UOB announced on 14 January 2022 that it will acquire Citigroup’s consumer banking businesses in Indonesia, Malaysia, Thailand, and Vietnam.
The total cash consideration for this transaction will be determined by adding an aggregate premium of S$915 million to the net asset value of Citigroup’s Consumer Business at completion. Given that this segment’s combined net asset worth as of 30 June 2021 was S$4 billion, this deal would be approximately S$4.915 billion and would be funded by UOB’s excess capital.
So, is this a good deal for UOB? And would it add value for its shareholders?
If you are a UOB shareholder or plan to become one, here are some key things to note:
5 things for shareholders should note
1) Acceleration of UOB Retail Banking Business Across ASEAN
Prior to this acquisition, UOB already had operations in all four Southeast Asian markets that it intends to purchase from Citi. As a result, Citi’s assets are merely a complement to UOB’s, enabling them to broaden their overseas divisions.
In terms of headcount, Citigroup had 2.4 million retail clients across four regions as of June of last year. Even after accounting for a 10% loss in customers (overlapping of customers), UOB’s retail customer base in the four regions would be doubled to 5.3 million as a result of the acquisition. An objective that was initially expected to be reached in 2026.
2) Changes to loan profile
Citigroup’s operation in four markets includes unsecured loans, secured loans, wealth management, and retail deposits. Following the purchase, there will be a significant increase in unsecured loans from 21% to 36%. An unsecured loan like student loans and credit cards do not require any collateral as security, such as the borrower’s property. While such loans have a greater margin, they are significantly riskier.
In terms of geological diversification, UOB’s loan profile would be more diversified. Singapore would still take up the majority at 50% of the loan portfolio, down from 51%. At the same time, the ASEAN mix would increase from 21% to 23%.
3) EPS and ROE accretive
As earlier noted, there would be a considerable increase in unsecured debt, which may be one of the reasons why this merger is EPS and ROE accretive. This acquisition, including one-time transaction expenses, would be EPS and ROE accretive by 2023, as total income produced by the new assets would increase by nearly 10% of UOB’s current earnings.
The company also intends to achieve a greater ROE of more than 13%. For comparison, UOB’s most recent ROE was 10.4%. DBS was at 12.1%, whereas OCBC was at 9.5%.
4) UOB’s Stable Balance Sheet
UOB’s CET-1 ratio would fall by 70 basis points to 12.8% following the acquisition. As a point of reference, here are the figures from the local banks’ third-quarter performance. UOB, DBS, and OCBC had CET-1 ratios of 13.5%, 14.5%, and 15.5%, respectively.
From this, UOB would remain the ‘worst’ of the three. ‘Worst’ because, while it is the lowest of the three banks, 12.8% is still a healthy figure that is substantially above the minimal CET-1 of 6.5% for a domestically systemically significant bank (D-SIBs).
5) The deal will not be completed anytime soon
The acquisition will be subject to regulatory approvals in each country as well as in Singapore. The completion date is expected to be between mid-2022 and early 2024, depending on the progress of the regulatory approval procedure.
As a result, the impact of this acquisition would not be felt as early on the financial statement (though the share price has already increased).
Future looks bright for UOB
If you look at the portfolio makeup of the three banks, UOB is the most active in Southeast Asia. With Southeast Asia’s rising affluence, UOB may be able to benefit from this tailwind in the coming years.
UOB’s Valuation
Banks share prices have risen significantly in recent weeks as a result of the inflation news discussed in the previous article.
Even so, UOB’s share price still has room to climb before reaching its P/B historical high of 1.41. (The current P/B is 1.27.)
In addition to that, I believe the upcoming Q4 earnings will give the local bank a final push. That said, UOB’s margin of safety has already been significantly diminished following the run-up, so new investors do take note of that.
Thoughts
UOB is probably the best candidate for this acquisition among the three local banks in Singapore, given its weightage in the ASEAN economy. It has consistently emphasized its ambition to expand its SEA market, which is unquestionably a fantastic opportunity for it to accelerate its growth.
From the announcement, Citigroup’s business will be purchased at 1.2x P/B. Compared to UOB’s current P/B of 1.27, I believe this transaction is acceptable. Not too pricey, but also not that affordable, given the slightly riskier nature of Citi’s operations.
However, it is also worth noting that this transaction won’t be completed until roughly 2024. Bank valuations are now high due to an inflationary climate that may or may not endure until 2024. If inflation remains high, then the Citigroup business is reasonably priced. However, if this inflationary environment doesn’t last, UOB may potentially be buying Citigroup business at a high.