UOB snares Citi's consumer units in 4 Asean markets for almost S$5b, double retail base to 5.3m

It's proposing to pay S$915 million plus the net asset value of Citiís consumer business in Indonesia, Malaysia, Thailand, Vietnam

Jan 14, 2022

UOB UOB: U11 +2.57% will acquire Citigroup's consumer banking assets in Indonesia, Malaysia, Thailand and Vietnam for almost S$5 billion in an aggressive push to scale up its retail franchise in Asean.

The lender will pay a cash consideration of S$915 million plus the net asset value of Citiís consumer arm - comprising its unsecured and secured lending portfolios, wealth management and retail deposit businesses - in the 4 markets.

The deal will double UOB's existing retail base in the 4 markets from about 2.9 million to 5.3 million, accelerating its target 5 years ahead of time.

It will also bring a 1.4 times income uplift and 1.2 times loan growth in the 4 markets. At the group level, an immediate S$1 billion in incremental annual income uplift and asset growth is expected through the expanded franchise.

At a media briefing on Friday (Jan 14), UOB chief Wee Ee Cheong said there is "minimal" overlap between UOB and Citi's retail base in the region, with opportunities to cross-sell and bring to scale existing products.

Citi's Asean consumer business has an aggregate net asset value of around S$4 billion and customer base of around 2.4 million as at Jun 30, 2021. It generated income of around S$500 million in the first half of 2021.

"We are able to kill 4 birds in 4 countries (with one stone), what more can we ask for? It will double our scale today, and I think that is good enough for the size of UOB. Citi is selling (its consumer units) in 13 countries, we're only interested in 4. These markets are where we have the bank strength, the people, and where integration risks will be a lot less," said Wee.

It was earlier reported that UOB was in the running for just the Indonesian franchise, so snapping up 4 markets comes as a surprise, CGS-CIMB analyst Andrea Choong told The Business Times.

"Seeing that this is UOBís first major acquisition in 16 years, we think this acquisition demonstrates that UOB is really looking for strategic and complementary fits for its Asean-focused business," she noted.

Pre-pandemic, the bank was already generating close to a third of operating income from Asean - a much higher proportion than its Singapore peers. UOB's digital bank, TMRW, is currently available in Indonesia and Thailand.

Following the acquisition, the bank will see a material 80 to 170 per cent bump-up of mass affluent and emerging affluent customers, said Maybank Securities Singapore research head Thilan Wickramasinghe.

"This is the critical customer segment the group has been targeting with their mass wealth management strategy delivered through physical and digital channels," he told BT.

Citi's consumer business has a return on risk-weighted assets (RORWA) of about 3 per cent, which is higher than UOBís.

UOB expects the deal to be immediately accretive to its earnings per share and return on equity (ROE), excluding one-off transactions. It is further targeting for a higher ROE of over 13 per cent and RORWA of 2 per cent by 2026.

Choong noted that Citiís portfolio will add a larger pool of unsecured products to UOB, in which it has a comparatively smaller presence.

"We think that this fits a product gap for UOB. It's the higher returns from this unsecured retail book that will ultimately drive the RORWA and ROE uplift," she said.

With 70 per cent of the revenue of the acquired businesses coming from cards, it will be the strategic focus of this acquisition, said Jefferies analyst Krishna Guha.

Citi has traditionally been a dominant player in the cards space. Post acquisition, UOB's credit card business is expected to double across Asean. At the group level, income contribution from cards is targeted to rise from 25 per cent currently to north of 35 per cent, said its head of group personal financial services Jacquelyn Tan.

The bank's fee income from credit cards came in at S$52 million in Q3 2021.

Still, given that the Citi deal will increase the proportion of income contributed by unsecured portfolios, asset quality risks and credit management execution need to be watched, Wickramasinghe cautioned.

UOB chief financial officer Lee Wai Fai noted that credit risks in Citi's consumer portfolio have been "quite well managed" and will likely only see marginal impact of 1-2 basis points to overall group performance.

From a cost management perspective, the larger franchise will easily bring down cost-to-income ratio by 3 percentage points by 2026, he added.

The bigger question is whether UOB is able to transition and retain Citi's existing pool of customers as well as integrate its internal teams, given differences in culture, branding, products and regulations.

"The fact that multiple markets need to be digested simultaneously, cultural and regulatory risks also need to be watched," said Wickramasinghe.

Wee told media that UOB is "very confident" of executing this integration by tapping on its existing standardised, digital platform to manage all markets. It looks to further build a committee to look at digital and product capabilites.

"We take a phased approach so we can replicate our learnings in each market with subsequent markets," he said.

The proposed Citi deal is expected to be completed between mid-2022 to early 2024, depending on the pace of individual countryís regulatory clearance.

UOB plans to bring onboard the 5,000 Citi employees in the consumer units, which includes senior leadership.

The acquisition will likely be financed through excess capital. It should also reduce its Common Equity Tier 1 (CET-1) ratio by 70 basis points to 12.8 per cent, based on its capital position as at Sep 30, 2021.

UOB plans to restore capital and guided for CET-1 ratio to be higher than 13 per cent next year. It is also confident of maintaining its 50 per cent dividend payout ratio, said Lee.

Last April, Citi had announced that it will exit from 13 retail markets to focus on wealth management. The markets are: Australia, Bahrain, Indonesia, South Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand, Vietnam, India and China.

Shares of UOB closed at S$29.93 on Friday, up S$0.75 or 2.6 per cent.