When Citi announced its plans to exit retail banking in 13 markets, primarily in Asia, in April 2021, it sent shockwaves through the banking industry.
Three years later, while it may be premature to assess the long-term impact of Citi's strategic shift, a closer examination of the situation in the Philippines provides valuable insights into the complexities of such events.
In the Philippines, Citi's retail banking business attracted numerous bidders. However, two years after it was acquired by Union Bank of the Philippines, the challenges of such an acquisition are becoming clear.
The primary question revolves around the acquisition price. Initially announced at P55 billion ($1.1 billion) in December 2021, the final bill for Citi's consumer banking unit reached P77.9 billion when the transaction closed in August 2022 – a 30% increase from the initial estimate.
This raises questions about the justification of the acquisition cost, especially when compared with similar transactions in the region, such as Citi's sale of four southeast Asian consumer franchises to Singapore's United Overseas Bank for around S$4.9 billion ($3.6 billion).
Union Bank's financial performance in 2023 reflected the challenges posed by the acquisition, with net income dropping 28% to P9.2 billion from the previous year's P12.7 billion
The high acquisition price has directly impacted Union Bank's capital buffer, prompting Moody's to revise its outlook on the bank to negative from stable. The rating agency cited concerns about the erosion of Union Bank's capital buffers and maintained this negative outlook in its latest rating action in 2024, pointing to uncertainties about the bank's asset quality and profitability metrics.
Union Bank's financial performance in 2023 reflected the challenges posed by the acquisition, with net income dropping 28% to P9.2 billion from the previous year's P12.7 billion.
The bank attributed this decline to higher provisioning and the integration costs associated with the Citi acquisition.
Profitability, as measured by return on average assets, fell from 1.3% in 2022 to 0.8% in 2023, according to Moody’s.
Beyond the financial implications, Union Bank has also faced difficulties in retaining Citi's high-end customers, who were drawn to the global bank's cross-border services and wealth-management expertise.
These customers, often characterized by their overseas education or foreign family ties, have demonstrated a clear preference for banking with institutions that can cater to their international needs.
"A bank like HSBC has global access, but Union Bank doesn't have that kind of global access," claims one local banker. "Some large corporates have migrated their payrolls from Citi to HSBC after the acquisition."
This migration can be attributed, in part, to the Philippines’ closed-loop payroll system, where employees must hold accounts with their employer's bank for salary disbursements. So, for example, when Citi's corporate clients shifted to HSBC, their employees followed.
Integration cost
The integration process itself has proven to be a challenge for Union Bank, as Citi's IT and software systems were not part of the acquisition deal.
"In a way, we are temporarily carrying the cost of running on two systems – we are paying Citi a fee to support the business on their platform while we develop and fully transition all ex-Citi retail customers to our own system," Manuel Lozano, Union Bank's chief financial officer, told local media. "These investments are necessary to ensure the sustainability of our consumer business growth moving forward."
Lozano added that the bank's overall profitability had been affected by front-loaded costs incurred in the integration of new businesses. In 2023, operating expenses surged by 43% to P45 billion, and this trend persisted into 2024. The bank incurred a one-time integration cost of P1.1 billion in the first quarter of 2024 alone.
The challenges faced by Union Bank in the integration process underscore the complexity of acquiring and absorbing a large-scale retail banking operation. The necessity to maintain parallel systems while gradually transitioning customers to Union Bank's platform has led to some big additional costs and operational inefficiencies.
As the bank continues to navigate the integration process, it remains to be seen whether the long-term benefits of the acquisition will outweigh the substantial short-term costs. Union Bank's ability to streamline the transition and fully realize the potential synergies of the deal will be critical.
However, it appears that the primary beneficiary of Citi's retreat may not be Union Bank, but rather international players such as HSBC.
It is a cautionary tale for other banks considering similar acquisitions. The true cost of such deals extends far beyond the initial price tag, encompassing the challenges of customer retention, systems integration and the potential erosion of capital buffers.