Brokers' take: Analysts largely positive on UOB's purchase of Citi assets

FOLLOWING the announcement of UOB's proposed acquisition of Citigroup's consumer banking businesses in Indonesia, Malaysia, Thailand and Vietnam, several brokerages have reacted positively reiterating their "buy" calls on the bank.

In separate research reports on Monday (Jan 17), DBS, Jefferies and CGS-CIMB raised their target prices on the bank to S$34.20 from S$29.93, S$33.50 from S$33 and S$33.50 from S$30.30 respectively. 

DBS's higher target price is based on the assumption that UOB's return on equity (ROE) will increase 11 per cent, up from the previously projected 10 per cent ROE.

Its analyst, Lim Rui Wen, said that the acquisition will help UOB accelerate and improve its regional strategy. The bank is expecting to take on about S$9.1 billion of loans, S$6.2 billion of deposits, S$6.7 billion assets under management and 2.4 million customers.

"We believe the deal is fairly priced, with the Citi assets being a good platform for UOB to deepen and scale up its regional franchise, solidifying its positioning and Asean strategy, given that UOB is the only Singapore bank with extensive Asean presence," Lim said.

Going forward, Lim believes shares of UOB will continue to re-rate as the bank expects economic recovery in a rate hike environment. The analyst predicts that 2022 will see an increase in net interest margins (NIM) as regional loans are known to have higher NIMs.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Lim also sees opportunities for UOB to cross-sell retail products in the medium term post the transaction with both banks' combined strengths in secured lending, as well as Citi's strengths in funding.

"We believe execution and integration remains key to longer-term synergies for the group, with UOB factoring in a customer attrition rate of about 10 per cent in its estimates, as UOB onboards about 5000 staff strength alongside the acquisition," Lim added.

Similarly, Jefferies' analyst, Krishna Guha, claims that the deal "checks all the right boxes" as it has no capital raise, maintains dividends policy, is EPS accretive and has arguably fair pricing.

Guha does not think integration will be an issue as the group has ex-Citi employees in its senior management ranks and is acquiring a well run business.

"Further, with more than two-thirds of revenue coming from unsecured book, it will complement and diversify the group's existing product/revenue mix thereby enabling cross-selling," the analyst said.

CGS-CIMB's research team agrees that the acquisition will boost UOB's market leadership in these 4 Asean countries and will fill in the bank's product gap in unsecured retail financing offerings. 

Its higher target price is attributed to the projected increase of UOB's NIMs that the team believes will come after the forecasted Fed rate hikes in 2022 and 2023. "We think that the current re-rating cycle is underway and has accelerated as regulators become progressively reactionary to market conditions," the report said. 

RHB also sees a boost for UOB in Thailand and Indonesia, where the unsecured lending businesses earn higher NIMs.

In its report, the research house said it is positive on the Citi deal as it believes this will enhance UOB's longer-term growth prospects. This is because the majority (90 per cent) of Citi's loans are classified as unsecured lending in Asean countries except for Malaysia. Its analysts also noted a "very strong" unsecured lending business in Indonesia.

RHB has maintained its "buy" call with the same target price of S$33.50, which is based on an intrinsic value of S$31 and a 8 per cent ESG (environmental, social and corporate governance) premium.

Likewise, Maybank Kim Eng (Maybank KE) also reiterated "buy" on UOB with an unchanged target price of S$31.15. Its research team views news of the deal as timely, as it believes the bank's acquisition of Citi's assets will enable it to take advantage of Asean reopening.

It estimates the acquisition to deliver up to 4 per cent of UOB's earnings per share (EPS) accretion by 2023.

With the Asean reopening and interest rates rising, the research house believes that it will bring strong opportunities for credit cards and mass wealth products.

With the deal expected to double UOB's Asean retail client base, Maybank KE believes UOB's mass-premium wealth management proposition is set to receive a "critical advantage" as it could increase the bank's mass-affluent customers by 81 per cent, and emerging affluent customers by 1.7 times.

Shares of UOB closed on Monday at S$30.18, up by S$0.25 or 0.8 per cent.