National Australia Bank (NAB) on August 9 announced the acquisition of Citi’s Australian consumer business for A$1.2 billion (US$881.85 million). The proposed acquisition, subject to regulatory approvals, is structured primarily as an asset and liability transfer, with NAB to pay Citi cash for the net assets of the consumer business plus a premium of A$250 million.
NAB chief executive officer Ross McEwan says the acquisition supported NAB’s strategic growth ambition for its personal banking business. “The proposed acquisition of the Citi consumer business brings scale and deep expertise in unsecured lending, particularly credit cards, which continue to be an important way for customers to make payments and manage their cashflows,” he adds. “The cards and payments sector is rapidly evolving and access to a greater share of payments and transaction data will help drive product and service innovation across our personal banking business and deliver market-leading customer experiences.”
The acquisition includes a home lending portfolio, unsecured lending business (operating under the Citi brand as well as white label partner brands), retail deposits business, and private wealth management business. NAB has also agreed to acquire the shares in Diners Club Pty Limited as part of the deal.
As at June 30 2021, the Citi consumer business had lending assets of approximately A$12.2 billion – comprising residential mortgages of about A$7.9 billion and unsecured lending of $4.3 billion – and deposits of A$9 billion.
NAB will not be acquiring all of the technology systems or platforms that currently service these portfolios. NAB will enter into a transitional services agreement (TSA) with Citi to assist with the integration of the Citi business into NAB. The TSA is expected to be in place for about 30 months. During this period, NAB will invest in a new technology platform to support the combined unsecured lending business.
As part of the acquisition, senior management and about 800 Citi employees in total are expected to join NAB. Citi’s institutional business in Australia is not included in the transaction.
Based on the anticipated increase in risk-weighted assets of A$8.9 billion, plus the premium to net assets to be paid on completion, the required equity is approximately A$1.2 billion. This implies a multiple of 8x the Citi consumer business pro forma net profit after tax (NPAT) of A$145 million for the 12 months to June 2021.
The acquisition is expected to be marginally accretive to cash earnings and cash return on equity from completion. Pre-tax cost synergies of approximately A$130 million per annum are expected to be realized over three years, with the majority achieved in the first two years.
The acquisition will be fully funded by NAB’s existing balance sheet resources. Based on the bank’s capital position as at March 31 2021, the impact of the incremental risk-weighted assets plus the premium to net assets on NAB’s common equity tier 1 (CET1) capital ratio is 32bp. NAB remains well capitalized with a pro forma CET1 ratio as at March 2021 of 11.83%, above its target CET1 of 10.75% to 11.25%.
About A$220 million of capital (~5bp of CET1) is expected to be released approximately three years post completion following migration of the Citi consumer business to NAB and achievement of advanced accreditation status. NAB’s future capital ratios will also be impacted by the expected acquisition and integration costs of A$375 million anticipated to be largely incurred over two years following completion.
Subject to the timing of the regulatory approvals, completion of the acquisition is expected to occur by March 2022. Citi will continue to operate its consumer banking businesses until the acquisition is finalized, with no immediate changes in the way it serves its customers.
