NEW YORK/HONG KONG (Reuters) - Capital One Financial Corp (COF.N) agreed to buy HSBC’s (HSBA.L) U.S. credit card arm for $2.6 billion more than the face value of the loans, the latest in a string of acquisitions for the credit card company turned U.S. bank.
The deal will lift profits starting in 2013 for Capital One, whose recent acquisitions include ING Groep’s online U.S. bank, a $9 billion transaction announced in June.
For HSBC, the sale is part of a drive by new Chief Executive Stuart Gulliver to streamline its business and cut costs by $3.5 billion a year.
HSBC will gain $2.4 billion on the sale after taxes, and boost its capital levels. But it will also lose earnings.
The sale further unravels HSBC’s disastrous $15 billion purchase of U.S. consumer lending firm Household in 2003, which triggered billions of dollars of subprime mortgage losses. Executives now say the purchase of Household, which included the credit card business, was a mistake.
Capital One is paying a premium to assets of about 8.75 percent, a low price by historical standards, and its shares rose 1.2 percent in morning trading, while HSBC’s declined 5.8 percent in London. Capital One was one of the few major bank stocks to rise in a difficult session for the sector.
“They paid a lower price than we anticipated, which speaks to what the market is like now,” said Chris Brendler, an analyst at Stifel Nicolaus in Baltimore.
Portfolios often attracted premiums of 10 percent in the 2000s and 20 percent in the 1990s, Brendler said. There are few recent comparable sales to benchmark this one against.
Capital One will raise about $1.25 billion of equity to help bolster its capital position after the deal. Up to $750 million could be through issuing shares to HSBC at $39.23 each, while the rest of the purchase will be made in cash.
Capital One has twice swooped in for unwanted U.S. assets from a retreating European bank in recent months, including the June deal for ING’s ING.AS U.S. online bank, which will give it on some $80 billion of additional deposits.
Bankers viewed Capital One as the most motivated bidder on the HSBC credit card portfolio because it needed assets to invest the ING deposits in.
For HSBC, the sale will free up capital when banks are under pressure to bolster their balance sheets, but it will not help Gulliver’s task of lifting profitability, as the U.S. credit card portfolio was a high-return business.
“Selling a business that makes an annualized 30 percent return on equity and parking the cash is clearly dilutive,” said Mike Trippitt, an analyst at Oriel Securities in London.
HSBC will boost its consolidated core Tier 1 capital adequacy ratio by 60 basis points to 11.4 percent. The bank will use the proceeds from the sale to repay debt, among other purposes.
The U.S. credit card portfolio earned $1 billion in pretax profit in the first half of 2011 and was consistently profitable during the downturn.
The portfolio includes about $9.4 billion of bank-issued credit cards, mainly MasterCard accounts, as well as $12.7 billion of “retail partner” cards, including Saks Fifth Avenue and Neiman Marcus. The remaining $7.6 billion are co-branded cards with parties including General Motors Co.
HSBC last week said it will shed nearly half of its underperforming U.S. branch network, selling 195 branches to First Niagara Financial Group Inc FNFG.O for $1 billion and closing 13 more.
Earlier this month, HSBC said it will cut 30,000 jobs as it slashes costs and retreats from countries such as Russia, Poland and the United States, where it lacks scale or is struggling to compete.
HSBC has been criticized for spreading itself too widely, gathering roughly 95 million customers across 87 markets, and Gulliver is aiming to put focus back on profitability.
The revamp, aimed at sharpening its focus on Asia, reverses a strategy that has been criticized for planting flags around the world.
Capital One shares were up 49 cents at $41.26 in morning trade on the New York Stock Exchange. The KBW bank index .BKX was down 2.5 percent.
HSBC’s London-listed shares were down 5.3 percent at 523.8 pence at 1600 GMT. The shares are down 17 percent this year, outperforming a 25 percent fall by the European banking index .SX7P.
JPMorgan advised HSBC on the deal, while Morgan Stanley, Centerview Partners and Kessler Group advised Capital One.
Additional reporting by Kelvin Soh in Hong Kong and Steve Slater in London; Editing by Ken Wills, Andrew Callus, John Wallace and Steve Orlofsky