United Overseas Bank Ltd.'s nearly US$3.6 billion acquisition of Citigroup Inc.'s consumer banking business in four Southeast Asian countries will allow the Singapore lender to strengthen its footprint in high-growth emerging markets.
The deal will help double the retail customers of United Overseas Bank, or UOB, to about 5.3 million in Malaysia, Indonesia, Thailand and Vietnam, and add nearly 5,000 employees across the four countries. The business generated about S$500 million income for Citi in the first half of 2021 and UOB expects the transaction to be immediately accretive to its earnings per share and return on equity.
"[The acquisition] will enable UOB to scale up and deepen its regional franchise. Citi's franchise is able to add to UOB's existing strengths in these markets," said Rui Wen Lim, an equity analyst at DBS Group Research. The deal will be positive for UOB's overall strategy, given it already has the largest presence across Southeast Asia amongst the Singapore Banks, Lim said.
UOB and its bigger local rivals DBS Group Holdings Ltd. and Oversea-Chinese Banking Corp. Ltd., or OCBC, are keen to tap growth markets across Asia as Singapore, a nation of 5.5 million people, seeks to grow its reputation as a financial hub. Local lenders also face competition from digital-only neobanks and the limitations of a highly developed economy that cannot maintain its fast pace of growth from prior decades.
DBS, Southeast Asia's biggest bank by assets, announced its acquisition of The Lakshmi Vilas Bank Ltd. in 2020 to expand its footprint in India. OCBC has been focusing on capturing China's growing wealth market by partnering with Ping An Bank Co. Ltd. for Wealth Management Connect, a scheme that allows banks to tap clients in the Greater Bay Area, a megapolis that includes nine cities in mainland China, Hong Kong and Macao.
"This deal would mean that Singapore banks would have a better opportunity in the region to expand. Singapore has been well known as Southeast Asia's dominant finance hub and this deal would only strengthen that," said Glenn Thum, Singapore-based analyst at Phillip Securities Research. UOB would be able to tap existing resources in each of the four countries and add value, Thum said.
For Citigroup, it marks a step in CEO Jane Fraser's plan to exit retail operations in 13 markets to focus on wealth management and corporate banking operations. The lender in December announced a deal to sell its consumer-banking business in the Philippines to a local lender, and earlier signed a similar divestment in Australia. The company also announced its exit from consumer banking in Mexico on Jan. 11, after which Fraser said Citi's strategic review of geographies is now complete.
Plugging gaps
"We think that this [deal] will help UOB plug is product gap, particularly in unsecured retail products such as credit cards, while building on its current retail offerings," said Andrea Choong, a Singapore-based equity research analyst at CGS-CIMB Securities. "Building scale is definitely the focus of this transaction."
UOB will pay a premium of S$915 million over the net asset value of the business at the time of completion. The combined NAV of Citi's consumer business was about S$4 billion as on June 30, 2021, UOB said in a Jan. 14 statement. UOB will need regulatory approvals in each of the four countries and in Singapore. It estimates completion between mid-2022 and early 2024. Analysts said they don't foresee any major hurdles to the deal going through.
Citigroup's portfolio in wealth and unsecured business will complement UOB's existing strengths in wealth, funding and secured businesses, DBS Group's Lim noted.
"The acquisition of Citigroup's retail business in our key markets of Indonesia, Malaysia, Thailand and Vietnam is a great opportunity that comes at the right time," CEO Wee Ee Cheong said. "UOB believes in Southeast Asia’s long-term potential and we have been disciplined, selective and patient in seeking the right opportunities to grow."
UOB expects to finance the transaction via excess capital. It will reduce the lender's common equity Tier 1 ratio by an estimated 70 basis points to 12.8%, based on its capital position as at Sept. 30, 2021. The bank's CET1 ratio will stay within regulatory requirements after the deal is completed, it said.
As of January 14, US$1 was equivalent to S$1.35.