Q3 Collection Issues Hobble HSBC's U.S. Cards Portfolio

HSBC Holdings PLC sought to assure the markets Nov. 9 that modest troubles collecting from borrowers last quarter have not disrupted the pending sale of its U.S. credit cards to Capital One Financial Corp.

"On the disposition of this credit card business, this is a very tight contract; there is no get-out clause," Iain James Mackay, HSBC group finance director, said during a conference call with analysts discussing third-quarter results. "The prospective acquirer … really likes this portfolio."

United Kingdom-based HSBC agreed in August to sell the credit card portfolio to Capital One Financial Corp. for a $2.6 billion premium (see story).  Cap One hopes to use it to lend out deposits it is getting from ING Group's U.S. online bank, which it agreed to buy for $9 billion in June (see story).

HSBC’s $30 billion portfolio saw a "very slight seasonal pickup in delinquencies" that Mackay does not "think is going to scare them away." He did not offer specific figures.

The division remains an asset worth buying given a solid "underlying performance" that is "strongly profitable," Mackay said. The U.S. cards division has a "very attractive cost-efficiency ratio" and "good returns on investment capital in equity," he said.

Mackay blamed the increase in delinquencies on a seasonal softness that HSBC tends to see this time of year in cards and mortgages. The difference between cards and mortgages is that a credit card borrower is "very much focused on maintaining the utility of their" card but may be more inclined to let their home slip into foreclosure, he said.

However, that trend may be changing (see story).

HSBC has announced the sale of 14 assets or business lines this year as it restructures globally. The deals could release $40 billion of risk-weighted assets and more than 13,000 employees. It intends to reinvest that capital in fast-growing markets.

The Cap One cards portfolio deal includes HSBC's MasterCard, Visa, private-label and other credit card operations. It does not include HSBC Bank USA's $1.1 billion credit card program.

HSBC is unloading another big U.S. asset: 195 branches in upstate New York and Connecticut First Niagara Financial Group Inc. agreed to buy for $1 billion in August.

The volatile equity markets has made investors nervous about banks being able to pay for big acquisitions by issuing stock. First Niagara still needs to issue shares for its deal. Capital One's expects to fund its HSBC deal with cash and the proceeds from balance sheet moves involving ING.

HSBC's North American operations, including its U.S. retail bank, reported a loss of $265 million for the quarter ended Sept. 30; it generated net income of $425 million the previous quarter and a net loss of $448 million a year earlier. Lower operating income and higher loan impairment charges and provisions drove the quarterly loss.

The higher losses were in subprime loans in North America the company has been running off since 2009.

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