COF Capital One Financial Corporation

It’s a ‘YES’ for Capital One Financial Corporation’s (COF) plan to acquire ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING). On Tuesday, the Federal Reserve finally approved the deal. The consent removes the doubt that the acquisition would create the next ‘too-big-to fail’ banking institution.

In June 2011, COF had announced that it would acquire ING Direct in a stock-cum-cash transaction. As per the terms of the deal, the company would pay $6.2 billion in cash and $2.8 billion in stock to ING Groep. For this, the company will offer 55.9 million shares to ING Groep at $50.07 per share, making ING Groep the largest single shareholder in COF. Now, the company is expected to close the deal over the next few days.

This deal will enable COF to move to the fifth position from the present eighth, in terms of deposits in the U.S. Additionally, ING Direct, with about 7.7 million customers in its kitty, would further enhance the company’s market share in the online banking sector.

Reasons for the Delay in Approval

Following the announcement of the agreement in June 2011, serious concerns were raised by Congressman Barney Frank and the National Community Reinvestment Coalition (NCRC) against COF-ING Direct deal. According to them, the deal would limit the consumer access to banking and credit services as well as would heighten the risks to the financial system of a new ‘too-big-to-fail’ institution.

The COF-ING Direct deal became the first acquisition agreement that was reviewed by the Fed under the provisions of the Dodd-Frank Act. The Fed, under the Dodd-Frank Act, was required to weigh the systematic risks of the deal before giving it the regulatory nod.

Hence, the Fed held three public hearings on the proposed acquisition during September-October 2011. The Fed had also extended the period for public comment on the abovementioned agreement.

Reasons for the ‘YES’

The Fed thoroughly analyzed the COF-ING Direct deal and scrutinized whether the proposed agreement would benefit the public at large with better efficiency, increased competition as well as greater convenience. These benefits should outweigh the adverse affects that include unfair competition, unstable banking practices, conflicts of interest and risk to the stability of the U.S. financial system.

The Fed also took into consideration various factors including complexity and size of both the companies, their regulatory capital ratios before and after the completion of the agreement, asset quality and inter-relation between the companies and the economy as a whole. Furthermore, the Fed also considered the other pending COF agreement relating to the acquisition of HSBC Holdings Plc’s (HBC) U.S. credit card unit.

The Fed stated that COF has a record of successfully integrating large companies with its business operations. Since 2005, the company has integrated three banks – Hibernia Corporation in 2005, North Fork Bancorporation in 2006, and Chevy Chase Bank in 2009.

Moreover, while building the case in its favor, COF guaranteed $180 billion in community loans and investments over the next 10 years. This includes $28.5 billion worth of home lending to borrowers, who are characterized as low-and moderate-income group. In addition to all these, the company announced its plans to hire workers in Delaware.

However, the approval came with a set of conditions. The Fed has asked COF to restructure its risk-management framework and lending, and debt-collection practices. The company has 90 days to fulfill these conditions.

In Conclusion

Following the completion of COF-ING Direct deal, COF’s shareholders and clients will benefit over the long term. The combined entity will create a valuable banking franchise to take advantage of a large number of branch banking in attractive high-growth markets and to gain from an online banking franchise with a national reach.

Additionally, COF’s credit lending business would further get a boost from nearly $80 billion of deposits that the company is about to receive with the closure of the ING Direct deal. Moreover, given the sound capital position and stable balance sheet, the company will be able to further de-risk its balance sheet, and provide its customers with better access to banking services.

Currently, Capital One retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.

 
CAPITAL ONE FIN (COF): Free Stock Analysis Report
 
HSBC HOLDINGS (HBC): Free Stock Analysis Report
 
ING GROEP-ADR (ING): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research