HSBC is selling US credit card business to Capital One

HSBC is selling its US credit card arm to Capital One Financial Corp in a $32.7 billion deal as Europe's top bank streamlines its mammoth operations.

It marks the second major deal in the United States for cards specialist Capital One, which said it was paying a $2.6 billion premium over the value of the loans. For HSBC, it is part of a radical overhaul to save $3.5 billion by new chief executive Stuart Gulliver.

'This sale frees up capital and it shows that Stuart Gulliver is executing on the priorities that he's laid out,' said John Wadle, an analyst with Mirae Asset Management.

'The price the business fetched was somewhat disappointing, but it shows that it was a buyer's market. All in, it is still progress because at least they completed this, and it did not take too long,' he added.

Credit card portfolios are valued at a discount or premium to the loans the buyer takes on. Before the financial crisis portfolios could be sold at hefty premiums of over 20 per cent, but more recent sales have been at slim premiums, discounts or have been scrapped.

HSBC's US credit card unit has total assets of about $30.4 billion, primarily its loans to customers which will transfer to Capital One's books.

The deal further unravels HSBC's disastrous $15 billion purchase of US consumer lending firm Household in 2003, which executives now admit was a bad deal as

they have taken massive losses on the sub-prime home loans they took on.

The deal created one of the world's top 10 credit card firms and HSBC said it gave it the scale and expertise to broaden its cards business across the world. Almost half of Household's $105 billion of loans were to credit card customers.

The deal marks the second time Capital One has swooped for unwanted US assets from a retreating European bank in recent months. The McLean, Virginia-based firm said in June it was buying ING's US online bank for $9 billion in cash and stock.

Wells Fargo & Co had also been interested in buying the portfolio, sources have said previously, and Britain's Barclays was also seen as a possible buyer.

The business earned $1 billion in pre-tax profit for the six months to the end of June.

For HSBC, the sale will free up capital when banks are under pressure to bolster their balance sheets, but it will not help Gulliver's task of lifting profitability as it was a high return business.

'Selling a business that makes an annualized 30 per cent return on equity and parking the cash is clearly dilutive,' said Mike Trippitt, analyst at Oriel Securities in London.

HSBC will book a post-tax gain of around $2.4 billion on the sale and boost its consolidated core Tier 1 capital adequacy ratio by 60 basis points to 11.4 per cent.

Capital One will pay the consideration in cash and stock, with HSBC taking up to $750 million of Capital One shares as part of the deal.

'This transaction continues the execution of the strategy we announced at our investor day ... to focus our US business on the international needs of customers in commercial banking, global banking & markets,' Gulliver said in a statement.

The deal is dilutive for earnings, but will cut group risk-weighted assets by up to $40 billion. The proceeds from the sale will be used for repayment of debt among others.

Source : New Age