Acquiring Citigroup’s retail business: Good or bad for Unionbank (UBP)?

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Union Bank of the Philippines Inc. (UBP) is offering 617.188 million shares at P64.81 apiece through a Stock Rights Offering (SRO). The offer size is equivalent to over 28% of UBP’s outstanding shares. UBP eyes to raise P40 billion to partially fund its P55 billion acquisition of the local retail arm Citigroup, Inc. The offering will run from April 25 – May 6, and the tentative listing date for the shares is May 16.

Analysis and Recommendation

UBP’s P55 billion acquisition deal with Citigroup, Inc. can boost its retail banking business. The deal includes Citi’s real estate interests in Citibank Square Eastwood, three full-service bank branches, and five wealth centers.

UBP’s acquisition should increase its high-yielding consumer loan portfolio, net interest margins and overall profitability in the long run. UBP’s consumer loans comprised 41% of its total loan portfolio compared to 19% average for the Philippine banking industry.

Whether UBP could maintain their financials after the acquisition, however, remains to be seen. As of September 30, 2021, UBP’s risk-weighted capital adequacy ratio as reported to BSP on a consolidated basis was 16.1%. The bank’s consolidated common equity tier 1 (CET1) capital adequacy ratio reported to BSP was 18.3%. Both ratios are still well above the capital adequacy requirements of the BSP of 10% capital adequacy ratio and 8.5% CET1 ratio applicable to the Bank.

Last January, Moody’s Investors Service (Moody’s) revised its rating outlook on UBP from stable to negative due to a significant decline in the bank’s capital buffers following the acquisition. The negative outlook means UBP’s credit rating could be downgraded within the year.

The bank will likely take multiple years to rebuild the capital buffers eroded after buying Citigroup. The extent and sustainability of the potential earnings boost from this acquisition is dependent on the successful retention of Citigroup’s clients. However, the different demographics of UBP and Citigroup’s clients may makeit difficult for UBP to retain the clients of Citigroup.

The long-term financials for UBP are difficult to predict. While UBP expands its high-yielding consumer portfolio following the acquisition, the Bank could face trouble in maintaining its capital buffers. They also must deal with an increased NPL and potential loss of Citigroup clients.

UBP’s non-performing loan ratio (NPL) increased to 4.9% as of September 2021 from 3.3% in 2019. Should UBP’s NPL hit as high as 6%, this could cause a further downgrade in UBP’s credit rating.

However, if UBP maintain an NPL of below 4.5% post-acquisition and core profitability improves, then the acquisition of Citigroup should turn out to be a good investment for UBP and the bank should continue to grow its earnings.

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