Aboitiz-owned Union Bank of the Philippines (UnionBank) expects to be the country’s third largest credit card issuer after acquiring Citi Philippines’ P55-billion credit card portfolio, according to a senior executive.
“We bought the Citibank portfolio for what it is, the leading credit card product in the market,” said UnionBank Chief Financial Officer and Treasurer, Jose Emmanuel U. Hilado in an online interview on the day the bank announced it has signed a “Share and Business Transfer Agreement” with Citigroup Inc. subsidiaries.
“It will launch us to the ‘Top 3 or 4’ on the credit card business,” said Hilado.
US-based Citi, also known as Citibank, has one million credit card holders in the Philippines worth P55 billion versus UnionBank’s over 200,000 with a transaction value of P8 billion.
From its current 8th place in the country’s credit card business, Citi’s portfolio will catapult UnionBank to one of the three major players in the credit card sector. “That’s transformative,” said Hilado.
Funding the acquisition
On Dec. 23, listed UnionBank disclosed to the Philippine Stock Exchange that to fund the acquisition of Citi, it is raising an additional capital of up to P40 billion via a stock rights offering (SRO) to all existing shareholders.
UnionBank is planning the SRO by end-March or early April in 2022. Hilado said all of the three biggest shareholders - Aboitiz Equity Ventures Inc. (AEV), The Insular Life Assurance Co. Ltd. and Social Security System - have committed to take up their share and even the unavailed allocation.
The bank is not planning to borrow money to fund the buyout. “When you acquire assets, there’s corresponding impact on your capital so you need the capital to back up the assets. It’s not as easy as just borrowing from the market or getting deposits because that’s just the funding side. On top of the funding side, there’s really impact on the capital,” said Hilado.
“We estimated that with the acquisition, for our usual growth, we would need to raise P40 billion to support our business next year,” he added.
AEV, UnionBank’s parent company, said that “it has been looking forward to this transaction as it is immediately value accretive” for UnionBank.
It’s more for the returns, not size
In terms of assets, loans and deposits, UnionBank is Philippines’ 10th largest lender out of 46, based on Bangko Sentral ng Pilipinas (BSP) data.
UnionBank competed to purchase Citi’s consumer banking business – edging out bigger banks -- to gain profitability and expand its portfolio. But, while it will launch its credit card business as one of the most valuable brand in the country, it will hardly affect its assets size.
“We don’t really aspire to be big for the sake of No. 5 (or Top 5). Our goal is really on the ROE (return on equity). Sometimes, it does not follow that when you’re big, you are profitable. We can just easily grow on the corporate banking side and take deposits but you won’t make money, so ours is a targeted expansion,” according to Hilado.
UnionBank wants Citi for the ROE. The American bank’s portfolio has an ROE of 37 percent and a net interest margin (NIM) of 13-15 percent. Comparably, UnionBank’s existing NIM is only 4.7 percent.
With the acquisition of Citi, Hilado said it will bring the Aboitiz-controlled bank to a “mid-5” percent in terms of consolidated margin and it will “increase the ratio of consumer loans which have higher net interest margins (which) will increase our ratio to 50 percent, the second largest in the industry.”
“So, its really the profitability that we are going for,” said Hilado.
Based on BSP data, Citibank N.A. in the Philippines has an ROE of 25.55 percent as of end-September 2021, it leads all banks here in terms of ROE ranking in the universal and commercial banking sector. UnionBank is in fourth place with an ROE of 14.27 percent.
Integrating with Citi business
UnionBank is buying Citi’s credit card, personal loans, wealth management, retail deposit businesses as well as its real estate assets, primarily Citibank Square in Eastwood, Quezon City.
It will take about a year to a year and a half to integrate the Citi business with the acquiring bank. Its biggest portfolio is its wealth management or assets under management which is worth P94 billion, followed by credit cards at P55 billion. Its personal loan portfolio is about P4 billion. Citi also has 950 multinational corporations as clients.
“Credit cards alone, they have one million accounts. You can imagine that we cannot just easily transition those one million accounts overnight,” said Hilado. “We want to make sure that we are able to maintain the quality of service and the product features. We have to build the system. By the time the Citibank clients are transitioned to us after a year, it will be seamless for them. The only thing that would have changed is the logo, the brand. From Citibank it became UnionBank but the same product features and customer service,” he added.
While buying Citi’s consumer banking business will launch UnionBank to the “Top 3” on the credit card market, it will not impact its total assets.
“Not on the total assets because there’s a big disparity there. If you ask me about being ‘Top 5’ that will come not overnight, in the next five years probably because we’re not really looking at size. More the returns. We have the best ROE in the market so for us it’s what we deliver in terms of returns. Not size. (It’s) really profitability and efficiency,” said Hilado.
The senior executive also said that they are prepared to absorb Citi’s manpower. Citi has 1,750 employees who will join UnionBank.
“That’s one of the reason why we got the business because we assured them that we will give everyone (a place),” said Hilado.
“Because our business is complementary. We don’t have overlap unlike the other top three banks. We need them to maintain the kind of efficiency and customer service that they have. So, we’re happy, we’ll have good quality (new employees),” he said.
UnionBank announced last week that it will pay Citi cash consideration for the net assets of the acquired businesses subject to customary closing adjustments plus a premium of P45.3 billion or $908 million, and P9.7 billion equity.
Citigroup is selling its $7-billion worth of consumer franchises in 13 markets including the Philippines. Citi said that subject to the timing of regulatory approvals, completion for the UnionBank acquisition is expected in the second half of 2022.