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The insurer wants to sell its depository but keep writing mortgages. Essentially, it’s making a bet on regulatory arbitrage — the idea that certain categories of institutions can dodge scrutiny being placed on their competitors.
July 21 -
Discover is an experienced direct-to-consumer marketer that can expand the lender it's buying from Tree.com and make broad use of it, executives said.
May 13 -
Discover Financial Services said it is pursuing more deals like the one it just struck with Allstate Corp. to expand its direct banking business.
February 9
Discover Financial Services' strategy to diversify beyond credit cards suffered a setback as the lender's deal to buy $1.1 billion of banking deposits from Allstate Corp. has fallen through.
Allstate said Monday in a quarterly earnings filing with the Securities and Exchange Commission that the deal had been terminated. "We are continuing with plans to wind down the Allstate Bank's operations and anticipate obtaining regulatory approval to cancel its banking charter by year end 2011," the property and life insurer said.
Allstate and Discover announced the deal in February. The credit card lender was to take on the deposits and the insurer's agents would market Discover's online savings accounts, certificates of deposits and other products to consumers.
The deal's termination "doesn't affect our commitment to our direct banking strategy," a Discover spokeswoman wrote in an email.
An emailed statement provided by an Allstate spokeswoman said that the two companies had agreed to a date by which regulatory approvals for the deal would need to be obtained to complete the transaction.
"Due to the complex and changing regulatory environment, the approvals needed were not obtained by the agreed upon date," Allstate said. "As a result, Allstate Bank and Discover Bank have terminated their agreement to transfer the deposits and will not enter into a marketing and distribution agreement." Allstate still plans to leave the banking business, which is "no longer core" to its "focus on insurance, retirement and investment products," it said. It expects to receive regulatory approval in the third quarter to close its bank and plans to cease bank operations in the fourth quarter.
When the deal was announced, Allstate cited heavier regulatory pressure as a reason it was getting out of the banking business, the same reason MetLife Inc. gave in July when it announced it was putting its $16 billion-asset depository up for sale. Discover has been trying to expand its direct banking business. In May it announced an agreement to buy the mortgage origination unit of Tree.com Inc. for $55.9 million, with plans to originate home loans and sell them to the secondary market.
The collapse of the Allstate deal is "not ideal" but is "certainly not meaningful in the whole scheme of things" because Discover "has had nice success going direct online," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods Inc., wrote in a research report published on Monday. Sakhrani added that Discover has about $35 billion in deposits, representing about 70% of its total receivables.
The loss of the deal isn't likely to change Discover's strategy, John Stilmar, an analyst with SunTrust Robinson Humphrey, said in an interview.
"Clearly a billion dollars is a lot of liquidity" but "one might surmise with liquidity as abundant as it is" that "there might be an opportunity for Discover to over time make that similar amount of deposits in a more cost-effective manner," Stilmar said.
"I think the macroenvironment is still one in which liquidity is ample in the deposit market, therefore the loss of this program, while it probably isn't necessarily what they were expecting, I don't think it changes the strategic path or any of the objectives of the company," Stilmar added.
Discover Financial Services' strategy to diversify beyond credit cards suffered a setback as the lender's deal to buy $1.1 billion in banking deposits from Allstate Corp. has fallen through.
Allstate said Monday in a quarterly earnings filing with the Securities and Exchange Commission that its previously announced agreement with Discover was terminated.
"We are continuing with plans to wind down the Allstate Bank's operations and anticipate obtaining regulatory approval to cancel its banking charter by year end 2011," the Northbrook, Ill., property and life insurer said in the filing.
Allstate and Discover, of Riverwoods, Ill., announced in February a deal in which the credit card lender would take on the deposits and the insurer's agents would market Discover's online savings accounts, certificates of deposits and other products to consumers. The companies did not disclose the financial terms of the agreement, which was part of Discover's ongoing efforts to expand beyond cards.
The failed deal "doesn't affect our commitment to our direct banking strategy," a Discover spokeswoman wrote in an email.
An emailed statement provided by an Allstate spokeswoman said that the two companies had agreed to a date by which regulatory approvals for the deal would need to be obtained to complete the transaction.
"Due to the complex and changing regulatory environment, the approvals needed were not obtained by the agreed upon date," Allstate said. "As a result, Allstate Bank and Discover Bank have terminated their agreement to transfer the deposits and will not enter into a marketing and distribution agreement."
Allstate still plans to exit the banking business, which is "no longer core" to its "focus on insurance, retirement and investment products," the company said. Allstate expects to receive regulatory approval in the third quarter to close its bank and plans to cease banking operations in the fourth quarter.
When the deal was announced, Allstate cited increasing regulatory pressure as a key reason for exiting the banking business, the same reason MetLife Inc. gave in July when it announced it was putting its $16 billion-asset depository up for sale.
Discover has been trying to grow its direct banking business.
In May, the company announced an agreement to buy the mortgage origination unit of Tree.com Inc. for $55.9 million, with plans to originate home loans and sell them to the secondary market.
