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Capital One snags HSBC credit card business

By Danielle Douglas,August 10, 2011

FILE - In this May 7, 2009 file photo, a branch office of Capitol One Bank is… (Mark Lennihan/AP )

Capital One Financial announced Wednesday a $2.6 billion deal for the U.S. credit card portfolio of London-based HSBC Holdings, a move that would make the McLean firm the nation’s third-largest issuer of private label, or store branded, plastic.

The deal puts Capital One at the forefront of a niche market it only entered into at the start of this year. The company made its foray into the space in January by picking up the credit card portfolio of Canadian retail conglomerate Hudson’s Bay Co. That deal was followed up in April when J.P. Morgan Chase sold Kohl’s Department Stores’s card portfolio, handing over more than 20 million accounts and the right to issue cards to Kohl’s customers.

After the HSBC sale is finalized, Capital One would issue cards for such retailers as Saks Fifth Avenue, Neiman Marcus and Best Buy.

Analysts said the store-brand credit card business is rebounding, after a precipitous decline during the downturn. Delinquencies and charge-offs have slowed in the past year, while stricter standards on traditional cards have made store cards more appealing to consumers.

Private-label cards typically carry higher interest rates and lower credit lines than general-purpose plastic. Consumers with limited credit options tend to rely on these cards, and because they are unsecured there is always the looming risk of delinquencies and defaults.

“Capital One has proven to be pretty good credit managers through this cycle, and this is a way for them to continue to leverage their card expertise and get some loan growth,” said Donald Fandetti, an analyst at Citi Investment Research.

Issuers are drawn to the high fee income of store cards. Retailers that offer private-label cards tend to have a vast distribution network of stores, allowing issuers to hedge their bets against regional distress.

“You have a captive audience and a strong marketing system because the merchant is incentivized to push your product,” Sanjay Sakjrani, an analyst with Keefe Bruyette & Woods.

What’s more, the shrinking field of private label card issuers “might provide an opportunity for existing players to not only take market share, but share more of the risk with merchants,” Sakjrani said. “Some of the terms were pretty egregious for the issuers prior to the recession.”

Still, there are challenges for Capital One. Delving deeper into the card business against the backdrop of a foundering economy could prove risky, if consumers become more cautious in their spending, said Robert Hammer, head of the credit card consulting firm R.K. Hammer.

Capital One, he added, will have to “put together an attractive feature and benefit menu for cardholders to get them to use that card even more” and runs the risk of “cardholder defection.”

Hammer said the company should be able to manage those issues.

Capital One has been undergoing a larger tranformation than just getting into the private-label credit card business. The nation’s fourth-largest credit card issuer is in the process of turning itself into a mainstream consumer bank and announced a $9 billion deal to buy online bank ING Direct in June.

Capital One’s HSBC deal is slated to close in the second quarter of next year. The lender may raise up to $1.25 billion in equity to help finance the deal and has the option of paying HSBC $750 million in stock, at $39.23 per share.

Capital One anticipates that integration will cost $420 million, but expects to reduce the portfolio’s operating expenses by $350 million. The firm is projecting roughly 25 percent return on its investment in the new portfolio in 2013.