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Capital One Financial will acquire Discover Financial Services for $35 billion, in a deal that brings together two of the nation’s largest lenders and credit card issuers.
NEW YORK — Capital One Financial will acquire Discover Financial Services for $35 billion in a deal that brings together two of the nation’s largest lenders and credit card issuers.
Discover Financial shareholders will receive approximately $140 worth of Capital One stock, according to a news release issued by the companies on Monday. Discover stock closed Friday’s trading at $110.49.
Virginia-based Capital One had total assets of $471.4 billion and deposits of $346 billion as of the third quarter, making it the 12th largest bank in the U.S., according to S&P Global. Discover, based in Lake County, ranked 33rd with $143.4 billion in assets and $104 billion in deposits.
Both companies are benefiting from the increased use of credit cards by Americans. Americans held $1.13 trillion in credit cards in the fourth quarter of 2023, and total household debt rose by $212 billion, an increase of 1.2%, according to the latest data from the New York Fed.
As card balances increased, consumers began paying higher interest rates. The average interest rate on bank credit cards is about 21.5%, the highest since the Federal Reserve began tracking the data in 1994.
At the same time, the two lenders are being forced to increase their reserves to guard against the possibility of increased defaults by borrowers. After more than two years of battling inflation, many low- and middle-income Americans have used up their savings, increasingly depleted credit card balances and taken out personal loans.
The additional reserves are weighing on both banks’ profits. Last year, Capital One’s net income available to public shareholders fell 35% from 2022 as loan loss provisions soared 78% to $10.4 billion. Discover’s full-year profit was down 33.6% compared to its 2022 results as its allowance for credit losses more than doubled to $6.02 billion.
Discover customers have $102 billion in credit card balances, an increase of 13% year over year. Meanwhile, charge-off rates and 30-day delinquency rates rose.
In addition to increasing bank deposits and loan accounts, the acquisition also gives Capital One access to the Discover payment processing network. Although smaller than industry giants Visa and Mastercard, the Discover network allows Capital One to generate revenue from fees charged on every merchant transaction made on the network.
Discover operates under intense regulatory scrutiny. Last summer, the company revealed that starting around mid-2007, it had been incorrectly classifying certain card accounts into the highest merchant price tier. The company also received an unrelated consent order from the Federal Deposit Insurance Corporation regarding its customer compliance controls.
Citigroup analysts said regulatory issues may have prompted the sale.
“While we are surprised that DFS is selling, recent regulatory challenges such as the October FDIC Consent Order and the card product misclassification issue have led the board to consider strategic alternatives that were not previously available. Assuming the door may be open for consideration, analysts Alen Ciganovich and Kaili Wang wrote in a note to clients.
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