A surge in mortgage lending volumes at Citigroup’s Australian subsidiary could result in National Australia Bank having to pay more than $A1.2 billion to acquire the American bank’s local consumer banking operation.
In the 12 months to the end of December, Citigroup almost quadrupled its bottom line profit on the retail banking assets earmarked to be transferred to NAB in the next few months.
Details of the earnings turnaround and other financial disclosures were revealed by Citi’s local banking arm in 2021 financial accounts filed to ASIC last week.
Special disclosures in the accounts show that the consumer business being sold to NAB generated a net profit of $A156.6 million – an increase of $118 million on the 2020 performance.
While the earnings improvement was partly attributable to loan writebacks and deep cost savings in areas such as marketing, it was also driven by record lending growth -particularly in mortgages.
Citi settled more than $2.5 billion of home loans in 2021, which was more than double its settlements in the previous year.
The record lending activity resulted in the value of mortgages held on balance sheet climbing more than 7 per cent.
While NAB chief executive Ross McEwan will no doubt welcome the momentum building in Citi’s retail business, the record asset growth means he might have to shell out more cash to complete the deal.
That’s because the sale is structured primarily as an asset and liability transfer, with NAB saying last August it would “pay Citigroup cash for the net assets of the Citigroup consumer business plus a premium of $250 million”.
When the deal was announced in August last year, the consensus among analysts was that NAB was likely to pay $A1.2 billion for the Citi assets.
However, disclosures in note 17 of Citigroup Pty Ltd’s latest accounts indicate that the net asset value of the business being sold to NAB stood at $A1.879 billion at the end of December.
With the addition of a $A250 million premium to net assets, the valuation formula given to the market by NAB suggests the transaction might end up costing more than $A2.1 billion to complete.
NAB’s investor relations team will need to explain whether the valuation formula disclosed in August applies – in a literal sense - to the sale, or whether it was loosely communicated to shareholders.
It might be the case that the formula also includes discounts on some of Citi’s assets – possibly a portfolio of securitised mortgages required to be held on the Citi balance sheet - that were not adequately explained by NAB when it pitched the deal as “value accretive”.
“Based on the anticipated increase in risk-weighted assets of $8.9 billion plus the premium to net assets to be paid on completion, the required equity is approximately $1.2 billion,” the bank stated in its August filing to the ASX.
“The Proposed Acquisition is expected to be marginally accretive to cash earnings and cash return on equity from completion.”
NAB shareholders will be hoping that their bank got its disclosure way wrong otherwise they might have to wait many years for Citi’s retail banking assets to deliver value to their company.