National Australia Bank: Acquisition marginally beneficial in wider context
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 11 August 2021, 7:00 AM
- Sectors Covered:
- National Australia Bank (ASX:NAB) yesterday afternoon announced it had entered into a Sale and Purchase Agreement with Citigroup Pty Limited (Citigroup) to purchase Citigroup’s Australian consumer business.
- While our view is that the acquisition stacks up for NAB shareholders, we view the benefit as marginal in the wider context of the NAB Group.
- Our target price of (login to view) is unchanged, and our recommendation is downgraded to Hold (from Add) due to recent share price strength.
The proposed acquisition is structured primarily as an asset and liability transfer, with National Australia Bank (ASX:NAB) to pay Citigroup cash for the net assets of the Citigroup Consumer Business plus a premium of $250m.
NAB has said that based on the anticipated increase in risk-weighted assets (RWA) of $8.9bn plus the premium to net assets to be paid on completion, the required equity is ~$1.2bn. This implies a multiple of 8x the Citigroup Consumer Business pro-forma NPAT of $145m for the 12 months to June 2021.
As at 30 June 2021, the Citigroup Consumer Business had lending assets of ~$12.2bn – comprising residential mortgages of ~$7.9bn and unsecured lending of ~$4.3bn – and deposits of ~$9.0bn.
NAB will not be acquiring all the technology systems or platforms that currently service these portfolios. NAB will invest in a new technology platform to support the combined unsecured lending business.
Pre-tax cost synergies of ~$130m pa are expected to be realised over three years, with the majority expected to be achieved in the first two years.
Based on NAB’s capital position as at 31 March 2021, the impact of the incremental RWA plus the premium to net assets on NAB’s CET1 capital ratio is ~32bps.
~$220m of capital (~5bps of CET1) is expected to be released approximately three years post completion following migration of the Citigroup 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 $375m, anticipated to be largely incurred over two years following completion.
Stacks up but not material in the scheme of things
Based on the figures provided by NAB, the Citigroup Consumer Business can deliver NPAT of ~$236m once expected cost synergies are realised. This would result in an ROE for this business of ~20% pre advanced accreditation and an ROE of ~24% post advanced accreditation.
We view the acquisition as advantageous for NAB’s shareholders from this perspective. However, in the scheme of things, the size of this business’s total loan book equates to ~2% of the size of NAB’s Group loan book. Consequently, we expect the acquisition to only be marginally accretive – ~20 basis points accretive – to NAB’s Group cash return on equity.
While the strategic rationale for this acquisition revolves around unsecured personal lending, our view on this front also is that it is all quite immaterial in the context of NAB as a whole.
Investment view and changes to forecasts
For the purposes of our forecasts, we have assumed that relevant approvals for the proposed acquisition will be received and that the acquisition will complete on 1 April 2022.
We have increased our cash EPS forecasts by 0.5%/1.8% for FY22F/FY23F respectively.
Our price target, based on our DDM valuation, is unchanged at (login to view).
Our recommendation is downgraded to Hold (from Add) due to recent share price strength.
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