Capital One Financial Corp., facing growing competition and an increasingly saturated market for credit cards, agreed yesterday to buy Hibernia Corp. of New Orleans for $5.35 billion.
The deal gives McLean-based Capital One, best known for selling credit cards and other loans on television or through the mail, its first network of branches. Hibernia has the dominant market share for retail deposits in Louisiana and in recent years successfully moved into the fast-growing Texas banking market by building its own branch network there office by office.
"This is a bank with a fabulous market position in Louisiana that has executed a very impressive growth strategy in Texas," Richard D. Fairbank, chief executive of Capital One, said in an interview yesterday. "We think it is the right puzzle piece for the strategy we laid out 15 months ago."
Capital One in 2003 said it was interested in buying a retail bank to diversify its balance sheet. While many major banking companies have been buying independent credit card and other consumer credit companies in recent years, this is the first time the reverse has occurred. It is a merger driven by broad trends in financial services delivered to individuals.
Primarily, the deal is a reflection of the resiliency of the bank branch. Derided by many as hopelessly anachronistic as the Internet age dawned a decade ago -- Bill Gates, famously, called regional and community banks "dinosaurs" -- the old-style bank branch has proved, with the adoption of new technology, a remarkably profitable and adaptable form of distribution for loans and deposits. Many banks with large branch networks, such as Citibank, Bank of America Corp. and Commerce Bank, have revamped, improved and lengthened the hours of their branches. And retail deposits, such as federally insured CDs, checking accounts and savings accounts, remain the cheapest way to raise money for loans.
Secondarily, the pursuit of Hibernia by Capital One reflects the reality of credit card economics. Since it went public more than 10 years ago, Capital One has grown about 30 percent a year by buying other consumer credit companies and through an aggressive advertising and direct-mail program. That growth will be more difficult to maintain in the future, Fairbank said.
"Every consumer lending product category has gone through massive consolidation," he said. "The top 10 credit card issuers have 93 percent of the total credit card market. And that's the end game we're seeing for all consumer lending products."
To maintain its growth, Capital One needed to find ways of getting its cards and other consumer products -- it is the second-largest independent auto lender and sells a variety of other types of consumer credit, such as home equity loans -- in front of more customers. To achieve this, it needed to buy a traditional regional bank, with a loyal base of depositors.
"This will enable the growth of many of our consumer products," he said.
Hibernia's low-cost deposits will significantly diversify Capital One's base of funding. The company already owns a federally insured thrift that sells wholesale and brokered deposits; it has $25 billion of such deposits, Fairbank said. But adding Hibernia's $17.4 billion of deposits, it will "significantly reduce our cost of funds and lower our risk profile," Fairbank said. Capital One also funds its lending with bond sales and by selling bundles of loans as securities to investors.
Hibernia officials said the primary strategic motivation for the deal was linking up with a fast-growing consumer lender. "With Capital One, we will gain access to higher-growth consumer financial services businesses where Capital One's 48 million accounts and national brand make it an established leader," Hibernia chief executive J. Herbert Boydstun said in a statement. "In fact, we expect that Hibernia's ability to serve consumers and businesses in both Louisiana and Texas markets will be strengthened."
Boydstun is to remain president of Hibernia and would report to Fairbank. Hibernia's chairman, E.R. Campbell, is to join Capital One's board of directors.
Hibernia had $1.2 billion in revenue in 2004, up 13 percent from 2003, the company said. Capital One had about $10.7 billion in revenue in 2004, up about 9 percent.
Capital One said it expects to save about $135 million in costs by 2007 after the two companies are fully integrated. The company did not say if it expected any layoffs to result from the merger.
The deal amounts to about $33 a share for Hibernia, the stock of which closed Friday at $26.57 per share. About 55 percent will be in cash and the rest in Capital One stock.
Capital One will pay the cash portion from its existing cash reserves. Capital One has $58 billion of assets; Hibernia has $22 billion and 316 branches in Louisiana and Texas.
Capital One said the deal, which needs approval from regulators and Hibernia shareholders, should close in the third quarter.