HSBC Plunges Into Consumer Lending With Its Household International Deal

HSBC Holdings PLC placed a big bet on the American financial services market when it recently agreed to acquire consumer lender Household International Inc. for $15.3 billion in stock and cash. The deal is the latest in a series of acquisitions of U.S. financial companies by European buyers. The Citizens Financial Group Inc. unit of Royal Bank of Scotland Group PLC acquired Commonwealth Bancorp Inc. for $450 million and Allied Irish Banks PLC merged its U.S.-based Allfirst Financial Inc. unit with M&T Bank Corp. in a $3.1 billion transaction. “There are a number of European banks that we would expect to be interested in picking up U.S. banking assets because they are all looking for increased distribution, and U.S. banks are looking cheap at the moment,” notes Norrie Morris, a banking analyst at Natexis Bleichroeder Inc. With assets of more than $100 billion, about 50 million customers, and 1,400 branches, Household expands the HSBC footprint in the U.S., where it already operates Buffalo-based HSBC USA Inc., which is concentrated in New York state. The lender specializes in auto finance and mortgage lending to low-income borrowers and is one of the U.S.’s largest issuers of credit cards. Upon completion of the deal, HSBC would increase the bank’s North American pre-tax earnings to more than 30% of the group’s total profits. Diversification is attractive to HSBC because it historically has depended on its base in Hong Kong, where it has been able to tap into Asia’s trade flows for most of its earnings. The company has a sizeable presence in Europe as well. HSBC, based in London, is the world’s third-largest financial institution by market capitalization. It has 423 U.S. branches, $56 billion in U.S. deposits, and $90 billion in U.S. assets. New face in sub-prime market The HSBC/Household hookup is raising questions on both sides of the Atlantic because it is the bank’s first major foray into the sub-prime lending market. Some shareholders also have questioned the lack of synergies between the U.S. operations of HSBC and Household. It has not been clear sailing in the sub-prime lending market for Household, and one cause of worry for some HSBC followers is Household’s potential ongoing liability due to the firm’s predatory lending practices. Household recently agreed to pay a fine of $484 million to settle charges that it misled borrowers in several states. The company has also stated that it anticipates another $600 to $800 million charge to align loan-loss provisions after the deal closes. HSBC chairman Sir John Bond stated that Household’s aggressive lending practices are in the past, and that the company’s legal problems made the acquisition cheaper than it otherwise would have been. Some observers note that the acquisition is standard operating procedure for HSBC, which has been known for buying distressed assets at a bargain price and revitalizing them. In Morris’ view, the “short-term metrics” of the deal look good,” but he believes that the deal comes with two big questions: will it close successfully and will it expose HSBC to a higher risk profile with an increased likelihood of volatile earnings? On the first count, deal critics point to continuing ferment among U.S. consumer activists over Household’s lending practices. The addition of a deep-pocketed new owner to the scene might intensify efforts to collect increased damages. In addition, Household’s decision to issue $1.25 billion in long-term bonds shortly after the announcement of the deal has led to speculation. By moving quickly to take advantage of better pricing in the debt markets based on news of HSBC’s bid, Household’s management has seemed overly eager to some observers to lock in some benefit from the deal’s announcement. Shifting view for investors Morris says that HSBC traditionally has been viewed as a defensive stock, but notes that the perception might change with the addition of Household’s more risky sub-prime lending business. Now HSBC must combine its emphasis on rich people with a new set of customers who aren’t rich,” says Morris.