Capital One, the former credit card monoline, is no stranger to diversifying into business lines other than cards in a bid to become a full-service bank. It acquired Hibernia Bank back in 2005 and North Fork Bank in 2006 and began rolling out auto loan and mortgage operations. But there is a new sense of urgency in its planned acquisition of another regional US bank, Chevy Chase, for $520 million in cash and stock. The deal, announced on 4 December, is subject to regulatory approval and is expected to close by the end of March.

In line with other banks now pulling back from credit lending and scrambling to boost their deposit bases, Capital One fended off competition from banking behemoth Citi to get its hands on Chevy Chase’s deposit base worth $11 billion, giving Capital One a combined deposit base of nearly $110 billion, along with Chevy Chase’s 244-strong branch network stretching across Maryland, Virginia and Washington DC. After completing the Chevy Chase purchase, Capital One will have a managed loan portfolio of more than $159 billion and 983 branches in total.

Capital One gets bargain price

Chevy Chase is yet another victim of the credit crunch, having relied heavily on selling adjustable rate mortgages (ARMs) in regions of the US where the house price crash has hit hardest, such as Florida and California. It is believed that it began looking for buyers around three months ago. Capital One stated that it was assuming that $1.75 billion of Chevy Chase’s portfolio of loans would go into default in the coming years, most of which would be associated with option ARM portfolios. It is this factor that is thought to have reduced Chevy Chase’s asking price in recent weeks.

Chevy Chase also has a significant history when it comes to credit cards, having built up a substantial card portfolio before selling it to Bank One. The proceeds of that sale enabled Chevy Chase to establish and expand its branch network and secure access to a much larger pool of customer deposits.

The Chevy Chase acquisition, along with the $3.56 billion it received as part of the US government’s bank bail-out programme, should help Capital One to bolster its capital reserves sufficiently to ride out the ongoing credit crisis. Under a new US Treasury regulation designed to encourage stronger US banks to acquire weaker ones, Capital One is in line to receive tax relief of up to $607 million over time, although it emphasised that it had relied on private capital of $700 million raised in October to fund the acquisition.

Greater card losses in 2009

Chevy Chase’s deposit base will help Capital One continue to fund its credit card lending as other sources of funding have dried up. But it remains to be seen whether Capital One’s card portfolio will suffer even greater losses as the year 2009 gets underway. Moshe Orenbuch, an analyst at Credit Suisse First Boston, told CI that Capital One’s October credit statistics showed its US card net loss rate had increased by 20 basis points to 6.54 percent from the previous month, and its fourth-quarter net loss rate is expected to be around 7 percent.

There could be more pain in store for Capital One and other major US credit card issuers in the months to come. In early December, it was announced that over 533,000 people had lost their jobs in the US in November, far surpassing analyst estimates and indicating charge-off and default levels could spike even higher next year.