in a statement.

"Given recent economic data, the broader economic outlook is somewhat weaker than expected and subject to a greater level of uncertainty."

Moshe Orenbuch, an analyst at Credit Suisse, said earnings should move the ratios closer to the long-term target range of 5.5 to 6.0 percent when credit losses moderate.

CREDIT LOSSES

In January, Capital One posted a quarterly loss after writing down the value of its auto finance business and setting aside more money to cover bad loans. It forecast more credit losses this year as debt-burdened American consumers struggle with the highest unemployment rates in 25 years.

Last month, the McLean, Virginia-based company said the annual net chargeoff rate -- a measure of credit defaults -- for U.S. 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 increased to 5.02 percent from 4.78 percent.

American Express -- the largest U.S. credit card company by sales volume -- said its annual net charge-off rate rose to 8.29 percent in January from 7.23 percent in December, while the rate for loans delinquent at least 30 days increased to 5.28 percent from 4.87 percent.

Capital One said on Monday overall credit trends have been roughly in line with expectations through February.

Shares of Capital One have fallen 72 percent this year to their lowest levels since the mid-1990s amid growing concern about mounting credit losses and the need to set aside more money to cover them.

The firm once specialized in credit cards but expanded into branch banking in recent years after acquiring Hibernia Corp and North Fork Bancorp Inc. More recently, the February acquisition of Chevy Chase Bank expanded its presence in the affluent suburbs of Washington. D.C.

The bank's stock was up 59 cents at $8.90 in morning trading on the New York Stock Exchange after rising as high as $9.66 earlier in the session.

"While we see significant value in Capital One's shares at current levels, the uncertainty in the economic and regulatory environment is greater," said Orenbuch, who has a price target of $15 for the stock.

(Reporting by Juan Lagorio, editing by Lisa Von Ahn and John Wallace)