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Citi consumer assets snapped up by United Overseas Bank, UnionBank, DBS
CASE STUDY: CITI ASSET SALE Citi consumer assets snapped up by United Overseas Bank, UnionBank, DBS
Analysts weigh in on who won—and who may have bitten off more than they can chew.
Citi’s bombshell announcement that it is rolling back its retail operations across 10 markets in Asia and 13 markets globally sent banks in the region abuzz with acquisition talks.
Almost a year later, three banks have won out so far: United Overseas Bank (UOB), which snatched up Citi’s consumer banking franchises in four markets; UnionBank of the Philippines has agreed to purchase the Citi retail assets in the country; and DBS is buying Citi’s consumer banking business in Taiwan.
But whilst the banks purchased the assets in the hopes of strengthening their profits, customer base, and portfolios, their possible futures following this purchase vastly differ from one another. Below, Asian Banking & Finance has compiled expert opinions on UOB, UnionBank, and DBS following their acquisition of Citi’s assets.
Following Citi’s decision to roll back retail operations in Asia, three banks swooped in to take the assets
No way but up
UOB was the biggest acquirer in Southeast Asia thus far, snatching up Citi’s retail business assets in Indonesia, Malaysia, Thailand and Vietnam, excluding the American bank’s institutional businesses in the four countries.
Analysts said that this is a big win for the Singaporean lender, as it reportedly enhances UOB’s longterm growth prospects and improves its profitability, whilst having a manageable capital impact.
In a report, RHB approximates that the new assets will add over US$735m (S$1b) in UOB’s annual revenue, against around US$515m (S$700m) in one-off transactions that UOB will shoulder over the first couple of years. The deal earnings are expected to be reflected beginning end-2023.
Moody’s Investors Service Vice President Eugene Tarzimanov also
UOB snatched up Citi’s retail business assets in Indonesia, Malaysia, Thailand and Vietnam
believed that the deal is positive for UOB Group.
“UOB’s announced acquisition of Citigroup’s consumer finance businesses in four ASEAN markets will strengthen its market franchise and retail customer reach, and lead to improved profitability,” Tarzimanov said.
“Whilst UOB’s core capital ratio will decrease modestly because of the acquisition, the bank is committed to strengthen its capital buffer in the medium term,” Tarzimanov added.
RHB is of the same opinion, saying that the acquisition is of the “right strategic fit” as the two banks have little overlap in customer base and product offerings.
The estimated 80% expansion in UOB’s ASEAN-4 customer base arising from the deal also reportedly accelerates UOB’s retail banking’s ambition to double its customer base by five years, the report added.
However, RHB warned of risks related to system integration, as well as staff and customer retention. On the upside, Citi and UOB both operate on a common IT system across the region, which the UOB management believes should reduce the complexity for integration.
Despite the advantages to UOB Group in general, Moody’s warned that the bank’s Thailand franchise may suffer a more negative impact, and gave it a negative outlook in a separate report.
“The negative outlook is driven by the material decrease of UOB’s core capital ratio after the acquisition is completed in 2022,” the ratings agency said.
According to Moody’s, UOB Thailand’s tangible common equity (TCE) to adjusted risk-weighted assets ratio (TCE ratio) will decline materially to below 10%, from a
UPB’s acquisition of Citi’s retail assets will reduce its capital, and it will take multiple years to rebuild its capital buffer
Citi Taiwan will accelerate DBS’ growth in the market by at least 10 years (Photo by Edgar Su)
strong level of 14.2% as of 30 June 2021 because of goodwill and additional assets, before rebounding to around 11% over the course of three years.
Regarding client retention, RHB believes that the minimal overlap in product offerings reduces the risk of customer attrition.
Gloomier tidings
Unfortunately, Moody’s could not share the same confidence it has on UOB with its outlook for UnionBank of the Philippines following the latter’s announced acquisition of Citibank’s retail assets in the Philippines.
The purchase weakens the bank’s capital buffers amidst heightened risks due to the still-raging pandemic, the ratings agency said.
“The acquisition will reduce UnionBank’s capital, and the bank will take multiple years to rebuild its capital buffer,” warned Moody’s, regarding the purchase.
On the upside, the acquisition will improve UBP’s core profitability due to an increase in the share of higheryielding retail loans.
But the extent and sustainability of the potential earnings boost from this acquisition is uncertain, as it is highly dependent on a successful post-acquisition retention of Citibank’s clients.
“The negative outlook reflects Moody’s view that UBP’s solvency will weaken after the acquisition is completed, a result of a significant reduction in UBP’s post-acquisition capital buffers amid heightened asset risks due to the ongoing pandemic,” the ratings agency wrote.
Moody’s regards the bank’s acquisition strategy as a supposed governance risk under its environmental, social, and governance (ESG) framework, given the implications for the Philippine bank’s capital, financial strategy, and risk management.
UnionBank’s assets are also under pressure given ongoing COVID-19 disruptions in the country. UnionBank’s gross non-performing loan ratio increased significantly to 4.9% as of the end of September 2021 from 3.3% as of the end of 2019, reported Moody’s.
One step, double the clients
For DBS, its acquisition of Citi’s consumer business in the market will make it the largest foreign bank in Taiwan by assets.
“The transaction makes strategic rationale, given the increased scale and expanded high quality customer base, which will propel DBS to be the largest foreign bank by assets in Taiwan,” OCBC Investment Research reports.
In particular, DBS’ purchase nearly doubles the high net worth and mass affluent clients the bank has in Taiwan, according to Jefferies equity analyst Krishna Guha.
“The deal checks all the right boxes: no capital raise, maintains dividend policy, EPS accretive and a good-looking price,” Guha said. “Whilst Taiwan is not a core market, the acquisition should help to capture growth in wealth management and Asian technology sectors. It helps to build scale and deepens presence in the one of the region’s wealthiest and a top private banking market.”
This marks DBS’ third big asset acquisition in a span of just a year and a half, following Lakshmi Vilas Bank (LVB) in late 2020 and a stake at Shenzhen Rural Commercial Bank in April 2021.
“The group has done three deals LVB in India, SZCB in China, and Citi Taiwan in quick succession. As such, it may stretch the management bandwidth,” noted Guha. “However, given that it is a single country deal and DBS has acquired and integrated businesses in Taiwan earlier–Bowa Bank in 2008, ANZ Taiwan in 2016–it is unlikely to pose major challenges, in our view.”
Guha and Jefferies did note, however, that the net asset value hasn’t been disclosed.
Acquiring Citi Taiwan will also accelerate DBS’ growth in the market by at least 10 years. Citi’s consumer business in the market is noted as a high-returns business, generating an average annual net profit of over US$183.9m (S$250m) in the two years before the pandemic hit.
In terms of accounts and branches, DBS is adding 2.7 million credit cards and unsecured accounts, 500,000 deposit and wealth customers, and 45 branches to its retail business in Taiwan once Citi’s assets were fully integrated.
