A Household name but not exactly the most popular bank in America

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HSBC pays £8bn for US loans giant

Outlook

If HSBC is boasting about its new acquisition in the US ­ the huge lending institution, Household ­ it has reasons. The purchase gives the London-based bank the penetration it has sought in North America for years. But Household, with a litany of recent financial problems, is anything but a prestigious prize.

For sure, Household has long held a lucrative franchise in the United States, but its core business is hardly sexy, catering to middle-class customers with credit problems or troubling credit histories.

And this year, Household has stumbled into serious financial difficulties. Wall Street has been sounding the alarm in recent weeks about Household's liquidity prospects. Now it should be able to draw on HSBC deposits to reassure the doubters and bolster its books.

HSBC will want to play down one less-than-salubrious secret about Household: the firm in October was forced to reach a record $484m preliminary settlement with regulators in 46 US states and the District of Columbia arising from predatory lending practices. How the money will be distributed to customers in individual states has yet to be worked out and civil lawsuits are still pending.

Among those suing, with a class-action suit, is a group called Acorn, or the Association of Community Organizations for Reform Now. It accuses Household of "deceitful marketing strategies", and calculates that $8bn is the correct figure owed by the company to customers it has allegedly duped.

The suit details the case of a Chicago couple who obtained a loan from Household that was folded into their mortgage. Allegedly, Household failed to disclose upfront finance charges of more than 7 per cent of the loan amount, an interest rate of 12 per cent and that credit insurance also came with the loan.

Household's share price has plummeted to seven-year lows over recent weeks and rating agencies have issued troubling downgrades. The company has suffered from an increase in bad loans due in part to wilting economic conditions in the US.

But Household, founded in 1878 and backed by a network of 1,400 branches in the US, has been bruised especially by the accusations of sleaze. Last month, it took a $525m charge in the third quarter of this year to cover the settlement. The company also agreed to changes in its lending practices, prompting fresh fears among investors that its growth prospects may be hampered.

Some analysts questioned the move by HSBC. "While the price paid for Household looks reasonable at 1.6 times book value, and 7.1 times first-half 2002 annualized earnings, we view this move as slightly bewildering strategically," Merrill Lynch said. "To now plunge into sub-prime or close to sub-prime US consumer credit looks strange."

"Household stock and bondholders have hit investor Lotto," David Hendler, an analyst at CreditSights, said. The deal "obviously bails out Household's credit and funding difficulties and will lead to rating agency upgrades."