© Reuters. The Capital One logo and symbol are displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 21, 2018. REUTERS/Brendan McDermid/Photo by archive
By Anirban Sen and Michelle Price
NEW YORK/WASHINGTON (Reuters) -Capital One, a U.S. consumer lender backed by Warren Buffett, is in advanced talks to buy credit card issuer Discover Financial Services (NYSE:), people familiar with the matter said. A deal combining two of the largest credit card issuers in the United States could be announced as early as Tuesday, sources said.
Discover has a market capitalization of $27.6 billion, while Capital One is valued at $52.2 billion, according to LSEG data.
While the exact size of the alliance was not immediately clear, it has the potential to be the largest acquisition in the US banking sector since Bank of America acquired Merrill Lynch for $50 billion in 2009. It would combine the fourth and sixth acquisitions larger. players in the US credit card market by volume as of 2022, according to Nilson.
The banks did not immediately respond to requests for comment. Bloomberg News was first to report on the deal talks.
The deal is likely to come under intense scrutiny as Democratic President Joe Biden's administration continues to focus on boosting competition in all areas of the economy, including with a 2021 executive order targeting banking deals.
Democratic progressives have long fought against bank consolidation, arguing that it increases systemic risk and hurts consumers by reducing lending, and they have increased pressure on regulators to take a tougher stance on the deals. That pressure intensified following deals aimed at bailing out bankrupt lenders last year, including JPMorgan's purchase of First Republic Bank (MILITARY CADET BODIES:).
“I predict that this deal, if it materializes, will cause significant pushback and receive increased regulatory scrutiny,” Jeremy Kress, a professor at the University of Michigan who previously worked on bank merger oversight at the Fed, wrote in an email to Reuters. Federal. .
“It will be the first major test of bank merger regulation since the Biden Administration's executive order on promoting competition in 2021.”
By assets, Discover was the 27th largest U.S. bank with nearly $150 billion in assets in December, according to Federal Reserve data, while Capital One was the ninth largest with $476 billion in assets. assets. The combined entity would be the sixth-largest U.S. bank, according to Fed data that ranks insured U.S. banks.
The deal would also come at a time of increased attention on credit card fees, which are subject to strict new rules proposed by the Consumer Financial Protection Bureau.
In a report last week, the agency flagged concerns about competition in the U.S. credit card market, noting that during the first half of 2023 small banks and credit unions tended to offer interest rates cheaper than the 25 largest credit card companies at all credit score levels.
SUPERVISION ISSUES
In late 2023, Discover said it was exploring the sale of its student loan business and would stop accepting new student loan applications in February.
The company, led by TD Bank Group veteran Michael Rhodes, has faced some regulatory challenges. In July he disclosed a regulatory review into some credit card accounts misclassified since mid-2007.
In October, Discover said it agreed to improve its consumer compliance and related corporate governance as part of a consent order with the Federal Deposit Insurance Corporation (FDIC).
While oversight issues are generally a hurdle for deals between financial companies, regulators are more receptive when the issues are related to the target company and the acquirer is considered a good actor, according to legal experts.
Discover and Capital One reported drops of 62% and 43% respectively in fourth-quarter profits as banks increased provisions for bad loan losses as rising interest rates increased consumers' risk of defaults. on credit card and mortgage debts.
