With Monday’s deal for the $16 billion-asset Westcorp of Irvine, Calif., Wachovia Corp. would greatly expand its auto finance business — and step into the California banking scene.
When the $3.9 billion stock deal closes in the first quarter, Wachovia would add 8,500 automobile dealer customers nationwide and 19 retail bank branches in southern California.
In a phone interview Monday, Ben Jenkins, the president of Wachovia’s general bank, said the transaction is aimed at turning its auto finance business into a national operation. He downplayed the move into California by calling the branch network “icing on the cake.”
In a conference call on the deal, Mr. Jenkins said the transaction would let Wachovia enter the California banking business “in a modest way and will allow us to observe and learn a lot more about the markets there.”
Analysts generally reacted positively to the transaction, which Wachovia said would be cash accretive in the first year and accretive on a GAAP basis in 2007. (The deal confirmed market speculation Aug. 23 that Wachovia would buy Westcorp and the auto finance business WFS Financial Inc., which is 84% owned by Westcorp.)
Like Mr. Jenkins, analysts viewed the California branches as a secondary benefit and did not expect Wachovia to make aggressive moves there in the short term. However, they said the branches would serve as a base from which to make acquisitions or add more branches.
“What’s important is Wachovia is now in southern California,” said Gary Townsend, an analyst with Friedman, Billings, Ramsey & Co. Inc. “It raises some interesting questions about the possibility of Wachovia becoming an acquirer of a bank in that market.”
Westcorp’s Western Financial Bank has about $2 billion of deposits, including $1.18 billion in Orange County. With a 2.04% deposit share, it ranks ninth in Orange County, just ahead of Zions Bancorp.’s California Bank and Trust, with 2%, and behind Citibank, with 3.58%.
In an interview, Nancy Bush of NAB Research LLC said the branches, in “one of the best counties in California,” are a West Coast “beacon” from which Wachovia can watch the market as consolidation continues in the coming years.
“The name Wachovia entering into that market right now with 19 branches means essentially nothing,” she said. Since Wells Fargo & Co., Bank of America Corp., and Citigroup Inc. are well established in California, Wachovia will need to take time “to figure out how they become meaningful in that market.”
In the conference call, Mr. Jenkins said, “We expect to take a very measured and steady approach to this market. We think watching these 19 [branches] operate will give us a lot of insight into this market, and then we’ll know more about what we want to do with that.”
Wachovia is focused on branch-building in Texas and in the New York City market, and that focus will not change any time soon, the company said.
“Given the success of our de novo effort in Texas and in New York, it’s not unreasonable to expect that at some point in time we’ll want to do some building,” Mr. Jenkins said.
In an interview, Kevin Fitzsimmons, an analyst at Sandler O’Neill & Partners LP, said, “The entry into California is very interesting, because it comes earlier than most of us had expected.” He said he had expected a move into California to come perhaps five years from now, after Wachovia was further along with its expansion in Texas and New York.
“Undoubtedly if Texas and New York City continue to proceed well, I would expect in ‘06 you start to hear them talk a little bit more about expanding in California,” Mr. Fitzsimmons said.
In the near term, Wachovia will focus on expanding its auto finance business and on cross-selling opportunities among Westcorp’s dealers.
Wachovia would pay $3.42 billion for Westcorp and $490 million for the 16% of WFS Financial held by the public. The combined business would be based in Irvine and headed by WFS president and CEO Thomas Wolfe.
The deal would more than double the size of Wachovia’s deal financial services business, making it the country’s ninth-largest auto loan originator, ahead of B of A and behind Wells. Six of the top seven auto loan originators are units of auto manufacturers.
Wachovia expects banks will gain market share from the finance arms of auto manufacturers, which are struggling with weak North American sales and high manufacturing costs.
It also sees opportunities to sell other banking products to auto dealerships. Mr. Jenkins said he expects those cross-selling opportunities to materialize as early as 12 months after the transaction closes.
“There are some revenue synergies that will occur as we take the Westcorp platform and leverage that to serve our dealers on the East Coast,” he said. “And then we can take our relationship management approach and leverage that with their dealers and do more business.”
Wachovia’s dealer financial services business offers auto financing to consumers and provides products and services to dealerships, including real estate loans, capital loans, and wealth management.
In an interview, Mr. Townsend of Friedman Billings said the opportunity to sell other Wachovia products to Westcorp’s customer base “is substantial and provides them a way to grow the C&I loan book.”
Westcorp has $16 billion of assets, including $12 billion in its auto lending portfolio. Wachovia’s auto loan portfolio would grow to $19 billion, 22% of which would be subprime, once the deal closes. according to Jon Balkind, an analyst with Swiss Reinsurance Co.’s Fox-Pitt, Kelton Inc.
Observers had mixed views about Wachovia’s entering the subprime auto market.
Fitch Inc. affirmed its ratings for Wachovia but warned in a report that the deal would have “a significant impact on the composition of the firm’s consumer credit, adding a considerable nonprime component at a point in the cycle when the strength of the consumer sector is doubted increasingly each day.”
Mr. Jenkins countered in the interview, “The key is can they target the right near-prime and subprime borrower to go after, and we think they can, and we think they do.”
In the phone interview, chief risk officer Don Truslow said 6,400 hours of due diligence left Wachovia “very impressed with Westcorp's processes, reporting, and just their whole approach to doing business.” After the transaction closes, subprime loans will constitute 6% of Wachovia's total consumer credit portfolio.
