What do you do when you already have more than 2,000 retail banking branches and a very strong mortgage business? Well, if you're Washington Mutual
WaMu has decided to get into the high-priced plastic game with a buyout of once-troubled, but still top-10, Providian
WaMu's rationale for going this route is pretty straightforward -- it already does just about everything else on a retail banking level. With a credit card business, it has yet another profitable product that it can try to cram through its retail banking operations. Moreover, WaMu executives said they were already in the process of building their own credit card business, so this acquisition will save them time and expense by giving them a "turnkey" credit card business.
Not so long ago, in my estimation, you couldn't have found anybody to bet you a nickel that this deal would take place. Providian was once a very aggressive (some have said "predatory") subprime lender that got tagged back in 2001 for fraudulent practices to the tune of $300 million. What's more, our own Selena Maranjian has pointed out Providian's high fees in the past.
Providian's troubles culminated in a death-defying dive in 2002 that took the stock into the dreaded realm of the Single-Digit Midgets. Since then, however, the company has attempted to leave the subprime market and go after the same higher-quality customers as MBNA
WaMu will largely be leaving Providian intact under current management -- likely a smart move given its lack of experience in the credit card space. While some of Providian's recent growth has come from accounting practices like lower loss reserves, I don't doubt that access to WaMu's retail banking channel and capital will help the combined business grow quite nicely.
Although I question whether WaMu's customers really need another credit card offer in their mailbox, this could prove to be a good move for the company. Return on assets had been skidding of late, and the mortgage business has been slowing, so this move could bump up profitability and growth. Top that off with a pretty good dividend yield, and maybe WaMu becomes a little more attractive to investors again.
For more on both players, check out these past Foolish takes:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).