Capital One Financial Corp. is the first monoline credit card issuer to buy a bank, announcing March 6 that it plans to buy Hibernia Corp. for $5.3 billion in cash and stock. Capital One's planned acquisition of the Louisiana bank is the largest in a series of moves by the McLean, Va.-based financial services company to expand beyond credit cards.
Capital One is one of the nation's largest credit card issuers. In the fourth quarter, it reported $48.6 billion in U.S. card receivables.
Some experts say the planned purchase may spark a trend among other issuers that want to get into the growing debit card market. Hibernia would provide the credit card company access to a debit card portfolio, which CCM sister publication ATM&Debit News estimates is at least 721,000 cards.
During an analysts conference call on March 7, Richard Fairbank, Capital One chairman and chief executive, noted that the debit card market has been something the company has been eyeing with great interest, "but from the point of view of being a credit card issuer, it's been difficult to go after that business." Fairbank, though, said he believes Capital One has a lot to add to Hibernia's debit card business, "and that would be one of the first things that we would look at when we do business with Hibernia."
George L. Albright, chairman of Speer & Associates, an Atlanta-based consultancy, believes the addition of a debit card portfolio was a major reason Capital One went after Hibernia. "As a strictly banking play, it is a bit of a surprise because Hibernia is not the franchise I would necessarily go after," he says. "But if they are using it as a lever to get into debit and expand the card business with that as an entry point, it would seem to make more sense."
Albright says Hibernia's credit card customers would not do much for Capital One's credit card portfolio. Capital One and Discover routinely jockey with each other for fourth place among the nation's credit card issuers.
Capital One's Hibernia deal may encourage other credit card issuers that are looking to expand into the debit card market, Albright says. "We will see other card issuers buying banks," he says. "[Other issuers] have been looking at this for some time given the strength of what the debit business will be in five to 10 years."
The purchase of Hibernia would make Capital One the ninth-largest consumer lender in the U.S. with $81 billion in managed consumer assets.
The proposed deal continues Capital One's diversification, which began several years ago. Credit card securitization, Capital One's biggest business, comprises 47% of its $86 billion in total liabilities. After the Hibernia deal is completed, possibly in the third quarter, card securitization will make up 38% of the company's total liabilities of $107 billion.
The Hibernia announcement ends a 15-month search by Capital One for a retail bank since the McLean, Va.-based issuer received a banking license in July 2004 from the Federal Reserve Board, a Capital One spokesperson says. "We issued credit cards through Capital One Bank, a subsidiary of Capital One Financial, but we didn't have a retail bank presence. Hibernia gives us one," the spokesperson says.
Kevin Fitzsimmons, associate director of Sandler O'Neill & Partners L.P., a New York-based equity firm, says Capital One folded, spindled and mutilated traditional thinking with regard to retail banking.
"Monoline card issuers usually buy banks' credit card portfolios, not the entire bank," he says. "Even when J.P. Morgan Chase & Co. purchased Bank One Corp., it was one bank buying another bank."
The combined bank would have $43 billion in deposits on a pro forma basis in 2004, making it the 18th-largest domestic deposit institution. During its conference call with analysts, Capital One reported that Hibernia's 306 branches in Louisiana and Texas would enable it to build its consumer and small business lending.
Last year, Hibernia reported $15.7 billion in loans categorized as 54% consumer, 25% commercial, and 21% small business. The consumer group's lending included $5.4 billion in mortgages and home-equity loans, and $2.4 billion in indirect auto loans. Capital One's Auto Finance division reported managed loans of nearly $10 billion in 2004, accounting for about 12.5% of the $79.8 billion in total loans that Capital One reported for 2004. Card loans made up $48.6 billion and global financial services generated $21.2 billion in loans.
In September 2004, Capital One agreed to pay $191 million to buy Onyx Acceptance Corp., an auto lender with $2.5 billion in loans through a network of 12,000 dealerships primarily on the West Coast. Cap One already claimed a network of about 13,000 dealerships.
To expand its home equity-related lending, Capital One in December announced it would pay $155 million for eSmartloan, an online originator of home equity loans and mortgages. That month, Cap One also announced the $117 million purchase of HFS Group, a home-equity lender in the United Kingdom that originated nearly 15,000 loans worth $630 million in the year ended March 2004.
Capital One pursued Hibernia partly because its Texas branches are located in the fast-growing Houston and Dallas/Fort Worth areas. But it also sought Hibernia because it is the largest depository institution in Louisiana, with a 22.4% market share. In New Orleans, Hibernia has a 29.9% deposit market share, making it the largest depository institution in the city, according to Capital One documents.
Hibernia's large deposits will provide Capital One with a less expensive and more stable source of funding for its business operations, the Capital One spokesperson says. An equity analyst firm agrees.
Capital One had long made it known it wanted to acquire a depository institution to lower its funding costs while providing a branch platform to grow its consumer-lending business, according to Sander O'Neill & Partners.
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