HSBC pays £8bn for US loans giant

HSBC Holdings yesterday launched the biggest deal on the London market so far this year when the bank agreed to pay $13bn (£8bn) for Household, America's second-largest consumer credit company.

The all-share deal expands HSBC's presence in the key United States finance market but increases its exposure to a slowing economy where levels of household debt levels are already high.

The acquisition increases HSBC's risk profile as Household's principally provides loans, mortgages and credit cards to so-called "sub-prime" consumers with lower incomes and patchy credit histories.

Household has also been at the centre of controversy in its home market where it has agreed to pay $484m to cover claims of overly aggressive selling of its products.

The deal met with a mixed reaction in the City, where HSBC shares fell 4 per cent to 679.5p. America has often proved a graveyard for UK banks as Midland Bank, now owned by HSBC, found with Crocker Bank in the 1980s.

"Over 75 per cent of all return on equity is derived from the United States, so it's where you have to be if you want to be a global player," said Mark Durling of Brewin Dolphin Securities.

But another analyst added a note of caution, saying: "Given the state of the US economy and how indebted US consumers are, there are risks."

HSBC has struck at a time when Household's shares have been languishing at seven-year lows. However, with a weakening economy and uncertainty over a possible war with Iraq, the outlook is mixed.

Sir John Bond, HSBC's chairman, moved to reassure the markets when he said: "The American consumer is at the heart of the world economy. There will still be people paying back their mortgages and using their credit cards [in spite of] whatever is going on in the geopolitical scene. We believe that the American consumer will continue to consume."

Based in Chicago, Household was founded in 1878 and has 53 million customers in the US across 46 states. It is the 11th largest credit card issuer in the US and owns HFC Bank in the UK. The business targets households with mid-range income of $45,000 to $60,000. More than a third of its customers are considered below "prime" in that they are higher credit risks though they also pay higher interest rates.

The business made profits of $1.8bn last year but has been badly affected by accusations of predatory selling. It had to restate its accounts after the Enron affair and later parted company with its auditor, Arthur Andersen.

In October Household reached a nationwide agreement to settle questionable sales practices. However, the deal has not yet been finalised and only covers the 20 states that have brought charges. A risk also remains of civil litigation, meaning the full liability is unknown. However, HSBC said consumers seeking part of the settlement would have to waive any rights to civil action.

HSBC said the takeover would enable it to sell Household's credit services through its own banking network. HSBC also plans an international roll-out of the Household model but has not disclosed the costs.

The London-based bank said the deal would give it greater geographic balance, with US profits rising from 12 per cent of total profits to 30 per cent.

Cost savings have not been detailed but HSBC said there would be savings from lower cost of funding for the Household business as well as savings in IT and administration. The deal is expected to be earnings enhancing in 2003.

HSBC has agreed to pay a break-fee of $550m if the deal is not completed. It is also taking a one-off provision of $600m to $800m to adjust loan-loss charges. Under the terms of the deal, Household shareholders will receive 2.675 HSBC shares.