Hong Leong Bank’s EPS to see little change from potential acquisition of Citi’s Malaysian assets

HLB, UOB and StanChart are in the forefront of bidding for Citibank’s consumer assets in Malaysia

by PRIYA VASU / Pic by MUHD AMIN NAHARUL

HONG Leong Bank Bhd (HLB) is not expected to see an erosion in its earnings per share (EPS) if it were to acquire Citibank’s consumer banking assets in Malaysia.

CGS-CIMB Research analyst Winson Ng noted that based on HLB’s conservative management style, the bank would be disciplined when negotiating the deal and not overpay for the assets.

According to a news report in a business daily on Sept 28, HLB, UOB Group and the Standard Chartered banking group (StanChart) are in the forefront of bidding for Citibank’s consumer assets in Malaysia.

Citigroup Inc announced its decision to sell its consumer banking assets in 13 markets, including Malaysia in May this year.

At end-Dec 20, Citibank Bhd had total consumer loans of RM14.8 billion, which included residential mortgages of RM7.7 billion and consumption credit (mostly credit card receivables) of RM5.6 billion.

“Acquiring these loans would increase HLB’s total loans by 9.8%, total consumer loans by 14.7%, and residential mortgages by 10.2%,” Ng noted in a report yesterday.

He added that buying Citibank’s consumer loans will enable the acquirer to access the former’s customer base in the consumer banking segment.

“However, this would not lead to an outright EPS accretion, in our view, because the successful bidder would have to pay a premium for Citibank’s consumer loans.

“If HLB were to acquire Citibank’s consumer banking assets in Malaysia, the potential EPS accretion would depend on HLB’s ability to retain and cross sell additional products/services to Citibank’s individual customers, but we think a certain level of customer attrition is imminent in any merger and acquisition deal,” he added.

The research outfit is neutral on HLB’s acquisition of Citibank’s consumer banking assets in Malaysia, should that materialise.

“It also does not change our add call on the stock which is premised on the potential rerating catalysts of above-industry loan growth, a decline in loan loss provisioning, and swift expansion in the associate contributions from Bank of Chengdu in FY6/FY22F. Our financial year 2022 (FY22)-FY24F EPS forecasts and DDM-based target price of RM20.78 are intact,” he added.

Separately, RAM Rating Services Bhd (RAM Ratings) in a report noted that Citibank’s planned exit of its consumer banking business in Malaysia will not affect its AAA/Stable/P1 financial institution ratings.

“Subsequent to our recently concluded assessment of the move, we are of the view that Citi’s (the group) propensity to provide parental support to the bank remains strong given the Bank’s strategic importance to the group’s operations despite the planned withdrawal from the consumer banking business,” said RAM Ratings.

It added that Citibank’s remaining franchise in Malaysia after the exit of the consumer segment — is closely aligned with the group’s strategy.

“The group’s presence in Malaysia is further reflected by its investments in the two Citi Service Centres (of 37 solutions centres worldwide presently) that support its global multi-business processing solutions. These centres are based in Kuala Lumpur and Penang with an aggregate of over 3,000 employees.We expect the bank to remain highly integrated with its parent and continue to leverage the Group’s global network to serve institutional clients in Malaysia,” said RAM Ratings.

It added that Citibank will operate on a leaner balance sheet after exiting the consumer banking business, typical of a wholesale bank which means a narrower business focus and potentially a more volatile earnings profile.

“Its ICG (Institutional Clients Group) business has a strong franchise and considers multinationals, government-linked companies and large local corporates as core clients. We expect the Bank’s asset quality and profitability (on a risk-adjusted basis) to improve in view of its emphasis on top-tier institutional clients,” RAM Ratings added.

Citibank derives the bulk of its funding from large corporate and institutional depositors, chiefly sourced via cash management operations.

“Capitalisation will remain strong, although it is uncertain how the sale proceeds of the consumer banking business will be redeployed by the Group for Citibank’s domestic ICG business,” RAM Ratings noted.