HSBC takes slice of American pie

HSBC signalled a major expansion in the US today, paying $14bn (?8.8bn) for Household International, a leading lender to people with poor credit.

HSBC, Europe's biggest bank, said the move would give it a national network for consumer lending in the key US market, as well as improving the geographic spread of its earnings and increasing its consumer assets.

The deal is a bold step for HSBC, which has built up a reputation for steady and conservative management in what is a tough climate for the financial services industry. In the past the US has proved to be a graveyard for the ambitions of European commercial and investment banks.

HSBC shares fell almost 4% to 679.5p amid concern over a move into the US at a time when the world's largest economy is faltering, with consumer debt levels high. HSBC will issue more shares as part of the acquisition, contributing to pressure on HSBC stock.

Based in Illinois, Household started out as a jewellery store in 1878 and now has 50 million customers. It operates 1,400 branches in the US and 300 in Canada and Britain. The second consumer finance firm in America after Citigroup, Household is a leading player in the so-called subprime market, catering to people who have problems borrowing from established high street banks - typically the less well-off.

Subprime lending is one of the fastest growing areas of the financial services industry, but the practice has come under increasing scrutiny from regulators. Household has been named in several lawsuits and last month agreed to pay $484m to settle claims that it engaged in "predatory" lending by charging poorer borrowers excessive interest rates on loans.

At the time, the Iowa attorney general, Tom Miller, said the settlement was the biggest ever in a predatory lending case. HSBC said it considered the settlement "conclusive".

"It was a far-reaching settlement," said HSBC chairman Sir John Bond, who defended the move into the subprime market. He pointed out that the US subprime market grew 13.4% in recent years, compared to 2% growth in the national mortgage market.

"These are people who need banks," he said. "We know of people aged 40-50 in every country, but we've never had the technology or skill set to do what Household does."

The credit rating agency Moody's confirmed its high A1 rating for HSBC bonds, but cautioned that the acquisition represented a "material diversification" away from HSBC's traditional retail and commercial banking businesses.

"The group clearly has the financial resources to manage this new line of business, but integrating Household in the overall business culture of the group remains an inherent challenge," Moody's said.

Analysts also pointed to the risky timing of the move.

"Given the state of the US economy and how indebted US consumers are, there are risks," Euan Stirling, a fund manager at Standard Life Investments, told Reuters.

But Sir John downplayed these risks, remaining upbeat about prospects for the US economy. "There will still be people paying back their mortgages and using their credit cards [in spite] of what is going on in the geopolitical scene. We believe that the American consumer will continue to consume," he said.

The deal is expected to have implications for the UK credit card market, where Household has an estimated 2.5 million cardholders. In recent years HSBC has been struggling to maintain its position in the UK credit card market; at the end of 2001 it ceded fourth place to HBOS.

"The addition of Household's credit cardholders will certainly bolster its [HSBC's] flagging performance," said Helen Smith, an analyst with Datamonitor, the business information company. "On a more general note, the deal points to the continuing trend of consolidation in the UK credit card market."