Focus on sale of consumer assets by Citi
AFTER a long lull, there is again the prospect of mergers and acquisitions in the local banking sector, triggered by the decision of the American company Citigroup Inc (Citi) to leave the consumer banking in Malaysia, alongside 12 other markets in Asia and the Middle East.
It is still early days since Citi announced on April 15, but an informal check from The Edge indicates that several local and foreign banks in Malaysia are seeking more detailed information on Citibank Bhd’s consumer activities with a view to acquiring it. potentially.
“We’re excited but he’s subject to a lot of things including rating and people [strength]A bank CEO told The Edge.
Citibank’s consumer activities primarily consist of home loans and credit cards.
Based on its latest unaudited financial statements for the third quarter ended September 30, 2020, the size of Citibank’s total loan portfolio – not just consumer loans – was RM20.08 billion, both. largest segments being home loans (RM 9.07 billion). and credit card receivables (RM 5.35 billion). The two represent almost 70% of its total loan portfolio. We learn that the major part, over RM 8 billion, of home loans are home loans.
As a perspective, a mid-sized local lender like RHB Bank Bhd had RM 64.53 billion in home loans and about RM 2 billion in credit card receivables during the same period.
“[Citi’s consumer business] is not that big that it would move the needle for one of the big local banks such as Maybank, but maybe for some of the smaller banks, such as Alliance Bank or Affin Bank, and the foreign banks here such than OCBC, HSBC and Standard Chartered Bank, it gives them an immediate boost on the credit card side. So, they might be interested, ”observes a banking analyst.
Citibank is among the top credit card players in Malaysia. The current size of its card stock is unclear, but it held a 15% market share in terms of receivables at the end of September 2020.
Its market share increased from 19% at the end of 2010, as local banks such as Maybank gained shares over the years in a highly competitive market, where frequent promotions and waiver of annual fees are necessary to attract and retain customers. clients.
Nonetheless, industry sources claim that Citibank derives high revenues from the cards. Card fees represented one-fifth of its total operating income as of 9MFY2020.
“In the map business, having scale is very important. Any small bank that acquires the business could immediately expand. But you also can’t ignore the interest of a big player like Maybank, because he might want to consolidate his position. So really it all comes down to pricing, ”says one analyst. Maybank’s credit card claims stood at RM 8.66 billion at the end of 2020, but the figure includes those in its regional markets.
Pricing will be the key, confirms a banker. “There’s no point in paying for the wallet if you fail to retain cardholders,” says the banker.
It’s hard to get a picture of potential pricing as there is no recent benchmark, analysts say. There has been no case in recent history of a bank abandoning only its consumer activities in Malaysia. The last merger and acquisition of the whole bank in Malaysia took place at the end of 2017, when Malaysia Building Society Bhd agreed to buy Asian Finance Bank Bhd.
Citibank made pre-tax profit of RM 519.34 million as of 9MFY2020, up from RM 887.33 million in the same period a year earlier.
It is not yet clear how Citi plans to sell its consumer banking business in Malaysia or other markets.
“So many options are possible. They may prefer to sell the regional portfolio as a [to one buyer] … But it could be complicated for some markets, ”says an analyst.
Besides Malaysia, Citi is exiting consumer banking in Australia, Bahrain, China, India, Indonesia, South Korea, Philippines, Poland, Russia, Taiwan, Thailand and Vietnam. However, it will continue its institutional activities in all these markets.
“While the… 13 markets have great companies, we don’t have the scale we need to be competitive,” said Jane Fraser, CEO of Citi, explaining her decision. The move was part of a strategic review of Citi’s business since Fraser took over as CEO in March.
Citi could recover up to US $ 6 billion (RM 24.7 billion) from the sale of assets in the 13 markets, Bloomberg reported on Friday, citing sources familiar with the plan.
He said Citi told investors that those 13 markets generated $ 4.2 billion in revenue in 2020. That figure, however, was reduced by operating expenses and provisions for credit losses, which left the combined units without profit for the year.
Citi has taken similar steps in the past. In February 2016, it decided to exit its retail banking and credit card businesses in Brazil, Argentina and Colombia in order to reduce costs.
Earlier in February, UK-based HSBC Holdings plc confirmed it would sell its struggling retail banking division in the US.
Another place for consumer banks
Consumer banking is indeed an increasingly difficult business and requires scale to be a meaningful player, says Shankar Kanabiran, a financial services consulting partner at EY Malaysia.
“So if you’re small and you don’t have the minimum scale you need to operate, serving the customer is not profitable. You will constantly try to gain market share. But it’s not easy against the bigger players, who have a wider reach, deeper pockets and a wide product line, ”he told The Edge.
There will always be a need for consumer banks, although smaller banks may come under increasing pressure as fintech companies gain market share and digital banks enter the scene. Bank Negara Malaysia will issue five digital banking licenses next year.
Kanabiran says, however, that for the first five years at least, digital banks should not pose a threat to incumbent banks, as they will be small and allowed to focus only on underserved and unserved markets.
“Consumer banking in Malaysia has good risk-adjusted net interest margins and can be profitable, but it’s only a slow growing business at the moment and needs scale,” says Tushar Mohata, Head of Equity Research at Nomura Malaysia.
Meanwhile, analysts and bankers The Edge spoke to doubt the sale of Citibank’s consumer business will trigger further bank mergers and acquisitions in Malaysia. They point out that Citi’s case is unique in that it does not give up its banking license in Malaysia and only sells one division of its business.
Some recognize that there are opportunities for mergers and acquisitions with banks such as AMMB Holdings Bhd, whose large foreign shareholder ANZ is well known for wanting to exit, but not without getting a good price. RHB Bank is also often seen as a piece of M&A and potentially a good partner for AMMB.
However, such mergers and acquisitions may not be immediate, as there are no major push factors.
“All the banks are so concerned with just trying to keep up with this difficult Covid-19 environment, it would probably be unwise for them to look into mergers and acquisitions at this time as Bank Negara scrutinizes capital intensively. », Notes an analyst.
At the end of the day, it all comes down to whether there are synergies to be found, says Wong Yin Ching, co-director of financial institutions ratings at RAM Rating Services Bhd.
“Banks today have overlapping industries, branch networks and even borrower segments. Thus, unless there is a great differentiation between the sectors of intervention of the two banks, the banks must ask themselves if there are strong synergies of revenues, ”she said.
“If they are to derive synergy from cost savings, then bank shareholders need to seriously consider whether this is a compelling proposition, given that it may involve downsizing, which could be sensitive to an economic slowdown. So the key is whether a merger and acquisition is capable of effectively capturing revenue synergies. “
See also “Citi Retail Units Expected to Reach US $ 6 Billion at Launch of Sales” – Page 26