Big 4 to buy Citi’s consumer business

National Australia Bank (NAB) has announced that it has entered into a sale and purchase agreement with Citigroup to purchase its Australian consumer business for $1.2 billion.

The proposed acquisition, which remains subject to regulatory approvals, is structured primarily as an asset and liability transfer, with NAB to pay Citigroup cash for the net assets of the consumer business, plus a premium of $250 million.

As part of the proposed acquisition, senior management and around 800 Citigroup employees in total are expected to join NAB.

The announcement of the proposed acquisition has followed confirmation in July by NAB that it was in discussions to buy Citi’s consumer business, which was put up for sale in April of this year.

According to Citi, NAB was selected following an auction process to acquire its consumer business, which includes credit cards, loans, retail banking, mortgages and wealth management solutions for high-net-worth individuals.

The bank is also a credit card provider for brands such as Bank of Queensland (BOQ), Coles, Kogan, PayPal, Qantas, Suncorp and Virgin Money.

Scope of the proposed deal

The proposed purchase would include a home lending portfolio, unsecured lending business (operating under the Citigroup 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 as part of the proposed acquisition, subject to certain additional conditions.

As at 30 June 2021, the Citigroup consumer business had lending assets of around $12.2 billion (comprising around $7.9 billion in residential mortgages and around $4.3 billion in unsecured lending), and deposits of around $9.0 billion.

NAB to invest in new platform

NAB will not be acquiring all of the technology systems or platforms that currently service these portfolios.

The major bank will enter into a transitional services agreement (TSA) with Citigroup to assist with the integration of the Citigroup business into NAB. The TSA is expected to be in place for around 30 months.

During this period, NAB will invest in a new technology platform to support the combined unsecured lending business.

Financial impact of deal

Based on the anticipated increase in risk-weighted assets of $8.3 billion plus the premium to net assets to be paid on completion, the required equity is around $1.2 billion.

This would imply a multiple of eight times the Citigroup consumer business pro forma net profit after tax (NPAT) of $145 million for the 12 months to June 2021.

The proposed acquisition is expected to be marginally accretive to cash earnings and cash return on equity from completion. Pre-tax cost synergies of around $130 million per annum are expected to be released over three years, with the majority achieved in the first two years.

It will be fully funded by NAB’s existing balance sheet resources. Based on NAB’s capital position as at 31 March 2021, the impact of the incremental risk-weighted assets plus the premium to net assets on NAB’s CET1 capital ratio is 32 bps.

NAB said it has remained well capitalised with a pro forma CET1 ratio of 11.83 per cent above its target CET1 of 10.75 per cent to 11.25 per cent.

It added that it has expected around $220 million of capital to be released around three years post-completion following migration of the 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 $375 million anticipated to be largely incurred over two years following completion.

Timing of the proposed acquisition

The proposed purchase of Citi’s consumer arm is subject to certain conditions, including approvals from federal Treasurer Josh Frydenberg, the Australian Prudential Regulation Authority (APRA), and the Australian Competition and Consumer Commission (ACCC).

Subject to the timing of these approvals, completion is expected to occur by March 2022.

Citigroup will continue to operate its consumer banking businesses until the proposed acquisition is finalised, with no immediate changes in the way it serves its consumer banking and wealth customers. Customers will be contacted in the coming months with more details.

Commenting on the proposed purchase deal, Citi chief executive Jane Fraser said: “This is a positive outcome for our clients, our colleagues and for Citi.

“As this transaction shows, we are moving forward with urgency as we refresh our strategy and execute the decisions we have already made as part of that effort. We are focusing our resources on businesses where we have scale and competitive advantages in order to deliver growth and improved returns over time.

“In addition to serving our wealth clients through four global hubs, we will continue to serve our institutional clients in Australia, as we have for nearly a century, and across the greater Asia-Pacific region. We are very pleased with the economics of the transaction and we will use the capital generated to invest in our strategic priorities, as well as to continue to return capital to our shareholders.”

Citi Australia CEO Marc Luet also spoke about the proposed deal, stating that it “is a very positive outcome for our clients, our colleagues and for Citi”.

“The sale agreement furthers Citi’s global strategy of focusing its resources on businesses that can drive stronger growth, deliver scale and enhance returns, which includes our institutional clients group businesses in Australia,” he said.

“Citi has been in Australia for close to a century and it remains an important growth market for the bank.”

NAB CEO Ross McEwan said that the acquisition would support NAB’s strategic growth ambition for its personal banking business.

He said: “The proposed acquisition of the Citigroup 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.

“The cards and payments sector are 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.

“Citigroup’s management team has also built strong white label partnerships with household names in the airline, retail, and financial services sectors over many years. This expertise, together with our commitment to deliver market leading products and services, provides an opportunity to grow with existing partners and add new partners.”

Citigroup’s institutional business in Australia is not included in the proposed acquisition.

The business provides a range of investment and banking services (including capital markets and corporate advisory, markets and securities services, commercial banking and treasury and trade solutions) to around 1,500 corporates, banks, governments and institutional investors in Australia, as well as clients offshore.