As per the regulatory filing on Tuesday, Capital One Financial Corporation (COF) has wrapped up the HSBC Holdings Plc’s (HBC) U.S. credit card business deal, which was announced in August 2011. This divestiture was a part of HSBC’s long-term strategy to reduce costs up to $3.5 billion by 2013 and cut back retail banking.
As per the terms of the agreement, Capital One paid $31.3 billion in cash, including $2.5 billion premium for credit card receivables acquired, to HSBC. Following the acquisition, the company assumed $28.2 billion of credit card receivables and $0.6 billion in other net assets.
The deal will likely bring high teens GAAP as well as operating earnings per share for Capital One in 2013. Also, an IRR of greater than 20%, return on invested capital of more than 25% and a 400 basis point improvement in return on tangible equity are expected to be the outcome of the transaction in 2013.
HSBC’s U.S. credit card business is a strategic fit for Capital One as it has a proven track record and generates more than half of its revenue from credit cards. The deal will definitely improve the credit card franchise of the company. Consequently, the company is expected to significantly gain from this transaction with low business execution risk.
Moreover, the closing of the transaction will barely have any impact on the customers. As an added advantage, HSBC’s credit card customers will now be able to have access to Capital One’s ATM network, across the country.
For Capital One, this would be the second-largest acquisition completed this year. In February, it closed the acquisition of ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING), in a $9.0 billion stock-cum-cash deal.
Our Viewpoint
Capital One has been growing organically as well as through acquisitions. Since 2005, it has integrated three banks – Hibernia Corporation in 2005, North Fork Bancorporation in 2006, and Chevy Chase Bank in 2009. Moreover, given its sound capital position and stable balance sheet, the company will be able to further de-risk its balance sheet, and provide its customers with better access to banking services.
Currently, Capital One 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.
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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