HSBC recently announced that it would sell its U.S. credit card portfolio to Capital One for $2.6 billion, handing over subprime loans and retail credit cards that total $30 billion. This deal comes on the heels of another major Capital One purchase: the young bank bought ING Direct in July.
The move has been hailed as a strategy by Wall Street: in a week when bank stocks were clobbered, Capital One’s rose 3.5%. The two deals, taken together, represent a deft adaptation to the post-2008 lending and legislative environment. Investors and regulators want banks to grow, but even historically low interest rates have met a tepid response from debt-burdened consumers. ING is entirely online, allowing Capital One access to deposits without the traditional costs of a brick-and-mortar bank. And although consumers are paying back more loans than they are taking out, the high interest rates on credit cards for bad credit and retail credit cards make for high returns.
What will happen to HSBC customers?
Former ING customers were not happy with Capital One’s acquisition. They feared that the bank’s ethos of no-frills, low-cost, customer-oriented service wouldn’t survive a takeover. The Southwest Airlines of direct banking did have to lay off a few workers, but for the moment, the accounts are unchanged.
At the moment, both lenders are keeping quiet about what will happen to Household and Orchard Bank customers. Capital One Secured card is a direct competitor to the HSBC subsidiaries’ offerings, so one or the other might be on its way out. While Capital One is more flexible and generous toward subprime borrowers than most U.S. banks, HSBC distinguished itself as one of the best options. The single assurance that consumers received: no changes would be made until the sale closes in 2012.
Capital One cashes in on foreign banks’ misfortunes
Capital One acquired HSBC’s high-return portfolio at a very low price, giving it greater access to the subprime and retail markets. HSBC’s holdings include Household Bank and Orchard Bank, whose easy qualification standards and relatively low interest rates attract those with less-than-stellar credit. Faced with criticism that it is spread too thin, HSBC is trying to focus on high-growth markets like Latin America, Asia, and the UK and to jettison its less lucrative businesses in the U.S. and Eastern Europe. Capital One made tentative steps into the retail credit card market by adding Kohl’s credit cards to its portfolio, and offers secured credit cards that compete with the Household Bank and Orchard Bank offerings. Now, it can expand further into these slightly riskier but more lucrative areas.
The U.S. bank was able to capitalize on ING’s difficulties as well. Hit hard by the global financial crisis, the bank received a 10 billion euro emergency capital injection from the Dutch state. As part of the agreement, the European Commission stipulated that ING must sell its online bank. Capital One paid a hefty premium for the online bank’s accounts, but promised that it would soon recoup the losses by trimming costs. Analysts predicted that Capital One would use the extra cash to finance the purchase of more credit card holdings. And so it did: the bank can use ING’s deposit accounts to fund more lending, paying unusually low yields, and use the deposit accounts to make loans to former HSBC customers.