Citi ASEAN is an accretive deal. Watch for execution
UOB’s acquisition of Citigroup’s SE Asia assets is well timed to take advantage of ASEAN re-opening. The acquired client base is synergistic to UOB’s mass-wealth, omni-channel strategy and should further strengthen its integrated ASEAN franchise. Execution risks need to be watched, particularly from a cultural, systems and regulatory perspective. Going forward we see upside risks from improved NIMs from higher rates, better loan and fee growth plus provision write-backs. Maintain BUY.
Synergistic acquisition
UOB is acquiring Citigroup’s (C US, USD67.78, NR) Indonesia, Malaysia, Thailand & Vietnam consumer business for ~SGD4.9bn. We think the 1.2x PB is reasonable. Average Indo & Thai banks trade at 1.4x PB where 70% of newly acquired customers reside. The deal is set to double UOB’s ASEAN retail client base. Importantly, it could increase their mass-affluent customers by 81% and emerging affluent by 1.7x. UOB’s mass-premium wealth management proposition should receive a critical advantage here, in our view. Pre-pandemic, ASEAN delivered 27-30% of operating income. We estimate the deal to deliver 3-4% 2023E EPS accretion.
Watch for execution and asset quality risks
UOB has not undertaken a major acquisition in nearly 17-years. This raises execution risks particularly from a cultural integration perspective. Historically, UOB has displayed a conservative approach to asset quality & growth, whereas 70% of deal assets are unsecured credit. On a pro-forma basis, the unsecured contribution to the Group’s 1H21 consumer income would increase to 36% vs. 21% pre-deal. Additionally, 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.
Strongest gearing to ASEAN re-opening. BUY
Overall, we believe this deal is digestible by UOB. The impact on CET1 is a manageable 70bps, leaving it well above regulatory minimums. Management claims the acquired businesses can generate a normalised
ROE of ~20% vs. Group ROE of 9.9% in 2021E. While we maintain EPS forecasts ahead of 4Q21 earnings on 16 Feb, we believe progressive ASEAN border re-opening creates strong opportunities for credit cards and mass wealth products especially as interest rates rise. UOB’s strong regional wholesale integration stand to benefit from North-South supply chain shifts and increasing capacity additions. Maintain BUY