• UOB acquired Citigroup’s consumer banking franchise in Indonesia, Malaysia, Thailand and Vietnam for ~S$5bn.
• Maintain ACCUMULATE with a higher GGM TP of S$31.30, from S$29.00. We raise FY21e earnings by 3.8% as we increase NIM estimates for FY21e. We now assume 1.26x FY21e P/BV in our GGM valuation, up from 1.17x, as we raise our ROE estimates to 10.2%. Recovery path for UOB is on track. Potential upside surprise includes GP writebacks and special dividends.

Details at a glance

• Citigroup’s consumer banking franchise in Indonesia, Malaysia, Thailand and Vietnam was acquired for about S$4.915bn (paid in cash, fully funded by UOB’s excess capital)
• Citigroup’s business’ net asset value (NAV) as at deal completion was about S$4bn, S$915mn premium paid
• Deal includes 2.4mn retail customers as of June 2021, and Citigroup’s 5,000 employees, including senior management, in the four countries
• Post purchase, UOB’s CET1 will drop by 70bps to 12.8% from 13.5% in 3Q21
• Completion expected between mid-2022 and early 2024
• Immediate ~S$1bn in incremental annual income uplift

The Positives

+ Gain scale in the four regional markets. With purchase of Citigroup’s consumer banking franchise, UOB is able to accelerate its growth by “five years” in these four countries, where UOB already has a significant presence in. UOB’s management has mentioned that it expects some slowdown in Singapore and North Asia, so this acquisition would position them to further grow their ASEAN presence.

+ EPS and ROE-accretive. The acquisition is immediately accretive to UOB’s EPS and ROE excluding one-off transaction costs, which would mainly be incurred over the first two years. If the one-off costs are to be included, the group would be EPS and ROE-accretive by 2023. UOB has also targeted a higher ROE of >13% and RORWA of ~2% by 2026 with this acquisition.

+ 50% dividend payout ratio to be maintained. With the purchase, UOB’s CET1 ratio has dropped by 70bps to 12.8%. Nonetheless, UOB has mentioned that it is “comfortable” with maintaining the current dividend policy of a 50% dividend payout ratio.

The Negatives

– One-off costs of S$700mn. The acquisition consists of one-off costs amounting to S$700mn. This includes a cost of S$200mn in tax and stamp duties, as well as expenses for integration and branding. Nonetheless, including these costs, UOB expects to be EPS and ROE-accretive by 2023.

Investment Action

Maintain ACCUMULATE with a higher target price of S$31.30, from S$29.00

We raise FY21e earnings by 3.8% as we increase NIM estimates for FY21e. We now assume 1.26x FY21e P/BV in our GGM valuation, up from 1.17x, as we raise our ROE estimates to 10.2%.