UNIONBANK of the Philippines, Inc.’s purchase of Citigroup, Inc.’s local retail unit is credit-positive, though it could narrow the Manila-based lender’s capital buffer in the short term, according to CreditSights, Inc.

The transaction would significantly boost the bank’s retail segment, CreditSights Asia Pacific analysts Lim Ze Hao and Yustina Quek said in a report.

“Citi’s local consumer business would be a great complement to any of the smaller banks in general, as its larger scale and greater strength in the upscale consumer market and wealth management businesses would mean few overlaps with the existing retail units of the smaller banks,” they said.

They noted that Citi’s retail segment has margins of 13-15%, while return to equity is about 20-30%.

UnionBank’s move to retain the Citi team would also ensure a smooth turnover when the transaction is closed, they added.

UnionBank has agreed to buy the local consumer unit of Citigroup, Inc.., including Citi’s credit card, personal loans, wealth management and retail deposit businesses in the country, UnionBank said told the Philippine Stock Exchange last month.

The acquisition also includes Citi’s real estate interests in relation to Citibank Square in Eastwood, three full-service bank branches, five wealth centers and two bank branch lites.

The transaction is part of Citi’s global plan to shed consumer franchises in 13 overseas markets, 10 of them in the Asia-Pacific region. It will continue to offer consumer banking in Hong Kong, Singapore, London and the United Arab Emirates, the bank’s four wealth hubs.

“Success in the longer term, however, would also depend on whether management can ensure that the key aspects which made the Citi consumer franchise successful in the Philippines are not lost during the integration process, to minimize the attrition of customers acquired,” according to the CreditSights report.

The analysts said the transaction could bring down UnionBank’s common equity Tier 1 ratio down by 260 basis points to 13.5%.

“While capital levels almost certainly will not fall below regulatory minimums as that would mean not getting the blessing of regulators, the acquisition looks set to leave the bank with a relatively thin capital buffer post-transaction, even with the large support from its shareholder group,” according to CreditSights, a unit of the Fitch Group.

The Aboitiz-led lender said the transaction was expected to be finalized by the second half. The deal is subject to regulatory approvals including by the Monetary Board of the Bangko Sentral ng Pilipinas, Philippine Competition Commission, Philippine Deposit Insurance Corp., Securities and Exchange Commission, and Insurance Commission.

The analysts noted that UnionBank has been a consistently profitable banking franchise “that has delivered above-peer returns to its shareholders.” “The recent strong backing that it has secured for this acquisition signals to us that more capital injections could be forthcoming if required in the near-term.”

Net income at the Aboitiz-led lender rose by 26% from a year earlier to P10.71 billion in the nine months to September, fueled by improving core businesses and lower loan loss provisions.

UnionBank closed 50 centavos at P99 apiece on Monday. The local bourse suspended trading on Tuesday after a system glitch, according to President Ramon S. Monzon. — Luz Wendy T. Noble