H&R Block Inc said a U.S. regulatory directive to block HSBC Holdings from funding the tax preparer's refund-anticipation loans (RALs) will hamper its plans to roll out alternative products the next tax season.
The directive from Office of the Comptroller of the Currency (OCC) scuttles the deal that H&R Block and HSBC reached after the tax preparer sued the lender in October.
With less than three weeks before the 2011 tax season begins, HRB's competitive position appears significantly weakened, analyst Scott Schneeberger of Oppenheimer said.
If H&R Block does not offer RAL in 2011, which is the most likely scenario, Schneeberger expects the tax preparation volume to fall 4 percent in 2011 and sees an earnings hit of 13 cents a share.
Though limited in robustness, Jackson Hewitt Tax Service Inc and privately held Liberty Tax, at this point, are positioned to offer RALs, while HRB and the vast majority of mom and pops are not for the 2011 tax season, analyst Schneeberger said in a note.
Shares of Jackson Hewitt, which recently said it funded 80 percent of its RAL program, jumped 26 percent, while those of H&R Block fell 9 percent in morning trade on the New York Stock Exchange.
NO EXCLUSIVE RIGHTS
HSBC's exclusive rights to provide such products ends with this directive, allowing H&R Block to enter into other partnerships for these financial products, the company said in a statement after market hours on December 24.
In August, the Internal Revenue Services (IRS) said it will not provide tax preparers and associated financial institutions with debt indicator, which is used to facilitate RALs starting with the next tax filing season.
The IRS move followed criticism of such loans by consumer groups concerned that high U.S. unemployment was forcing more people to borrow short-term at high rates. This has wiped out 39 percent of H&R Block stock's value in one year.
HSBC did not return calls requesting comment, while H&R Block said it will continue to develop other financial products by the early part of the tax season.
The tax preparer will continue to offer its traditional refund-anticipation checks (RACs) that do not require any out-of-pocket costs by taxpayers, it said.
RALs, which usually last 7-14 days until taxpayers receive their refunds from the U.S. Internal Revenue Service (IRS), are highly profitable for tax preparers.
(Reporting by Abhinav Sharma and Archana Shankar in Bangalore; Editing by Gopakumar Warrier)