United Overseas Bank announced it has entered into agreements to acquire Citigroup’s consumer banking businesses comprising its unsecured and secured lending portfolios, wealth management and retail deposit businesses in Indonesia, Malaysia, Thailand and Vietnam.

The acquisition, which is based on the $4.5 billion net asset value of the to be acquired businesses, plus $915 million, will be financed by excess capital. The cost of funding the acquisition will reduce UOB’s CET1 ratio by 70 basis points (bps) to 12.8%, based on its CET1 of 13.5% as at Sept 30, 2021. OCBC Credit Research calculates that UOB will have still have a capital buffer of $11 billion against the regulatory minimum requirement.

The cost of acquisition represents 1.2 times the book value of Citi’s consumer business. In terms of price to be paid, this compares - favourably for want of a better word - against the $10 billion, or 3 times book DBS Group Holdings paid for Dao Heng Bank more than 20 years ago, and the US$4.97 billion, or 1.8 times book paid by Oversea-Chinese Banking Corp for Wing Hang Bank. In 2001, UOB paid around $10 billion or 1.9 times net asset value in a share and cash transaction for Overseas Union Bank. More recently, in April 2021, DBS acquired a13% stake in Shenzhen Rural Commercial Bank Corporation (SZRCB) for RMB 5,286 million, the equivalent of $1,079 million, and at 1.01 times book.  

What differentiates this acquisition from those of DBS and OCBC is that UOB is familiar with these four geographies and already has subsidiaries operating in each of these markets. “We know this region well and believe in its growth potential. With this deal, we get to scale up our business across four target markets at one go," says UOB group CEO Wee Ee Cheong. 

"In one move, doubling our retail franchise in four countries, propelling our market leadership positions and accelerating our growth targets by five years,” he adds.

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The transaction will be immediately accretive to UOB's EPS (earnings per share) and ROE (return on equity), excluding a one-off transaction cost, Wee adds. “Including one-time cost, we will be EPS- and ROE-accretive by 2023 and generate higher returns over time, of ROE of more than 13% by 2026. Our CET1 will be restored to above 13% by 2023,” he indicates.  

UOB will take a one-time cost of $700 million over two years. Of this, $200 million is in stamp duties. However, the impact on net interest margins is positive, according to Lee Wai Fai, UOB's group CFO. “The downside is credit cost but it’s quite well managed. We are confident the impact on the portfolio is not big. The credit cost is marginally [higher], of 1 to 2 bps, but RoRWA (return on risk-weighted assets) is greatly enhanced,” Lee says.

Lee says he is targeting a 2% RoRWA by 2026. Based on RWA of $252.81 billion as at Sept 30, this works out at $5.05 billion. When fully integrated, ROE is likely to be 13%. UOB’s equity as at Sept 30 was $41.84 billion. Hence, based on pro forma numbers, the acquisition could boost earnings by around 30% by 2026.   

“We think this move is credit supportive, given UOB’s solid capital position and existing presence in southeast Asia. This adds scale and diversity to UOB’s overall business with synergies expected to UOB’s existing complementary businesses across all retail segments,” says OCBC Credit Research.

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The acquisition is expected to double UOB’s retail customer base in Indonesia, Malaysia, Thailand and Vietnam from around 2.9 million to 5.3 million, in line with UOB’s pre-acquisition target to achieve 2 times growth by 2026.

Even with this acquisition, UOB’s main geographic focus will remain in Singapore, with 50% of loans post-acquisition based on 1H2021 loan composition, compared to 51% pre-acquisition.

Citigroup had previously announced the sale of its consumer business in Australia, Bahrain, China, India, Indonesia, South Korea, Malaysia, the Philippines, Taiwan, Thailand and Vietnam. Citigroup’s move is part of a strategy review under CEO Jane Fraser, who assumed this role on March 2021. 

National Australia Bank has been announced as the acquirer of the Australian business. Union Bank of the Philippines is the likely acquirer of Citi’s Philippine business.

Standard Chartered and DBS are said to be bidding for Citi’s Taiwanese bank, which is reported to be worth US$2 billion to US$4 billion.

It hasn’t gone unnoticed that UOB’s share price rallied following the announcement of the proposed acquisition of the Citi businesses.

In contrast, iFAST Corp, which announced the proposed acquisition of a British digital banking fell from $8.15 pre-announcement to $7.95 post-announcement, and ended the week at $7.68.

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“This is a reasonably priced acquisition that enables UOB to scale our franchise, fast forward our customer growth, strengthen our capabilities and contribute to realising our target ROE of more than 13% by 2026," says Lee, the CFO.

"With capital staying strong and CET1 expected to be more than 13% by 2023, we remain comfortable with maintaining dividend policy of 50%,” he adds.

Perhaps that is why the market likes this deal, reasonably priced, earnings accretive, and dividend policy unchanged.