Capital One Will Buy ING’s Online U.S. Bank for $9 Billion in Cash, Stock

Capital One Financial Corp. (COF), the credit-card lender that expanded into branch banking, agreed to buy ING Groep NV (INGA)’s U.S. online bank for $9 billion to gain deposits and access to 7 million customers.

Capital One, this year’s top performer in the KBW Bank Index, will pay $6.2 billion in cash and $2.8 billion in stock, giving ING a 9.9 percent stake, the companies said yesterday. The deal would make McLean, Virginia-based Capital One the sixth-largest U.S. lender by deposits, up from seventh, and marks the nation’s biggest bank takeover since 2008.

The deposit boost may help Capital One, which derives more than half its revenue from credit cards, to diversify its funding base and tap into what it calls a younger and more affluent clientele. ING relies on the Internet to attract customers and has just seven U.S. outlets, which are modeled after coffee shops.

“The strategy is deposits,” said Jonathan Hatcher, a credit strategist who covers financial companies at Jefferies Group Inc. in New York. “ING Direct had gained great traction in the U.S., and obviously it’s a low-cost way of gathering deposits. For younger people it’s not as important to have a bricks-and-mortar branch.”

Capital One Chairman and Chief Executive Officer Richard D. Fairbank, 60, said on a conference call with analysts that the company may buy securities with the additional funds. He declined to comment when asked whether Capital One is interested in acquiring the U.S. credit-card business of London-based HSBC Holdings Plc. (HSBA)

‘Power Alley’

“Asset acquisitions are an opportunity that’s right in our power alley,” Fairbank said. “We know consumer assets very well. That’s what we do. The ING Direct deal only enhances the potential economics of asset opportunities.”

Capital One intends to finance the cash portion of the deal mostly by issuing about $2 billion in stock and $3.7 billion of debt. The transaction, which is expected to be completed in late 2011 or early 2012, will boost tangible book value at closing, add to earnings per share in 2012 and “result in mid-single- digit accretion in 2013,” the company said.

The acquisition of ING Direct “is a game-changing transaction that delivers attractive financial results immediately as well as a compelling value creation over time,” Fairbank said during the conference call. “The deal economics are attractive, particularly against the backdrop of more traditional bank deals.”

Government Bailout

ING, the biggest Dutch financial-services firm, has been ordered by the European Union to sell the U.S. unit as a condition of its government bailout during the financial crisis. The company discussed potential deals with firms including General Electric Co. (GE), CIT Group Inc., Ally Financial Inc. and Citigroup Inc. (C), people familiar with the matter have said.

The agreement, which requires approval from the U.S. Federal Reserve and Dutch Central Bank, gives ING a seat on Capital One’s board, the Virginia bank said yesterday in an investor presentation. Capital One’s restructuring charges and transaction costs will total $210 million, according to the presentation.

“The diversified asset base of Capital One combined with the large deposit base and marketing strengths of ING Direct USA make an ideal combination for a strong future,” ING CEO Jan Hommen said in a statement.

Credit Cards

ING doesn’t consider its stake in Capital One as “strategic in the long term,” Hommen told analysts today, adding he doesn’t feel “uncomfortable” with it either. There is a six-month lock-up period following the deal, he said.

First-quarter profit at Capital One climbed 60 percent as fewer credit-card borrowers defaulted and the firm released money from an account to cover soured loans. The company said in March that its quarterly dividend would remain unchanged at 5 cents a share after the Fed reviewed the ability of the 19 largest U.S. lenders to weather another recession and approved some banks’ plans to boost payouts.

The ING deal would make Capital One the fifth-biggest bank by U.S. domestic deposits only, the company said. It ranks eighth on that basis currently.

Capital One and ING agreed on a non-compete arrangement, Hommen said today. Capital One is only allowed to use the Direct model in the U.S. and U.K.

U.S. Mortgage Assets

“The U.K. is a competitive, huge market, so we didn’t object,” Hommen said.

Capital One dropped 0.3 percent to $48.84 as of 4:15 p.m. in New York, after climbing 2.4 percent yesterday following news reports that it was close to a deal. The shares have gained 15 percent this year, compared with a 9 percent decline for the 24- company KBW Bank Index. ING gained 2.8 percent to 8.19 euros in Amsterdam today, giving the company a market value of 31.4 billion euros ($45 billion).

ING received 10 billion euros of state aid in 2008 and transferred the risk on 21.6 billion euros of U.S. mortgage assets to the Dutch government in 2009. The company has repaid 7 billion euros and plans to repay the rest by May.

The divestment of ING Direct USA will release $4.1 billion in capital, the company said, while boosting ING Bank’s core Tier 1 ratio by 99 basis points. A basis point is 0.01 percentage point.

In addition to the sale to Capital One, ING yesterday said it agreed to move the risk-transfer deal with the Netherlands from ING Direct USA to its banking unit to avoid the state having to guarantee assets for a third party.

‘Important Step’

“ING is a complex deleveraging story and this transaction is an important step on that road,” William Elderkin, a London- based analyst at Societe Generale wrote, in a note today. “Compared with the redemption cost of the remaining Dutch government capital” the capital generated by the deal, together with the potential divestments of the firm’s Latin American insurance operations, gives ING “an increasingly strong position,” he said.

The online bank’s $40 billion in net loans and leases gave it a Tier 1 capital ratio, a measure of financial strength, of 26.8 percent at the end of 2010, compared with an average of 12.7 percent for all U.S. lenders, according to FDIC figures. The return on assets was 0.3 percent in 2010, less than half the industry average of almost 0.7 percent, according to the FDIC.

ING Direct USA’s assets include $40.7 billion in outstanding mortgage loans, Capital One said in its presentation yesterday. Capital One said it expects to take a credit mark of $1.7 billion, or about 4 percent of mortgage balances.

Insurance Operations

European Union regulators approved ING’s taxpayer-funded bailout in November 2009, after the company agreed to sell its insurance and U.S. online-banking divisions and make additional payments to the state. The firm also has to dispose of Dutch lender WestlandUtrecht Bank.

ING is considering divesting its insurance operations through two initial public offerings, one for the U.S. and one for the European and Asian business. Hommen has said the IPOs are likely to take place in 2012 depending on market conditions.

The firm also is reviewing options for the Latin American insurance operations, Hommen said today. The company may make further announcements on this in the next three to four months, he said.

In addition to HSBC, other banks based abroad are weighing the sale of U.S. businesses. Royal Bank of Canada is seeking a buyer for its U.S. retail branch network, people with knowledge of the matter said in April.

“This deal stands on its own,” Fairbank said of Capital One’s agreement with ING. “It does not require additional acquisitions to make it financially compelling.”

Morgan Stanley (MS), Barclays Capital, and Centerview Partners LLC are advising Capital One. Frankfurt-based Deutsche Bank AG and New York-based JPMorgan are advising ING. ING’s Event Finance & Advisory unit also advised the firm on the U.S. unit’s government support.

To contact the reporters on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.