CORRECT: Capital One Wins ING's US Online Bank

CORRECT: Capital One Wins ING's US Online Bank - Sources

ING Groep NV (ING, INGA.AE) decided to sell its U.S. online-banking business to Capital One Financial Corp. (COF), according to people familiar with the matter.

Disclosure of the deal, valued at $9 billion, is expected soon. Capital One will pay $6.2 billion in cash and $2.8 billion in stock for ING Direct USA, which will give ING about a 10% stake in the McLean, Va., bank, according to a person with direct knowledge of the matter.

Capital One will raise $2 billion in fresh capital before the deal closes, expected later this year, this person said. Its shares rose $1.13, or 2.4%, to $49.00 Thursday in a mixed market for bank stocks.

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.

Standard & Poor's equity analyst Robert McMillan said the deal could be positive for Capital One because it is lowering its cost of making loans, and diversifies 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.

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 seven 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.

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 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" as defined by the Federal Deposit Insurance Corp., according to regulatory filings. Such core deposits, 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, are key for bank funding and often determine the value of bank deals.

The deal is expected to be accretive to earnings in 2012, said the person familiar with the matter.

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 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.

A person familiar with the deal said Capital One 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; 212-416-2471; matthias.rieker@dowjones.com

--Anupreeta Das and Gina Chon contributed to this article.

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