The National Australia Bank (NAB) has announced that it has entered into a buy-and-sell agreement with Citigroup to buy its Australian consumer business for $ 1.2 billion.
The proposed acquisition, which remains subject to regulatory approvals, is primarily structured as a transfer of assets and liabilities, with NAB to pay Citigroup in cash the net assets of the consumer business, plus a premium of $ 250 million.
As part of the proposed acquisition, senior management and approximately 800 Citigroup employees in total are expected to join NAB.
The announcement of the proposed acquisition follows NAB’s confirmation in July that it was in talks to purchase the consumer business of Citi, which went on 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 supplier of credit cards for brands such as Bank of Queensland (BOQ), Coles, Kogan, PayPal, Qantas, Suncorp and Virgin Money.
Scope of the proposed agreement
The proposed purchase would include a portfolio of real estate loans, unsecured lending activities (operating under the Citigroup brand as well as white label partner brands), retail deposit activities and private wealth management activities.
NAB has also agreed to acquire the shares of Diners Club as part of the proposed acquisition, subject to certain additional conditions.
As of June 30, 2021, Citigroup’s consumer business had approximately $ 12.2 billion in credit assets (including approximately $ 7.9 billion in residential mortgages and approximately $ 4.3 billion in non-mortgage loans. guaranteed) and deposits of approximately $ 9.0 billion.
NAB invests in a new platform
NAB will not purchase all of the technology systems or platforms that currently serve these portfolios.
The big bank will enter into a Transitional Services Agreement (TSA) with Citigroup to help integrate Citigroup’s business into NAB. The TSA should be in place for about 30 months.
During this period, NAB will invest in a new technology platform to support the combined unsecured loan business.
Financial impact of the transaction
Based on the anticipated increase in risk-weighted assets of $ 8.3 billion plus the premium on net assets payable on completion, the required capital is approximately $ 1.2 billion. dollars.
This would imply an eight-fold multiple of Citigroup’s pro forma after-tax net income (NPAT) from consumer activities of $ 145 million for the 12 months through June 2021.
The proposed acquisition is expected to have a marginal impact on cash earnings and return on equity upon completion. Pre-tax cost synergies of approximately $ 130 million per year are expected to be achieved over three years, with the majority achieved in the first two years.
It will be fully funded by existing resources from the NAB balance sheet. Based on NAB’s capital position as of March 31, 2021, the impact of incremental risk-weighted assets plus net asset premium on NAB’s CET1 capital ratio is 32 basis points.
NAB said it remained well capitalized with a pro forma CET1 ratio of 11.83% above its CET1 target of 10.75% to 11.25%.
He added that he expected around $ 220 million in capital to be released approximately three years after the completion of the migration from mainstream business to NAB and obtaining accreditation status. advanced.
NAB’s future capital ratios will also be affected by expected acquisition and integration costs of $ 375 million which are expected to be largely incurred over two years after completion.
Timing of the proposed acquisition
The proposed purchase of the consumer arm of Citi 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 business until the proposed acquisition is finalized, with no immediate changes to the way it serves its consumer and wealth banking customers. Customers will be contacted in the coming months with more details.
Commenting on the proposed purchase agreement, Citi Managing Director Jane Fraser said: “This is a positive result for our customers, our colleagues and for Citi.
“As this transaction demonstrates, we are moving forward with urgency as we update our strategy and execute the decisions we have already made as part of this effort. We focus our resources on companies where we have a competitive size and advantage in order to generate growth and better returns over time.
“In addition to serving our heritage clients through four global hubs, we will continue to serve our institutional clients in Australia, as we have been doing for nearly a century, and in the greater Asia-Pacific region. We are very satisfied with the economics of the transaction and 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, saying he “is a very positive result for our customers, our colleagues and for Citi“.
“Sale agreement reinforces Citi’s global strategy of focusing resources on businesses capable of generating stronger growth, increasing scale and improving returns, which includes our clients’ group businesses institutional in Australia,” he said.
“Citi has been present in Australia for almost a century and remains an important growth market for the bank. “
NAB CEO Ross McEwan said the acquisition will support NAB’s ambition for strategic growth for its personal banking business.
He said, “The proposed acquisition of Citigroup’s consumer business brings scale and deep expertise into unsecured loans, particularly credit cards, which continue to be an important vehicle for customers to make payments and manage their cash flow.
“The cards and payments industry is evolving rapidly and access to more payment and transaction data will help drive product and service innovation across all of our personal banking businesses and to deliver market-leading customer experiences.
“The Citigroup management team has also established strong white label partnerships with well-known names in the airline, retail and financial services industries over many years. This expertise, coupled with our commitment to providing market-leading products and services, provides an opportunity to grow with existing partners and add new partners. “
Citigroup’s institutional operations in Australia are not included in the proposed acquisition.
The company provides a range of investment and banking services (including capital markets and business advisory, securities markets and services, commercial banking, and treasury and commerce solutions) at approximately 1,500 companies, banks, governments and institutional investors in Australia, as well as offshore clients.
[Related: Big 4 confirms it’s looking at Citi acquisition]
Malavika Santhebennur is the Mortgage Securities Editor at Momentum Media.
Prior to joining the team in 2019, Malavika held positions at Money Management and Benchmark Media. She has been writing about financial services for six years.