In afternoon trade, National Australia Bank Ltd (ASX: NAB) announced it will acquire Citigroup’s Australian consumer business.
NAB will acquire the assets and liabilities of Citi’s Australian operations for a total cost of $1.2 billion including a cash premium of $250 million.
The market reacted favourably to the news, with NAB shares up $1.31% to $27.04.
Proposed deal
The acquisition includes a $7.9 billion home lending portfolio, $4.3 billion unsecured lending business (credit cards and personal loans), $9.0 billion in retail deposits.
Additionally, NAB will secure Citi’s $2.5 billion private wealth business and 1.4 billion customers.
Approximately 800 Citigroup employees will join NAB.
The deal is subject to regulatory approvals with a target competition date of March 2022.
Citi’s Australian consumer business currently generates underlying earnings of $330 million and cash net profit after tax (NPAT) of $145 million.
This values the deal on 8x NPAT multiple. Management believes the acquisition will be marginally accretive to cash earnings and cash return on equity from completion.
NAB will spend $375 million in anticipated acquisition and integration costs over the next two years. The company will also spend $165 million to build a new technology platform for the combined unsecured lending business.
To compensate for these costs, NAB is estimating cost synergies of approximately $130 million per annum for three years.
NAB will not raise capital, rather using existing balance sheet resources.
As a result, NAB’s CET1 capital ratio will reduce by 32 basis points. As of 31 March, the ratio was 11.83%, well above the 10.75%-11.25% target.
Why does this make sense for NAB?
Acquiring Citigroup’s assets align with NAB’s strategy to build a leading digital personal bank.
The company will increase its unsecured lending while gaining access to transaction data with over 1 million customers. This is crucial for building a better digital bank experience.
Combined, the NAB will be Australia’s second-largest credit card provider.
The mortgages acquired are relatively low risk given the large allocation to the middle class and affluent customer demographics.
Additionally, the deal provides NAB access to a number of white label partnerships Citi has built with airlines, retail and financial services. Although the presentation notes “there is no certainty that all white label partners will transition to NAB”.
Credit card and personal loan customers are 80% more likely to take out a home loan compared to transactional customers.
My take
NAB is doubling down on consumer credit and mortgages.
Citigroup’s loan book is high quality because it offers bespoke solutions for high net wealth individuals. Will those same customers want to remain with NAB?
The presentation noted, “while total balances have declined in recent years, credit cards remain an important product facilitating customers’ short-term cashflow needs”.
With the rise of buy-now-pay-later to 18% of total debt (and rising), I question if this is the right strategy? Millennials and Gen Z continue to gravitate towards more flexible credit on better terms.
Given the significant integration and technology costs, I’m not convinced this will be shareholder accretive. Only time will tell if I’m wrong.
