HONG KONG HSBC (HSBA.L) is selling its U.S. credit card arm to Capital One Financial Corp (COF.N) in a $32.7 billion (20.1 billion pounds) deal as Europe's top bank streamlines its mammoth operations.
It marks the second major deal in the United States for cards specialist Capital One, which said it was paying a $2.6 billion premium over the value of the loans. For HSBC, it is part of a radical overhaul to save $3.5 billion by new chief executive Stuart Gulliver.
"This sale frees up capital and it shows that Stuart Gulliver is executing on the priorities that he's laid out," said John Wadle, an analyst with Mirae Asset Management.
"The price the business fetched was somewhat disappointing, but it shows that it was a buyer's market. All in, it is still progress because at least they completed this, and it did not take too long," he added.
Credit card portfolios are valued at a discount or premium to the loans the buyer takes on. Before the financial crisis portfolios could be sold at hefty premiums of over 20 percent, but more recent sales have been at slim premiums, discounts or have been scrapped.
HSBC's U.S. credit card unit has total assets of about $30.4 billion, primarily its loans to customers which will transfer to Capital One's books.
The deal further unravels HSBC's disastrous $15 billion purchase of U.S. consumer lending firm Household in 2003, which executives now admit was a bad deal as they have taken massive losses on the sub-prime home loans they took on.
The deal created one of the world's top 10 credit card firms and HSBC said it gave it the scale and expertise to broaden its cards business across the world. Almost half of Household's $105 billion of loans were to credit card customers.
CAPITAL ONE BULKS UP
The deal marks the second time Capital One has swooped for unwanted U.S. assets from a retreating European bank in recent months. The McLean, Virginia-based firm said in June it was buying ING's (ING.AS) U.S. online bank for $9 billion in cash and stock.
Wells Fargo & Co (WFC.N) had also been interested in buying the portfolio, sources have said previously, and Britain's Barclays (BARC.L) was also seen as a possible buyer.
The business earned $1 billion in pre-tax profit for the six months to the end of June.
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 it was a high return business.
"Selling a business that makes an annualised 30 percent return on equity and parking the cash is clearly dilutive," said Mike Trippitt, analyst at Oriel Securities in London.
HSBC will book a post-tax gain of around $2.4 billion on the sale and boost its consolidated core Tier 1 capital adequacy ratio by 60 basis points to 11.4 percent.
Capital One will pay the consideration in cash and stock, with HSBC taking up to $750 million of Capital One shares as part of the deal.
"This transaction continues the execution of the strategy we announced at our investor day ... to focus our U.S. business on the international needs of customers in commercial banking, global banking & markets," Gulliver said in a statement.
The deal is dilutive for earnings, but will cut group risk-weighted assets by up to $40 billion. The proceeds from the sale will be used for repayment of debt among others.
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, it also announced it will axe 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 criticised 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 criticised for "planting flags" around the world.
HSBC's London-listed shares were down 0.7 percent at 541.2 pence at 0830 GMT, in line with the broader bank sector. The shares are down 17 percent in 2011, outperforming a 25 percent fall by the European banking index .SX7P.
(Additional reporting by Kelvin Soh in HONG KONG and Steve Slater in LONDON; Editing by Ken Wills and Andrew Callus)