WaMu Deal Good for Cross-Sales

Looking to put credit cards in the hands of its mortgage and home-equity (as well as its retail banking) customers, Washington Mutual here has agreed to buy Providian Financial, a credit-card provider based in San Francisco. The deal is currently valued at $6.45 billion, with 89% being paid in WaMu stock and the rest in cash.

During a press conference call, WaMu chairman and chief executive Kerry Killinger said rather than sell mortgages and home-equity products to Providian customers, the primary synergies of this transaction are to cross-sell its mortgage servicing and new mortgage origination customers credit cards.

WaMu has a total of 14 million customers across all its product lines and the deal makes a "terrific opportunity" to get credit cards into their hands, he said.

Later in the press conference, Steve Rotella, WaMu president and chief operating officer, said the thrift's own market research found that its customers were "very interested" in getting a credit card from WaMu. It has not marketed its own cards until now. Previous WaMu-branded cards were issued through other firms including MBNA and Associates.

When asked if WaMu was worried that borrowers are turning to home-equity products to pay down outstanding credit-card balances, Mr. Rotella said that was more of an issue among prime and superprime borrowers, not the middle-market customer that Providian targets.

In fact, because WaMu does originate home-equity products, Mr. Rotella said the deal allows it to "cross-correlate risks across the businesses" based on which ever way interest rates move.

WaMu says that Providian's emphasis on middle-market customers makes it a strategically compelling fit.

Providian had not always gone after middle-market customers, noted a report from Standard & Poor's. The credit-card company shed its "legacy portfolio" and moved away from the deep subprime customer towards a middle-to-prime market focus.

John K. Bartko, credit analyst at S&P, said, "The successful implementation of the revised strategy is evident in the progress Providian has made to date in improving asset quality metrics specifically, and more generally, overall financial performance."

Meanwhile, a statement from Fitch Ratings affirmed Washington Mutual's ratings of "A/F1" with a stable outlook. Fitch has placed Providian on "Rating Watch Positive," which is similar to S&P putting that company on CreditWatch with positive implications.

The Fitch statement noted, "Recognizing the somewhat higher risk profile of credit-card receivables vs. WaMu's existing asset mix, which is dominated by prime residential mortgages, WaMu's pro-forma capital targets are now somewhat higher, on both a stated and a tangible basis, which Fitch considers appropriate for the ratings assigned."

Mr. Killinger said in a statement "this combination also helps to further diversify our balance sheet and earnings by adding attractive, high-yielding credit-card assets, while improving our net interest margin and adding stable fee income."

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