How buying Citi’s ‘crown jewel’ can be game-changing for UnionBank

Edwin Bautista

This Christmas, Aboitiz-led Union Bank of the Philippines bought for itself a new bank—and it’s no less than a crown jewel of American banking giant Citi.

UnionBank bagged on Dec. 23 the much-coveted local consumer and retail banking assets of Citi, beating bigger peers in the race.

The acquisition—the largest seen in the local banking scene in recent decades—is valued at about P55 billion. It includes Citi’s Philippine credit card, personal loans, wealth management, and retail deposit businesses and related assets. UnionBank agreed to pay a premium of P45.3 billion plus P9.7 billion in cash—equivalent to the equity value of the business.

Once the deal is consummated by the second half of 2022, UnionBank’s balance sheet will expand by about P89.5 billion, bringing its total resources to P735.5 billion, moving one notch higher to become the country’s ninth largest bank.

As of end-June, Citi had a local consumer loan book of P59.7 billion while its retail banking segment, composed mainly of affluent clients, had P67.8 billion in deposits and P95 billion in investment assets under management.

In this interview with the Inquirer, UnionBank president Edwin Bautista discusses why he thinks that this is a match made in heaven.

Q: How will this acquisition change the game for UnionBank?

Bautista: It’s not so much on the asset expansion, but more in terms of profitability contribution—because it’s a high-yielding portfolio, coming from the (high-end) consumer segment. With our digital transformation, most of our retail customer acquisition has been focused on the middle and lower (-income) segment. With the purchase, it’s almost like we’ve accelerated our targets in the higher-end segment by five to 10 years. We are talking here of about a million credit card customers and every single one of them qualifies for a mortgage or a car loan that Citi does not currently offer. So it’s really a great untapped segment.

And because Citi has a very high threshold of (deposit) balance requirement, only 5 percent of the 1 million actually have bank accounts with Citi. So if they move over to us, we’re talking of over 900,000 customers whom we can offer a UnionBank account to. Since we already know them—they were already KYC’d (subjected to know your customer process)—with one click, we can open an account literally for each one of them if they so desire. So it’s now up to us on the marketing side to invite them to open an account. What’s the value of doing that? If they have an account and they pay their Citi card, right on the spot, their balance is adjusted.

Their 1 million (client base) is several fold of our regular customers because it’s high-end. In terms of wallet, one Citi customer is probably five times or 10 times more than the average UnionBank customer. So it’s really great and transformative for us. It is a perfect match because they’re strong where we are weak, and we are strong in the areas Citi doesn’t even compete in.

I think one key selling point that Citi considered was our promise to absorb the entire Citi consumer bank employee force. It is ideal for us, because we need them to run the existing business. There might be some efficiencies that you will need down the road but remember, we are also building a digital bank. We’re also ramping up our (fintech arm) UBX. We need new people. When Citi saw that, they said: “I believe you that you will take care of the people. I can actually see that you need all these people for all your initiatives.” Another major consideration is the ability to match the product set of Citibank. A proportion of their client base is already digitized on the app, so there was a concern that if it is acquired by whoever that does not have the digital ability, they (clients) may just walk away. They (Citi) were pleasantly surprised to find out that our digital penetration for our own credit card base is even higher than theirs.

I think it’s really a perfect combination, plus the fact that our cultures are very similar. I told them: If you recall the history of UnionBank, the key senior officers were all ex-Citibankers. These are people who never worked with any bank other than Citi—like (former chair/CEO Justo) Tito Ortiz, (former president) Vic Valdepenas and (former head of corporate banking) Guia Lim. So they purposely built UnionBank almost like Citi because that’s the only way they knew to run a bank. The employees whom we will be absorbing will find many of our processes to be very similar to what they were used to.

Citi has a very advanced workforce—highly digital, used to mobile (platforms) also—so we thought that if they would join us, we could make use of the skills that they already have. Other banks can offer them employment, but they might not be provided with the technology support—like data science and analytics that they are used to … We showed Citi: this is the way our people operate today, and it’s very similar to Citi, so they felt comfortable.

Q: What was the basis for the valuation of the assets, particularly for the premium that you agreed to pay?

Bautista: We went through the usual valuation process using the DCF/DDM (discounted cash flow/dividend discount model) method based on the five-year plan that Citi provided and our own assumptions on cost and revenue synergies. Cost synergies would be in the area of funding cost and IT costs. On top of that, we looked at the cross-sell opportunities for us. This is the one that made the difference because each bank, depending on how comfortable it is with its marketing ability and digital cross-sell ability, either you become aggressive or you become too timid. That will affect your valuation. Of course, we also looked at the last five years and the next five years. We checked every assumption to make sure that we are comfortable: the assumptions on credit growth rate, attrition, among others, and then you can adjust it accordingly based on what you think is reasonable. Based on all these assumptions, we ran it through our financial models and came up with a number that we’re confident will produce a good return on our investment.

Q: How much is that projected return on investment?

Chief financial officer Jose Emmanuel Hilado: If you factor the synergies, it’s 18 percent over 10 years based on compounded growth.

Corporate planning head Carlo Enanosa: The projected return will largely come from recurring income. The net interest margin of their consumer business is high—13 to 15 percent average for their credit cards and personal loans.

Bautista: Since we are buying a portfolio (from Citi New York head office), they use the term “assigned capital.” The ROE (return on equity) on the assigned capital is about 37 percent. It’s a super profit generator.

Q: What will be the impact on the bottom line?

Enanosa: It will increase our consumer portfolio by more than P50 billion, so from 40 percent (share of) consumer to total loans, it will now become 50 percent of total loans. If you annualize the first half net revenue of this business, it will be roughly P12-billion increase per year.

Bautista: The impact of that is P6-billion earnings before tax. We’re looking at an ROE of about 15 percent (starting the first full year of integration).

Also, the minute the economy picks up after COVID-19, you’re going to get a lift from renewed growth and customer acquisition. So we are confident with a 15-percent ROE, higher than last year and this year’s 12-percent ROE. INQ