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Is UOB Worth a Buy After its Citigroup Acquisition?

Here's what you need to know about UOB Ltd's latest Citigroup acquisition. Is this a good deal for shareholders?

“Will my dividends get cut more after UOB buys Citigroup?”

No, wait… “Is this even a good acquisition?”

Okay, okay let’s take a step back on this huge news. It’s not everyday UOB gets to buy a new business.

Here’s the thing: UOB Ltd (SGX:U11) has won the bid to buy out Citigroup’s S$5 billion Consumer Business in Asia. 

And I’m positively surprised. I’ll explain.

Citigroup’s Consumer Business has presence in Indonesia, Malaysia, Thailand And Vietnam. The four big markets that UOB is in. That’s outside Singapore.

Now, Consumer Businesses are Citigroup’s lending business — including personal and housing loans, deposits and its wealth management business.

This is a pretty big deal for UOB

UOB is shelling out cash that equals 10% of UOB’s market cap for Citigroup’s consumer business. Today, UOB’s market stands at S$50 billion. 

It’s a pretty good deal.

You see, unlike DBS and OCBC, UOB focuses on dominating consumer lending in Southeast Asia. 

Today, UOB has 2.9 million customers. If the acquisition succeeds, this will double UOB’s retail base to 5.3 million customers. It brings forward their big ambitions by five years. 

That’s why UOB is aggressively taking over Citigroup’s consumer business.

In fact, this is UOB’s biggest purchase over the last 20 years.

So far, UOB’s track record of buying businesses isn’t too bad (see below).

Source: UOB Acquisition Presentation Slides Jan 2022 

But what’s more important is this: banks mostly grow by buying other banks’ businesses. Why? Because banks’ assets and deposits are “sticky”. 

Once the relationship is built, it’s hard to get customers to conveniently switch services from one bank to another.

And over the past years, UOB has successfully integrated their acquisitions into their business.

Here’s what’s more exciting: Citigroup’s Asian consumer business has done a good job building its Asian presence — S$4 billion of assets, S$9 billion of loans, S$6.2 billion of deposits and a modest S$6.7 billion of wealth management assets. 

However, today, Citigroup’s strategy in Asia is different. This major U.S. bank wants to focus on other areas instead — mainly institutional lending and wealth management. And coincidentally, UOB isn’t that interested in both businesses

Last year, Citigroup sold off its South Korean and Australia consumer business. It also plans to exit India, Taiwan and Philippines and China.

In business, just like in life, taking risks is important. But the right risks is what grows the business. And UOB has been taking smart risks.

While both DBS and OCBC banks focus on institutional and wealth management growth, UOB is quick to look the other way — instead, it’s capturing as much consumer lending business within Southeast Asia as possible.

So what’s in it for UOB?

  • Immediately, there’s a S$1 billion annual profits for UOB after this buyout.
  • Management estimates UOB will grow ROE to more than 13%. ROE is a common measure of banks’ profitability — how much UOB produces its profits for every dollar of shareholders’ equity. 
  • Good news for shareholders: dividends to maintain at 50% dividend payout ratio. Dividend payout ratio calculates how much dividends are paid from the profits it makes.

Source: UOB Acquisition Presentation Slides Jan 2022 

In other words, after UOB’s acquisition, its profits will go up. Dividends will go up.

UOB is riding on one big tailwind

I’d say UOB is set to soar higher because of the Southeast Asia story. 

Quality banks are the thread of the economy that holds the fibre of a country’s future.

By 2030, there will be more than 700 million people in Southeast Asia, with more than US$6.3 trillion of output for the big four ASEAN countries. It’s a big market for UOB’s banking services.

If you ask me, at 1.2x P/B, UOB is paying a fair price for Citigroup’s consumer business. It’s not too bad, not too bad. 

Price to book ratio (P/B ratio) is a quick measure to value banks. You take share price divide by the book value (or shareholders’ equity) of the stock. 

It’s a popular valuation metric because you get to quickly figure out whether UOB has overpaid, fairly paid or underpaid for Citigroup’s assets.

Many brokers have also “positively reiterate their buy calls on the bank”. They are optimistic about UOB’s future after this acquisition. This is one of the few times I agree with brokers’ calls. 

Of course, assuming the deal goes through (the time to complete the entire transaction is until 2024).

In its latest third quarter results, UOB grew net profits by 4% to S$1 billion. This was driven by loans and fee income.

What’s more, UOB has excellent risk management: Singapore’s third largest bank has around S$306 billion of customer loans. And bad loans carry only 1.5% of its entire loans (see red box below). That’s tiny, compared to other emerging countries’ banks. 

And this despite UOB’s exposure to emerging countries — places where default risks are much higher than Singapore’s borrowers. 

UOB is careful with who they lend to. And gets to keep a much higher share of profits.

Source: UOB 3Q2021 Presentation Slides 

UOB doesn’t bite more than it chews

UOB holds S$350 billion of deposits. But only lends out S$306 billion of loans. That’s why, even after buying out Citigroup’s consumer business, UOB’s still financially strong.

Since October 2020, UOB shares went up 57%. And has hit close to its all-time high when its shares traded in April 2018. A pretty solid gain for a Singapore blue-chip.

In my opinion, UOB is heading in the right direction with Citigroup’s consumer business acquisition. 

Even though it’s the third biggest Singapore bank, it’s strategy is different from DBS and OCBC, fighting for dominance in the Southeast Asia lending market.  

Amongst all the three Singapore banks, I find UOB the most attractive buy right now.

Sometimes investing can be simple.

Willie Keng, CFA

Founder, Dividend Titan

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Kah Meng
Kah Meng
8 months ago

Hi Willie, thanks for analyzing the acquisition. As a UOB share holder, I am glad to know that this is a good move for UOB.

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