HSBC yesterday struck a deal to sell its card and retail services business in the US to Capital One Financial for up to $33 billion.
With the sale, HSBC intends to exit its monoline US credit card and private-label credit card business. The assets being sold include gross customer loan balances and real estate. Included in the sale are HSBC’s MasterCard, Visa, private-label and other credit card operations, but not HSBC’s own $1.1 billion credit card programme, as the UK-listed bank intends to continue to offer credit cards to its customers in the US.
The assets HSBC is disposing of were valued at $30.4 billion as of June 30, which includes $29.6 billion of customer loan balances. The pre-tax earnings of the business being sold was $2 billion for the calendar year ended December 2010 and $0.6 billion for the previous year.
The deal has been struck at a premium of 8.75% to customer loan balances, which based on June 30 numbers, suggests Capital One will pay HSBC $32.7 billion, including a premium of approximately $2.6 billion. The actual amount payable will be determined based on agreed final closing statements. Capital One can pay HSBC either in cash or a combination of cash and equity. The buyer and seller have agreed that Capital One will issue not more than 19.1 million equity shares at a price of $39.23 per share for a maximum value of $750 million.
“This transaction continues the execution of the strategy we announced at our Investor Day on May 11 to focus our US business on the international needs of customers in commercial banking, global banking and markets, retail banking and wealth management and onshore global private banking,” said Stuart Gulliver, HSBC group chief executive, in a written statement. “Although dilutive in the short term, this transaction will reduce [HSBC] group risk-weighted assets by up to $40 billion which, together with an estimated post-tax gain on sale of $2.4 billion, will allow capital to be redeployed over time.”
Gulliver had announced on May 11 that a strategic review of the card and retail services business in the US was underway as it did not fit HSBC’s strategy. In the US, HSBC intends to focus on commercial banking, global banking and markets, retail banking and wealth management, and an onshore private banking business providing investment opportunities in emerging markets. Last week, while announcing results, Gulliver emphasised the need for HSBC to shore up capital to ensure it is compliant with the enhanced requirements under Basle III.
HSBC was advised on the US deal by J.P. Morgan.
Capital One, which is a Virginia-based financial holding company with $126.1 billion in deposits and $199.8 billion in total assets outstanding as of June 30, was advised by Morgan Stanley, Centerview Partners and The Kessler Group with Wachtell, Lipton, Rosen & Katz, and Morrison & Foerster as legal advisers.