Capital One's $12 Billion Bet on U.S. Banking

| About: Capital One (COF)

Despite all the talk about weak U.S. financials, Capital One Financial Corp. (NYSE:COF) has struck another deal that strengthens its tie to the troubled sector south of the border. On Wednesday, Capital One announced that it would buy HSBC’s (HBC) $30 billion credit card portfolio in the U.S. for $2.6 billion. (Much like TD’s purchase of Chrysler Financial Corp., the actual deal value is much less than the value of the loans outstanding.)

The transaction comes on the heels of Capital One’s $9 billion purchase of the U.S. online arm of ING Bank.

After both deals, Capital One will have a credit card portfolio worth $85 billion and deposits that total more than $200 billion. Those figures make the company the fourth-largest general purpose credit card issuer in the U.S., the third-largest private-label credit card issuer and the fifth-largest bank as ranked by deposits.

Why would any company want to strength its tie to the U.S. consumer right now? Because savings rates are going up and delinquencies are going down. Since August 2010, the percentage of credit card balances that have been classified as net charge-offs or delinquencies has fallen every single month, from about 9.5 percent to 6 percent for net charge-offs and from about 4.5 percent down to around 3 percent for delinquencies.

As for the deposits, a bigger base lowers Capital One’s cost of funds, making it easier to borrow money. With Americans saving more as they cut debt, that deposit base can reasonably be expected to grow.

To pay for the deals, Capital One will use existing cash and raise new equity and debt. While the HSBC deal will be paid for primarily with cash, $6.2 billion of the ING deal will be paid for in cash and $2.8 billion in stock. Capital One is also expected to raise $2 billion in new stock and $3.7 billion in debt to finance the deals.

The HSBC deal had long been expected after word of multiple bids was reported by the media.

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