A booster shot from Citigroup’s franchise
? We think that the acquisition of Citigroup’s consumer businesses is not cheap but strategic to boost UOB’s retail banking market share in ID, MY and TH.
? Fed rate hikes should provide ROE uplift until earnings contribution from the acquisition kicks in. We raise FY22-23F NIMs by c.2-5bp to c.1.57-1.67%.
? Reiterate Add with higher TP of S$33.50. We view the roadmap towards c.13% ROE by 2026 positively. A faster pace of rate hikes is a key catalyst.
Acquisition boosts UOB’s market leadership in ID, MY, TH
UOB announced that it will be acquiring Citigroup’s consumer businesses in Indonesia, Malaysia, Thailand and Vietnam. The transaction is valued at 1.2x P/BV, with the acquisition of the TH business driving this. Although slightly higher than the average 0.9x FY22F P/BV valuation of TH banks, w e think the premium is justified given the boost to UOB’s market leadership in these countries. Total cash consideration will be calculated on the S$4bn NAV of Citigroup’s businesses plus an aggregate premium of S$915m, fully funded by UOB’s capital. The allure of this acquisition lies in Citigroup’s strong credit card franchise, filling in UOB’s product gap in unsecured retail financing offerings, in our view.
UOB expects ROE to rise to >13% and RORWA of c.2% by 2026
Synergies from the combination of UOB’s and Citigroup’s assets are expected to result in S$1bn in incremental annual income w hen integration is completed (on a pro-forma basis), which will drive >13% ROE by 2026 (from c.10% currently, c.2% pts of the uplift is expected to stem from rising interest rates), as income from these 4 markets rise 1.4x. Provisioning risks are minimal with Citigroup’s portfolio having taken substantial credit charges over FY20 due to Covid-19. UOB projects incremental credit costs of c.1-2bp per annum from this book, which is manageable, in our view , especially given that stronger RORWA of c.2% (by 2026, currently c.1.6%) should offset this comfortably.
EPS accretion only in FY23F due to one-off transaction costs
We now factor in one-off transaction costs (for system upgrades, marketing and stamp duty) of S$700m (split over FY22-23F) and conservatively include income contribution from these 4 businesses (annual NPAT of c.S$200m-300m on normalised basis), based on expected legal commencement dates (c.2Q-4Q22F), into FY22-23F earnings estimates. This results in c.20 Scts EPS accretion in FY23F. The transaction w ill be EPS-accretive in FY22F if not for S$200m in stamp duty incurred for the acquisition of the MY business.
We raise our NIM to incorporate Fed rate hikes
Further, we factor in the Federal Reserve’s more aggressive stance to fight inflation and its corresponding forecasts of 3 interest rate hikes in 2022 and 3 in 2023. As a 25bp Fed rate hike could result in c.4bp NIM expansion (c.3% rise in net profit) for UOB, w e raise FY22-23F NIMs by c.2-5bp to c.1.57-1.67% (from 1.56% in FY21F). Our GGM-based TP of S$33.50 incorporates the acquisition and factors a lagged pass-through (c.6-9 months) of Fed rate hikes into NIMs. For 4Q21F, w e estimate net profit w as S$986m (-6% qoq).