January 28, 2008
Home Depot Withdraws Bank Bid
Home Depot has decided that it’s not ready to get into the banking business.
The DIY chain, which had applied to buy EnerBank USA, a Utah industrial loan bank in May 2006, had been waiting during an 18-month moratorium placed on new charters by the Federal Deposit Insurance Corporation (FDIC). Interestingly, Home Depot is pulling out just as the waiting period is due to expire next week.
Ron DeFeo, a spokesperson for Home Depot, told the New York Post that the company’s decision had nothing to do with the opposition it has faced or the current state of housing and credit in the U.S.
“As we start 2008, this acquisition is just not part of the strategy,” Mr. DeFeo said. “We’re focusing all our efforts on the retail business.”
Home Depot’s move follows a decision last year by Wal-Mart to withdraw its application to operate a bank. The world’s largest retailer had faced stiff opposition on Capitol Hill from members of both parties sitting on the House’s Financial Services Committee.
Last year, the House passed legislation that would only make industrial loan bank charters available to companies that generate 85 percent of revenues from the financial business. The Senate was looking at its own industrial bank legislation and the likelihood is Home Depot would not have met the criteria worked out between the two bodies.
A number of non-financial companies including Wal-Mart rival Target were able to establish charters before the FDIC’s moratorium went into effect.
Discussion Questions: Should retailers be able to charter industrial loan banks? Do American consumers derive some benefit from keeping retail businesses out of banking or does it ultimately work against them?
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Home Depot, like many other retailers, should run its own lending operation, whether that’s called a bank or a credit plan or something else. It’s not a distraction, it’s a sales and profit builder. The expertise is readily available, so the current management need not learn a new business. Setting up a lending operation is a test of management’s ability to recruit and delegate appropriately.
If allowed to pursue the banking option, Home Depot would have to be in a position to create a separate SBU and hire experienced personnel who are familiar with that market. Right now Home Depot is facing enough challenges in its core business and should be focusing attention there rather than creating an SBU in an industry in which it has no experience.
I wish there were a logical way to analyze the economy, but the truth is that with so many moving parts there is really no way to definitively associate cause and effect. That’s what makes politics so much fun. If you’re a Republican, the Bush tax cuts spurred investment and employment causing economic expansion. If you are Democrat, reckless lending through lax oversight of mortgage financing let consumers spend more than they had and has left us with an economic hangover. The truth probably lies somewhere in between.
The whole idea of retailers being able to finance consumer spending makes absolutely no sense to me. Even affiliated credit cards run the risk of retailers encouraging consumers to spend more than they can really afford. Some of the customers will figure out a way to keep their heads above water but for others, the personal hardships that evolve from excessive spending will far outweigh the initial thrill of consumption. Ultimately the bills must be paid.
It’s not an issue whether it’s right for the consumer or not, it’s more of an issue of whether or not Congress is going to allow them. although the ban may be nearing an end, don’t look for anybody to jump other than Congress. With it being an election year, this issue has too much potential media play to simply go away. Look for the U.S. Senate to extend the moratorium for no other reason than that it’s an election year.
I doubt anybody will be able to do anything until 2009 and even then it will depend on who has the majority in the Senate and who occupies the White House. Should the Democrats have the majority in the Senate, look for the ban until 2009 to be extended even more, unless a Democrat is in the White House and the belief is to focus efforts on health care, etc.
I think a free market necessarily entails that businesses should be able to expand into whatever areas may be in the best interest of their investors, but the reason for the FDIC moratorium has less to do with keeping retailers out of banking than to control the risk to the deposit insurance fund. Any bank that partially finances its loans with deposits (thrifts) are entitled to have their deposits insured by the FDIC. If the FDIC were to openly allow all business entities to enter the banking business, they would not only be acting irresponsibly, but also contrary to the charter entrusted to them by the Federal Government, which is to protect the savings of the general public, while making loans more accessible.
Home Depot’s decision not to pursue the acquisition is a strategic (and smart) move in the current economic environment. The general flattening trend in the yield curve compresses the net interest margin banks can earn on their loans, which is the life-blood of any banks profitability (‘NIM’ compression). Banks need a sufficient enough margin between how much interest they offer you on your savings account and how much interest they charge you on your loans.
Yes the government needs to let up and let businesses operate as they please. If they do, I have a feeling that all those 5% rebate credit cards would disappear.
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Home Depot, like many other retailers, should run its own lending operation, whether that’s called a bank or a credit plan or something else. It’s not a distraction, it’s a sales and profit builder. The expertise is readily available, so the current management need not learn a new business. Setting up a lending operation is a test of management’s ability to recruit and delegate appropriately.
If allowed to pursue the banking option, Home Depot would have to be in a position to create a separate SBU and hire experienced personnel who are familiar with that market. Right now Home Depot is facing enough challenges in its core business and should be focusing attention there rather than creating an SBU in an industry in which it has no experience.
I wish there were a logical way to analyze the economy, but the truth is that with so many moving parts there is really no way to definitively associate cause and effect. That’s what makes politics so much fun. If you’re a Republican, the Bush tax cuts spurred investment and employment causing economic expansion. If you are Democrat, reckless lending through lax oversight of mortgage financing let consumers spend more than they had and has left us with an economic hangover. The truth probably lies somewhere in between.
The whole idea of retailers being able to finance consumer spending makes absolutely no sense to me. Even affiliated credit cards run the risk of retailers encouraging consumers to spend more than they can really afford. Some of the customers will figure out a way to keep their heads above water but for others, the personal hardships that evolve from excessive spending will far outweigh the initial thrill of consumption. Ultimately the bills must be paid.
It’s not an issue whether it’s right for the consumer or not, it’s more of an issue of whether or not Congress is going to allow them. although the ban may be nearing an end, don’t look for anybody to jump other than Congress. With it being an election year, this issue has too much potential media play to simply go away. Look for the U.S. Senate to extend the moratorium for no other reason than that it’s an election year.
I doubt anybody will be able to do anything until 2009 and even then it will depend on who has the majority in the Senate and who occupies the White House. Should the Democrats have the majority in the Senate, look for the ban until 2009 to be extended even more, unless a Democrat is in the White House and the belief is to focus efforts on health care, etc.
I think a free market necessarily entails that businesses should be able to expand into whatever areas may be in the best interest of their investors, but the reason for the FDIC moratorium has less to do with keeping retailers out of banking than to control the risk to the deposit insurance fund. Any bank that partially finances its loans with deposits (thrifts) are entitled to have their deposits insured by the FDIC. If the FDIC were to openly allow all business entities to enter the banking business, they would not only be acting irresponsibly, but also contrary to the charter entrusted to them by the Federal Government, which is to protect the savings of the general public, while making loans more accessible.
Home Depot’s decision not to pursue the acquisition is a strategic (and smart) move in the current economic environment. The general flattening trend in the yield curve compresses the net interest margin banks can earn on their loans, which is the life-blood of any banks profitability (‘NIM’ compression). Banks need a sufficient enough margin between how much interest they offer you on your savings account and how much interest they charge you on your loans.
Yes the government needs to let up and let businesses operate as they please. If they do, I have a feeling that all those 5% rebate credit cards would disappear.