Fed Inquires COF-ING Direct Deal - Analyst Blog

According toThe Wall Street Journal, the Federal Reserve has asked Capital One Financial Corp. (COF) to respond to the queries that are designed to ascertain whether its proposed acquisition of ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING), would create a bank so huge that its failure would be dangerous for the U.S economy.

The Fed has also planned public hearings for the proposed COF-ING Direct deal. These are scheduled to be held on September 20 in Washington, D.C.; September 27 in Chicago and October 5 in San Francisco. The Fed has also stated that it has extended the period for public comment on the agreement till October 12.

In June, COF had announced an agreement to acquire ING Direct in a stock-cum-cash transaction valued at $9.0 billion. COF would receive $92 million in assets, including $40 million of mortgage loans, at the closure of the deal, taking the company’s total assets to about $300 billion.

Additionally, following the acquisition, COF would become the fifth largest bank in the country, in terms of deposits. ING Direct, with about 7.7 million customers in its kitty, would further enhance COF’s market share in the online banking sector.

COF’s Response

Responding to Fed’s queries, COF commented that it is not engaged in any risky business that would lead to systematic risks issues, which the Dodd-Frank Act sought to assess. The company also stated that it would hold only 1.5% of the total deposits in the country, even after the closure of the ING Direct deal.

COF would be adding a large number of jobs to the economy at the time when various financial institutions are resorting to layoffs. Stating about its sound capital position and stable balance sheet, the company affirmed that the ING Direct deal would further de-risk its balance sheet, and provide its customers with better access to banking services.

Reasons for Enquiry

The Fed’s decision to probe into the COF-ING Direct transaction followed from serious concerns that were expressed by Congressman Barney Frank and the National Community Reinvestment Coalition (NCRC). According to them, the deal would limit the consumer access to banking and credit services as well as heighten the risks to the financial system of a new ‘too-big-to-fail’ institution.

Moreover, the Dodd-Frank Act requires the Fed to weigh the systematic risks of the COF-ING Direct deal before giving the regulatory nod.

However, the regulators are not clear as to how they would establish whether a particular financial institution poses a systematic risk to the economy. Additionally, financial institutions with more than $50 billion in assets are subject to stringent capital, leverage and other regulatory requirements.

What is Probed?

The Fed will scrutinize whether the proposed COF-ING Direct agreement will benefit the public at large with better efficiency, increased competition as well as greater convenience. These benefits should outweigh the adverse effects that include unfair competition, unstable banking practices, conflicts of interest and risk to the stability of the U.S. financial system.

Additionally, the Fed would review COF’s financial and managerial resources as well as the performance of COF and ING Direct under the Community Reinvestment Act.

Our Viewpoint

With the addition of ING Direct USA, COF’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 and an online banking franchise with a national reach. Additionally, COF’s credit lending business would greatly benefit from the deposits it would get with the closure of the ING Direct deal.

Currently, COF retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.

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

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