Analysts have nothing but praise for United Overseas Bank’s (UOB) near $5 billion acquisition of Citi’s consumer business in Indonesia, Malaysia, Thailand and Vietnam, announced Jan 14.
See: UOB to acquire Citi's consumer business in Indonesia, Malaysia, Thailand, Vietnam for $5 billion
See also: The market likes UOB's acquisition of Citi's consumer banking business
The target is Citigroup’s unsecured and secured lending portfolios, wealth management and retail deposit businesses in these four markets, part of an overall divestment of consumer banking businesses across the region by Citi. The transaction should be completed between mid-2022 and early 2024.
UOB will acquire at an aggregate premium of $915 million plus the net asset value (NAV) of around $4 billion of the target businesses. For 1HFY2021, they generated revenue of some $0.5 billion.
Citi's business includes consumer portfolio of $9.1 billion of loans, $6.2 billion of deposits and $6.7 billion of wealth AUM, an estimated 2.4 million non-overlapping customers, 24 branches and more than 5,000 employees.
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Four birds, one stone
The move lands UOB four birds with just one stone, writes Jefferies Research analyst Krishna Guha, who in his Jan 17 note, maintains his “buy” call on UOB with a target price of $33.50, up from $33 previously.
The deal checks all the right boxes, writes Guha. It involves no capital raise, maintains dividend policy, is earnings per share (EPS) accretive and has arguably fair pricing.
In particular, Thailand is interesting, notes Guha, as almost half of the new consumer base comes from the country. He points out that since UOB’s digibank TMRW was laujnched in Thailand in Feb 2019, it has signed up just 355,000 customers as of June 2021 — “a relatively gentle pace”.
As such, Guha wonders if the deal was in anyways a bid to speed up the growth. “We also wonder about the growth outlook of the group's secured business given the housing policy and disruptions faced by commercial real estate,” he adds.
Also on Jan 17, RHB Group Research analysts hold an identical “buy” recommendation and target price on UOB, noting that UOB’s common equity tier-1 ratio (CET-1) will be lowered to 12.8%, which will keep it within preferred range of 12.5%-13% and allowing for unchanged dividend payout of 50%.
First major acquisition in 17 years
That said, UOB has not undertaken a major acquisition in nearly 17 years, notes Maybank Securities Research analyst Thilan Wickramasinghe, which therefore raises execution risks when it has to integrate the soon-to-be former Citi employees.
“Historically, UOB has displayed a conservative approach to asset quality and growth, whereas 70% of deal assets are unsecured credit. On a pro-forma basis, the unsecured contribution to the Group’s 1H2021 consumer income would increase to 36%, compared to 21% pre-deal,” notes Wickramasinghe.
In a Jan 14 note, he is maintaining “buy” on UOB with a target price of $31.15.
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While the deal is “timely” and “accretive”, Wickramasinghe advises investors to “watch for execution”. “The deal would require multiple levels of regulatory approvals. Further, the group would need to clearly articulate the value proposition to the Citi customer base in a backdrop of rising competition from domestic and digital challengers.”
Local bank research houses acknowledge win
Meanwhile, research houses from UOB’s contemporaries in Singapore acknowledge the bank’s notable win.
In a Jan 14 note, OCBC Investment Research is maintaining “buy” on UOB with a target price of $34.80, a figure raised on Jan 12. “UOB’s share price has outperformed the STI index in 2021 by 10%, underscoring our prior advice to add positions since last year.”
OCBC Investment Research continues to see scope for UOB’s share price to gain ground, with potential catalysts from improving fee income momentum, loans growth recovery, stabilising NIMs and easing concerns in its Asean loan book.
“The group remains focused on its digital agenda to capture customer demand, and sees opportunities arising from the growth recovery in Greater China and developed markets,” they add.
DBS Group Research analyst Lim Rui Wen thinks the acquisition “cements UOB’s Asean strategy”.
In a Jan 17 note, Lim is maintaining “buy” on UOB, with a raised target price of $34.20 from $31 previously.
“We believe there is further room for UOB’s share price to re-rate as we continue to expect economic recovery in a rate hike environment. Management expects some net interest margin (NIM) improvement into FY2022F as it gears up on regional loans, which typically have higher NIMs,” writes Lim.
“Successive fed hikes will also be positive for UOB’s NIM through FY2023F. Release of its management overlay buffers in general provisions may further provide return on equity (ROE) upside in FY2022F.”
Finally, UOB Kay Hian Research, in a non-rated note, puts forth that the acquisition “will propel UOB to be a leading retail bank and card issuer in Southeast Asia”.
“UOB is able to deepen the engagement of existing clients through its omni-channel platform and acquire new clients through its TMRW digital platform,” notes UOB Kay Hian Research on Jan 17 .
As at 11.25am, shares in UOB are trading 12 cents higher, or 0.4% up, at $30.05.
Photo: Bloomberg
