Capital One-HSBC Deal Under Review - Analyst Blog

Earlier this week, the Office of the Comptroller of the Currency (OCC) announced the recommencement of the comment period on Capital One Financial Corp.’s (COF) proposed deal to acquire HSBC Holdings Plc’s (HBC) U.S. credit-card business. This decision was taken following consumer and housing advocates’ opposition to the agreement.

Though the original comment period on the deal ended on November 7, the OCC stated that now it would take public responses through December 19. This was decided after the National Community Reinvestment Coalition (NCRC) and other consumer groups asked the OCC to extend the comment period.

Additionally, the NCRC and consumer group coalition is requesting for a public hearing of the Capital One-HSBC transaction. They want the public hearing to be held in at least five major cities, thereby allowing greater input from across the country. However, the OCC is yet to decide on the public hearing proposal.

The $33 billion deal to acquire HSBC’s U.S. card unit was announced by Capital One in August. The transaction is expected to be completed by the second quarter of 2012 and is likely to bring high teens GAAP as well as operating earnings per share for Capital One in 2013.

What to Investigate?

The OCC will scrutinize whether the proposed Capital One-HSBC agreement will benefit the public at large with better efficiency, increased competition as well as greater convenience. These benefits should outweigh the adverse effects including unfair competition, conflicts of interest and risk to the stability of the U.S. financial system.

Reasons for the Investigation

Some serious concerns expressed by the NCRC coalition led to OCC’s decision to investigate the Capital One-HSBC deal.  According to them, the deal would intensify Capital One’s focus on credit card business, thereby heightening the risks to the financial system of a new ‘too-big-to-fail’ institution.

Capital One’s Response

Though Capital One stated that the HSBC deal would benefit its clients and investors, it appreciated the extension of the comment period. When various financial institutions are opting for layoffs, Capital One would be adding more jobs to the economy. Stating its sound capital position and stable balance sheet, the company affirmed that the HSBC deal would further de-risk its balance sheet.

Similar Action Before

This is not the first time that Capital One’s acquisition is reopening for public comments. Earlier in August, the Federal Reserve had extended the comment period for responses to the acquisition of ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING), following the concerns expressed by consumer and housing advocates. The concerns raised at that time resembled issues related to the deal.

In Conclusion

With the addition of HSBC U.S. Card unit, Capital One’s clients will benefit over the long term. The combined entity will create a valuable banking franchise to take advantage of a large number of branch banking in attractive high-growth markets. Additionally, the acquisition will enable Capital One to drive shareholder value.

Currently, Capital One retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

CAPITAL ONE FIN (COF): Free Stock Analysis Report

HSBC HOLDINGS (HBC): Free Stock Analysis Report

ING GROEP-ADR (ING): Free Stock Analysis Report

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