With its $6.45 billion purchase of Providian Financial, Seattle-based Washington Mutual hopes it is getting more than a ready-made credit-card...

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With its $6.45 billion purchase of Providian Financial, Seattle-based Washington Mutual hopes it is getting more than a ready-made credit-card operation.

WaMu, the nation’s sixth-largest financial institution, expects Providian will stabilize its mortgage-heavy business, which soars or sinks depending on the broad interest-rate environment, something beyond WaMu’s control. WaMu also believes Providian offers a new avenue for growth.

The deal, WaMu’s largest acquisition since 1998 and its third-largest ever, rounds out the giant thrift’s products and brings new cross-selling opportunities, WaMu Chief Executive Kerry Killinger said in an interview.

“The demographics for the customer base of both of us are very similar — we both serve the broad middle market and small business,” Killinger said. “This is clearly a very nice complement to our other loan portfolios.”

The stock-and-cash deal, expected to close late this year, will pay Providian shareholders the equivalent of 0.45 WaMu shares for each Providian share. Based on yesterday’s closing prices, that would be $18.24 per Providian share, for a 3.5 percent premium.

Banking analysts agreed that, on paper at least, the deal makes all kinds of sense. WaMu can market Providian’s cards to its 11.7 million customers from coast to coast through its 1,968 branches. It also can try to entice Providian’s 9.4 million cardholders to open checking accounts or take out mortgages at WaMu.

WaMu’s vast deposit base — $183.6 billion as of March 31 — also will be a much cheaper source of cash for Providian’s credit-card operation.

Washington Mutual

Headquarters: Seattle

Employees: (Dec. 31): 52,459

What it does: Mortgages and home-equity loans, retail banking

2004 profit:$2.9 billion (25.8 percent drop from 2003)

Assets (as of March 31):$319.7 billion.

Providian Financial

Headquarters: San Francisco.


What it does: Consumer credit cards

2004 profit:$381.2 million (+73.8 percent from 2003)

Assets (as of March 31):$14 billion

Source: Company reports

“When a credit-card company becomes part of a bank, a lot of good things can happen,” said Frederick Cannon, a banking analyst with Keefe, Bruyette & Woods in San Francisco. “Your funding costs go down, and you pay less to run the business as part of a large organization.”

For a bank like WaMu, credit cards have the advantage of being on the opposite side of the interest-rate cycle from home loans. When rates rise, fewer people refinance mortgages or get home-equity loans; instead, they load up on their credit cards and make smaller payments.

Since ending a marketing-only relationship with Citigroup last year, WaMu has been working to develop its own credit card. That card, Killinger said, had been slated for test-marketing late this year or early next.

However, doubts remain about how many of Providian’s cardholders can be counted on to pay their bills, and to a lesser degree about WaMu’s ability to integrate large acquisitions.

“I’m going back and forth on this thing,” said Richard Bove, an analyst with Punk, Ziegel in Pinellas Park, Fla. “I think it’s a good deal for WaMu, but none of my customers do. They think it’s a rotten deal.”

Both companies’ stock fell yesterday. WaMu lost $1.03, or 2.5 percent, to close at $40.54; Providian slipped 33 cents, or 1.8 percent, to close at $17.63.

Much of the skepticism derives from Providian’s past.

Until a few years ago, Providian concentrated on the “subprime” market — putting high-interest cards in the hands of low-income consumers. The company bet it could gain enough in interest and fees to more than offset losses from defaulted charges.

“For any credit-card company, the most profitable customer is the guy who always pays, but always pays late,” Bove noted.

The risk is that during an economic slowdown, subprime borrowers are more likely to default, as Providian found out when the late-’90s boom went bust. The company went from a $667.4 million profit in 2000 to a $54.6 million loss in 2001.

In addition, regulators in California and Connecticut challenged Providian’s marketing practices, and the company was sued by angry shareholders after its stock plunged 93 percent in less than four months.

Providian’s former CEO resigned under pressure and was replaced by Joseph Saunders, a FleetBoston veteran who cut some 1,500 jobs, divested the company’s British and Argentinian card operations and an online lender, and sold $2.5 billion in credit-card assets.

Saunders refocused on attracting middle-income customers — a move that ultimately made it attractive to WaMu.

Killinger acknowledged that five years ago, he wouldn’t have been interested in Providian.

“We do not want to take on a significant amount of problem assets,” he said. But, he added, Saunders and his team “have done a tremendous job of improving credit quality over there.”

Some analysts aren’t so sure. They noted that Providian was rumored to have been on the market for some time.

“The key issue is, how good is this portfolio?” said Bove. “If you assume that Citigroup has looked at it, Bank of America has looked at it, Wachovia has looked at it, and none of them wanted it, the assumption one can make is that it’s not a great portfolio.”

Providian has managed to ratchet down its delinquency rate — the percent of loans it manages that are overdue by more than 30 days — from 11.1 percent at the end of 2002 to 5.16 percent in the first quarter of 2005. That’s still higher than other card issuers report: MBNA’s rate was 4.17 percent in the first quarter; Capital One Financial’s was 3.45 percent.

But credit cards are a business that rewards economies of scale, said analyst Cannon, and it may make sense for WaMu to buy a big operation all at once — especially one that appears headed in the right direction — than to slowly grow one from scratch.

To set interest rates so they accurately reflect risk, Cannon said, card issuers need to analyze large numbers of customers.

“You need scale to do that; you need 10,000 people with [credit] scores of 710 to 750 before you can get a fix on how many will default. You need some kind of scale just to be in the game.”

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com