The Federal Reserve has announced to hold public hearings on the proposed acquisition of ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING), by Capital One Financial Corp. (COF).
The public hearings for the proposed COF-ING Direct deal 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 get $92 million in assets, including $40 million of mortgage loans, at the closure of the deal. ING Direct, with about 7.7 million customers in its kitty, would further enhance COF’s market share in the online banking sector.
What is to be 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 affects 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 also review COF’s financial and managerial resources as well as the performance of COF and ING Direct under the Community Reinvestment Act.
Reasons for Examination
The Fed’s decision to probe 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 and would heighten the risks to the financial system of a new ‘too-big-to-fail’ institution, as it would lead to the formation of the fifth largest bank in terms of deposits in the country.
Furthermore, the Fed under the Dodd-Frank Act is required to weigh the systematic risks of the COF-ING Direct deal before giving the regulatory nod.
COF’s Stand on the Probe
Though COF is not against the Fed probe, the company stated that it is well capitalized with a stable balance sheet. The ING Direct deal would further derisk its balance sheet, and the consumers would benefit from better access to banking services.
Further, to add value to its argument for the deal, COF asserted that following the acquisition, the combined entity would have about $300 billion in assets, which is substantially lower than the biggest banks in the country. Also, the company would be adding a large number of jobs to the economy at the time when various financial institutions are resorting to layoffs.
Additionally, COF also commented that its credit lending business would greatly profit from the deposits it would get with the closure of the ING Direct deal.
Our Viewpoint
With the addition of ING Direct USA, COF’s clients will benefit over the long term. The combined firm 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. However, if the Fed blocks the deal, COF’s overall growth outlook will be hurt.
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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