Capital One-HSBC Deal Under Review - Analyst Blog
26 November 2011 - 4:49AM
Zacks
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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