Will Capital One Ruin ING Direct?

When I heard that Capital One Financial (NYSE: COF  ) was buying ING's (NYSE: ING  ) ING Direct segment, my reaction was simple and to the point:

"Aw, crap."

I don't own Capital One stock, nor do I own ING's stock. But I am a customer and big fan of ING Direct, and the last thing I want to see is some main-line bank start meddling with something that's beautiful in its simplicity.

And I know for a fact that I'm not the only one who feels this way. A slide in Capital One's acquisition presentation shows that the "net promoter" score for ING Direct -- that is, the percentage of customers who would recommend the bank -- was 58%, crushing that of Wells Fargo (NYSE: WFC  ) , JPMorgan Chase's Chase Bank, Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) , which top out at 35% for Wells. Interestingly, Capital One didn't include its own net promoter score in the slide.

Of course Capital One isn't going to issue a statement saying, "Hey ING Direct customers, we're about to screw up your bank!" So, unfortunately, we'll just have to wait to see how much tinkering the new parent ends up doing.

In the meantime, there are a couple of other aspects of the deal that we can take a closer look at.

Too big to fail?
The issue of "too big to fail" has been a hot spot for me ever since Uncle Sam busted open the piggybank to save the massive financial institutions whose failure would have sucked our economy into a black hole. The insanity of the issue is that even as people were pulling their hair out over "too big to fail," Bank of America was acquiring Merrill Lynch and Countrywide, JPMorgan was taking over Bear Stearns and Washington Mutual, and Wells Fargo gulped down Wachovia.

Insanity is ... oh yeah, doing the same thing and expecting different results.

Fast-forward to today and we've got Capital One vaulting into the No. 5 spot among banks in the U.S. based on deposits. Is this yet another "too big to fail" institution making itself even more unwieldy? Fortunately, I think we can answer a solid "no." At the end of the first quarter, Capital One had $199 billion in total assets, so even after adding the $90 billion or so of ING Direct, it will be closer in size to the No. 6 by deposits US Bancorp (NYSE: USB  ) -- which has just more than $300 billion in assets -- as opposed to the trillions in assets at the big four.

It's also notable that Capital One has recovered relatively well from the financial crisis, reporting net income over the past 12 months that exceeded that of 2006.

But who wins?
In a deal like this, both parties don't win -- it's just not the way it works. In this case, I have to say it's pretty easy to pick a winner: Capital One.

ING had to sell ING Direct as part of a restructuring following its $15 billion bailout from the European Union. If it weren't for this, I don't see why it would have wanted to jettison this asset. Worse still for ING is the fact that the worldwide banking industry is still not exactly on sure footing, so there was little hope for a heated bidding war that would have cranked up a great price for the online bank. GE (NYSE: GE  ) was supposedly in the mix here, but apparently didn't have the appetite to be particularly aggressive.

From Capital One's perspective, the deal seems pretty sweet, if not an obvious strategic fit. The company noted in its presentation that the purchase price is equal to ING Direct's tangible book value, which is a pretty good price for a financial asset like this. And while management will obviously put rosy assumptions on the deal, I'll also throw out that it sees the deal being accretive to earnings per share in 2012 and offering an overall internal rate of return, or IRR, of 20%.

But what really caught my eye about the deal from Capital One's perspective was this note in its presentation: "Opportunity to swap higher-yield Capital One loans for ING Direct assets." The bulk of ING Direct's assets are low-loan-to-value, high-credit-score mortgage loans, U.S. Treasuries, and agency-backed mortgage-backed securities. If Capital One can shift some of these lower-yielding assets to higher-yielding credit card loans, it could make this deal look pretty darn smart.

Of course, offsetting that is the fact that Capital One doesn't exactly have an auspicious acquisition history. Its last big splash was the $14.6 billion takeover of North Fork Bancorp in March of 2006. Yes, that 2006. Is this a chance for redemption? Perhaps, but I couldn't blame investors for being skeptical.

Mark my words, Capital One
Overall, I'd have to give this acquisition a thumbs-up from the perspective of Capital One shareholders. But I'll offer that with the caveat that execution will be key.

As I noted at the beginning, my selfish concerns about Capital One mucking up a good thing at ING Direct are likely echoed by many other ING Direct customers. If Capital One starts monkeying around too much with the ING Direct model, it could alienate customers and sap some (much?) of the rationale for the deal.

You hear that, Capital One? Don't do anything stupid and we'll all get along just fine.

If you want to keep a close eye on Capital One and the rest of these banks, you can add them to your watchlist by clicking the "+" next to their ticker. Don't have a watchlist yet? Click here to start one for free.

The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (18) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2011, at 1:55 PM, EnigmaDude wrote:

    I agree with you and had the same reaction when I heard the news. I hold an ING Direct checking account but I may decide to close it if Capital One starts making changes that I don't like.

  • Report this Comment On June 20, 2011, at 1:59 PM, TMFHousel wrote:

    From a conversation I had with Matt: I think people like ING because it isn't Wall Street -- at least it doesn't feel that way. It feels more like a community bank. People might flee just for that reason once it becomes Capital One.

  • Report this Comment On June 20, 2011, at 2:26 PM, TMFKopp wrote:

    Also from the convo that Morgan and I had, I think COF would do well to rename it something that doesn't closely associate it with the Capital One brand.

    Matt

  • Report this Comment On June 20, 2011, at 3:37 PM, pmlang37 wrote:

    I've had accounts in both banks. I closed the one at Cap1 long ago, and I'm very happy with the one at ING. That says it all!

  • Report this Comment On June 20, 2011, at 3:47 PM, TMFLomax wrote:

    Thanks for writing this, Matt -- yeah, I also had an "aw crap" reaction and share a lot of the thoughts here. I think ING Direct has a good reputation for being very customer-centric. Capital One, not so much. I also suspect a lot of people will ditch ING once they get wind of this. Had a conversation with someone who's already thinking about it just earlier today (he also had an "aw crap" reaction about Capital One).

    Alyce

  • Report this Comment On June 20, 2011, at 4:29 PM, TMFKopp wrote:

    @Alyce

    These could be famous last words, but I'm going to give them the benefit of the doubt and wait until they're actively screwing it up until I pull my money. Until then, I'm going to assume that they have some basic understanding of why net promoter scores are so high at ING Direct and why the deposits are so sticky.

    But again, I could be giving too much credit...

    Matt

  • Report this Comment On June 20, 2011, at 7:44 PM, jphphila wrote:

    At the close of the markets today, i emptied my Sharebuilder account. Within three days I will transfer my entire portfolio out of Sharebuilder and move it to my ING Direct Electric Orange account. On the fifth day of this week, I will close out both my savings and my Electric Orange account. I informed ING DIRECT USA, that i was leaving them with EXTREME PREJUDICE due to their decision to let Cap One buy them. Cap One is the worst bank, except for Wells Fargo, for customer service. I am sorry to leave ING Direct after 10 EXCELLENT years of service. I will not give CAP ONE a dime of my money.They are criminals.

  • Report this Comment On June 21, 2011, at 4:48 PM, OliverKloseoff wrote:

    On ING's Facebook page the number of customers who say they are going to jump ship are in the hundreds if not thousands. All but $1.00 is left in my account until the end of the month.

    Capital One may do a good job, but culturally, everyone liked ING Direct's almost religion of saving as opposed to Cap One, just another bank who will do what it can for itself at the customers expense.

  • Report this Comment On June 21, 2011, at 6:21 PM, ceallachqn wrote:

    My understanding is that Sharebuilder remains with ING and the Orange Savings and Checking (ING Direct) was sold. Correct? I don't plan to keep the ING Direct with Capital One on board even if I do like Vikings.

  • Report this Comment On June 21, 2011, at 6:39 PM, Borbality wrote:

    yeah does anyone know if Sharebuilder is still with ING? haha I do have a Capital 1 online savings account but that's just where I park cash.

  • Report this Comment On June 21, 2011, at 9:13 PM, ducttapenasty wrote:

    Sharebuilder is staying with ING. The banking and Loans are being bought by Capitol One Financial. So ING is still in business as a online brokerage also margin accounts will stay with ING. Its just gonna be a real pain to have to manually put my funds into a sharebuilder account now.

  • Report this Comment On June 23, 2011, at 1:56 PM, MSaver2012 wrote:

    The business models of these two companies are incompatible. INGDirect and their customers focus on savings, with no fees or minimums. INGDirect has philosophically opposed and never offered credit cards. Capital One is all about fees and minimums and is a credit card bank at its core. Capital One's motive is to buy $85 billion in deposits and 8 million customer files, then convert as many of those customers into non-secured credit card debt, high-interest and fee-paying customers. This will fail, as INGDirect customers will flee. INGDirect should have worked with a large private equity group to take off ING Groups' hands, then prepare for a 2012 IPO.

    It will be interesting to see if INGDirect customers get wise about their future with Capital One and abandon ship in sufficient numbers that Capital One drops the deal and pays the termination fee.

  • Report this Comment On June 30, 2011, at 10:10 PM, FreeTigress wrote:

    I HATE Capital One! I am going to have to put my money elsewhere. I will miss the old ING Direct. :(

  • Report this Comment On July 07, 2011, at 11:59 AM, nedliug wrote:

    Save a spot for me on this wagon. I don't like the idea of Capital One taking over INGDirect and have my exit route planned. Since the high yield savings account doesn't really exist anymore, I moved most of those assets into dividend stocks in 2008/9 and primarily used Electric Orange for their large free ATM network. There are other places just as good these days though, and about the only thing that kept me from switching was the branding and customer service I suppose.

  • Report this Comment On July 09, 2011, at 9:09 AM, ThriftyCat wrote:

    I am really concerned. Not only do we have savings accounts with ING, but ING holds our mortgage. We have been 100% satisfied with ING's mortgage. I am fairly sure CapOne will sell that mortgage as quickly as possible. The thought of our mortgage being serviced by some giant company literally makes me feel ill.

  • Report this Comment On August 18, 2011, at 12:57 PM, CMoon22 wrote:

    I am so disappointed that ING is selling out to Capital One. I was recently delighted to have ING advise Electric Orange checking account holders that paper checks could be purchased for a one-time fee of only $5. I was about to close out my SunTrust checking account because that bank is instituting new fees of $7 per month for less than $500 average daily balance and $5 per month for unlimited use of the check card ( for ATM or credit purchases online or in a store). Now what to do? Is there another bank that can compare to ING and its consumer friendly save money motto? I mean ING doesn't even charge postage if you use their bill pay or person2person checks that are mailed! Any suggestions on where to move my money?

  • Report this Comment On November 30, 2012, at 2:29 AM, Sysop100 wrote:

    With ING converting to Captial operation. The whole operation of a credit card company taking on this time of venture from the get go is just ot good. There model of finatical background is just negitive to a once high yielding proiduct. The Two just don't mix. A investment company/insurance company would be a better prospect. I would see the yield drop even future than it is when things in get into full swing by 2013 as I have heard and they are re-branded at that point.

    I am going by there agressive actions in the credit card business and law suites. Is that the kind of operator you want at the helm of ing. I don't at the moment know was was offered but some real thought should of gone into this before it was ecepted. I to have an investment in ING since about 2005 or so and am waiting to see what unfolds..

  • Report this Comment On November 14, 2013, at 1:20 PM, Acapuchini wrote:

    Cap 1 is absolutely a disaster waiting to happen. This is a guaranteed failure! This bank doesnt know if its coming or going? Their operations department is really at a total loss!! The bank has lost control of its departments and operations. I know this persoanlly and its THE GREAT BIG SECRET! I would stay away from them.

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