It's a long way from Des Moines to San Jose, Costa Rica, but Norwest Corp.'s consumer finance unit doesn't plan to stop once it gets there.

In fact, San Jose may well be a stepping-stone for the Des Moines-based Norwest Financial Inc. to expand not just in Central America and the Caribbean but further afield into South America.

In its biggest foray outside the United States since it acquired Trans Canada Credit Corp. two years ago, Norwest last month reached an agreement to acquire Island Finance, ITT Corp.'s Caribbean consumer finance operations, comprising a number of separately chartered companies.

"Island gives us an opportunity to expand into other Central and South American markets to the extent we want to," says David C. Wood, chairman and chief executive of Norwest Financial Inc.

"It'll make it much easier than doing it de novo on our own."

Norwest is paying around $475 million, or 11.3 times estimated 1994 earnings, to acquire Island Finance and $1 billion in receivables, bringing Norwest Financial's total receivables to some $6 billion.

The deal is expected to close in April or May, and will give Norwest Financial 54 branches in Puerto Rico, 15 in Panama, five in the U.S. Virign Islands, five in the Netherlands Antilles, two in Aruba, and one in Costa Rica. It also gives Norwest-the-parent a franchise stretching well beyond its traditional stronghold in the Midwest.

Analysts have lauded the move, saying Norwest's expansion into consumer finance makes sense for a simple reason: that business is growing faster and yielding a higher return than traditional banking.

"What it adds up to is that it increases the concentration in the earnings mix of their consumer finance business, where they have higher returns and faster growth than their banking business," says Lawrence R. Vitale, an analyst with Bear Stearns & Co.

"From their standpoint it's exactly what they should be doing."

"People tend to not think of Norwest as a diversified financial services company and often think of it as a bank, but this company is anything but a plain-vanilla bank," remarked Sandra J. Flannigan, a first vice president at Merrill Lynch & Co. in New York.

"This was an opportunity to acquire a good franchise in markets they can use as a base to expand south of the border."

The acquisition of Island Finance follows the recent purchase of Directors Mortgage Loan Corp., a California-based mortgage company with a $13.1 billion servicing portfolio and 121 retail and wholesale branches, mainly in California. These and other strategic acquisitions "have significantly expanded the earnings capacity of the Norwest franchise" helping turn the Minneapolis-based bank into "one of the premier diversified financial services companies in the United States," CS First Boston noted in a recent report.

Adds Merrill Lynch, in another report, "Norwest Financial has consistently been among the most successful performers in the finance industry, in terms of both profitability and asset quality."

The unit's "broad geographic distribution of the asset base, closely monitored credit approval standards, and relatively small individual credit exposures have resulted in above average asset quality throughout all phases of economic cycles," the report added.

Profits at Norwest Financial rose 11.2% last year over the previous year to $222.5 million and equal to over 25% of the parent company's total earnings. Compared to average bank earnings, where anything exceeding a 1% return on assets and 15% return on equity is considered praiseworthy, Norwest Financial has for the last few years frequently registered a more than 4% return on assets and return on average equity in the high 20's. Assets last year rose 17% to $6.1 billion from $5.2 billion, excluding Island Finance.

"It's the crown jewel of Norwest," said one executive.

Although Norwest is already planning to open several additional offices in Costa Rica, the bank's most immediate goal will be to integrate Island Finance into its existing consumer finance activities spanning 46 states, Guam, and Canada. The bank has long been looking to acquire a business in Puerto Rico and the Caribbean.

"Puerto Rico's been a market we had our eye on for 10 to 15 years but could not figure out how to get in there except de novo and de novo would be a very difficult way to get in," Mr. Wood said.

Island Finance is already the largest consumer finance company in Puerto Rico, well ahead of its three main other competitors: Irvine, Calif.-based Avco Financial Services Inc.; Dallas-based Associate Corp. of North America, and Evansville, Ind.-based American General Finance Corp.

Executives say that Island's 11% annual increase in receivables over the last five years, coupled with prospects for future growth, made the company an extremely attractive target for Norwest.

"The fact that they're a market leader, a pretty darn good company in their own right, and our feeling that we could bring some value to the table and make Island a better company in the future," all figured into the decision to make the acquisition, Mr. Wood said.

Norwest hopes to add several products, such as real estate secured loans, to Island Finance's business. Out of some $1 billion in receivables, Mr. Wood notes, Island Finance has less than $20 million in real estate secured loans, and he believes there is ample room to expand.

Norwest also plans to add credit cards to Island Financial's services and to expand its retail sales finance operation, which buys up installment loans issued by retailers and converts those contracts into loans.

At a later stage, Norwest may also integrate Island Finance's computer system into its own, although Mr. Wood emphasized that the San Juan-based company's own system "adequately serves their needs."

Founded in 1897 and formerly known as Dial Finance Corp., Norwest Financial was acquired by the $56.6 billion-asset bank holding company in 1982. Purchase of Island Finance is only the latest in a series of acquisitions that have marked a relentless growth in Norwest's consumer finance organization.

Since 1988, Norwest Financial has acquired nine other consumer finance companies. Among them, HBE Leasing Corp. in Missouri; Financial Investment Association in Illinois; ABQ Financial in Tennessee; Coast Program in California; Termplan Inc. in Louisiana; AIC Financial Services in Tennessee; Trans Canada Credit Corp. in Ontario; Allied Business Systems Inc. in Georgia; and Community Credit Co. in Minnesota, Illinois, and Wisconsin.

Over the next few months, Norwest is planning to open additional offices in Canada as well as its first consumer finance office in Troy, Mich. When that is completed, Norwest will have operations in 47 states, excluding only Maine, Vermont, and Arkansas.

"There's always been a lot of different economic conditions and ups and downs in interest rates and inflation, but this is a pretty doggone good business that just seems to weather the storms of everything that's happening," Mr. Wood remarked.

"We're looking at other acquisitions and expansions if opportunities arise," he said.

But, he added, Norwest intends to take a "disciplined" approach to bidding and will not bid for anything that would be dilutive.

"This is not the sort of thing you can plan," Mr. Wood observed. "You just try to stay abreast of what's happening and what's for sale, run the numbers, and make your bid."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.