3rd UPDATE: Capital One Wins ING Direct For $9 Billion

ING Groep NV (ING, INGA.AE) agree to sell its U.S. online-banking business to Capital One Financial Corp. (COF), the companies said Thursday.

Capital One will pay $9 billion for ING Direct USA; $6.2 billion in cash and $2.8 billion in stock. The deal will give ING an almost 10% stake in the McLean, Va., bank, and make it Capital One's largest shareholder.

Capital One will raise $2 billion in equity and $3.7 billion in debt before the deal closes, expected later this year. Its shares closed up 2.4%, to $49.

Capital One is currently the ninth-largest bank in the U.S. by deposits; adding ING Direct would make it No. 5, putting it ahead of PNC Financial Services Group Inc. (PNC) and U.S. Bancorp (USB). Bank of America Corp. (BAC) is No. 1.

"The acquisition of ING Direct is a game-changing transaction" for Capital One, said its founder, Chairman and Chief Executive Richard Fairbank in a press release.

Standard & Poor's stock analyst Robert McMillan said the deal could be positive for Capital One, which is lowering its cost of making loans, and diversifying its funding sources. But he said he is worried about the dilution that the deal might cause to shareholders.

The stock that Capital One would issue to pay ING and to raise capital is "at the high end" of what Keefe, Bruyette & Woods Inc. analyst Sanjay Sakhrani said he expected the bank to need for an ING deal.

"In isolation, this wouldn't be an ideal deal," he said. "But it puts them in a position to do something else," such as pursuing another acquisition, preferably of a loan business, or to buy back shares or raise the dividend.

During a conference call with investors, Fairbank said the ING deal is worthwhile in and of itself but the bank would be open to further acquisitions, particularly deals for loans.

As previously reported by Dow Jones Newswires, Capital One has also made a complementary bid for HSBC Holdings PLC's (HBC, HSBA.LN, 0005.HK) U.S. credit-card business, according to people familiar with the matter. The bidding for HSBC's cards business is in the early stages. Capital One could fund the expanded card business with the ING deposits, allowing it to grow at a time when consumers are reluctant to take on new debt and the economy is sputtering.

ING Direct is one of the largest and most successful online deposit gatherers, with $82 billion of deposits and 7 million customers that proved more loyal to the online bank than banking analysts and consultants expected when Internet banking emerged as a standalone banking strategy just over 10 years ago.

"It is with confidence that we are taking a stake in Capital One," Jan Hommen, chief executive of ING, said in a release. "The transaction today shows ING is taking decisive steps in the restructuring of ING Group."

Credit Suisse advised ING. Morgan Stanley, Barclays Capital and Centerview Partners were Capital One's financial advisers; Wachtell, Lipton, Rosen and Katz, Mayer Brown and Loyens & Loeff were its legal advisers.

ING, of Amsterdam, was ordered by the European Commission to sell the business by 2013 as a condition for government aid it had received during the financial crisis. The forced disposal is part of a wider restructuring plan.

Capital One, meanwhile, has been transforming itself from a credit-card lender to a bank to use more stable deposits to fund its loans, and created its own online bank. It has since bought three traditional banks.

The bank said the deal is expected to be accretive to earnings in 2012. It said it expects the deal to lower funding costs by $200 million annually and to cut ING Direct's costs by $90 million; merger costs will at $210 million.

The deal's $9 billion value reflects the tangible book value of ING Direct and a very low deposit premium of less than 1%. However, almost all of ING Direct's deposits are what is known as "core deposits," that is mainly savings- and checking-account deposits from consumers rather than big-ticket certificates of deposits from institutional clients such as mutual and pension funds that can leave a bank quickly.

Capital One was bidding for ING Direct along with General Electric Co. (GE), according to people familiar with the matter. But Capital One was more willing than the industrial conglomerate to take on mortgages and mortgage-backed securities that are part of the online bank, those people said.

ING Direct comes with about $40 billion in mortgages and $30 billion of securities, mainly mortgage-backed ones issued by Fannie Mae (FNMA) and Freddie Mac (FMCC) and other U.S. agencies, according to the most recent regulatory filing.

Some of the securities are backed by risky "alt-A" mortgages that require less documentation at origination than mortgages backed by Fannie Mae and Freddie Mac.

Capital One said in a presentation it won't need to write down the value of the securities it is purchasing from ING, and will reduce the value of the mortgages it acquires by 4%, reflecting an expected rate of future delinquencies. Most of the mortgages were underwritten by ING directly rather than by brokers or purchased from other banks, and were originated in 2008 or later, when lending standards had already tightened, including FICO scores and loan-to-value ratios.

-By Matthias Rieker, Dow Jones Newswires