Citi deal can perk up Axis Bank's prospects, but there are challenges too

Cheaper-than-expected valuation for the above-average customer franchise is positive; extracting synergies, smooth integration among key challenges

The Axis Bank–Citi deal has caused a buzz in the banking sector. Axis Bank is acquiring Citi’s consumer business in India for an all-cash consideration of around $1.6 billion. This includes over 2.85 million retail customers and 1.2 million loan accounts alongside credit cards, home loans, wealth management, etc. The transaction includes the sale of the consumer business of Citi’s non-banking financial company (NBFC) Citicorp Finance (India), comprising the asset-backed financing business, which includes commercial vehicle and construction equipment loans, as well as the personal loans portfolio. Citi will retain its institutional business.

The deal includes the transfer of 3,600-odd employees to Axis Bank and subject to regulatory approvals, it should conclude in the last quarter of 2022-23. The payment is not milestoned – it will be made at one shot when the assets are formally transferred. According to public statements, the transaction size does have some consideration for possible client attrition built into it which could move the size of the deal. Axis Bank believes it can easily raise the Rs 12,325 crore it requires, either from internal resources or via loans.

The rumours were that the deal would be worth $2 billion (about Rs 15,000 crore), so the market may be surprised at the cheaper valuation. Citi has a retail book of about Rs 68,000 crore, of which retail loans account for Rs 28,000 crore. Citi has a credit card base of around 2.5 million in India and while these are considered premium customers with higher average spend, there has been attrition since the news broke that Citi was intending to exit. Citi credit cards accounted for Rs 3,555 crore worth of transactions that took place in February, including Rs 6.7 crore of ATM withdrawals.

Axis intends to use the Citi team it is taking over to continue servicing Citi clients and it will also offer the Citi customers its own apps and platforms. The cost of this gradual and hopefully seamless transition is estimated at about Rs 1,500 crore, and Axis will pick up most of the tab.

Axis Bank is the third-largest private bank and it is available at lower valuations than its larger peers, HDFC Bank and ICICI Bank. While Citi lost some 7,000 credit card customers in February, Axis gained nearly 2.5 lakh new cards, taking its base to around 8.6 million cards. However, the February transactions indicate that the average spend on Axis cards is Rs 9,025 while the Citi average spend is around Rs 13,900. If they can retain those customers, this does add high-value, apart from increasing the customer base by close to 30 per cent in unit terms. The ticket size of Citi loans, net interest margins, etc., may be similarly higher-value though this is hard to judge.

The market appears to be happy with the acquisition. The Axis Bank share opened high in the morning, under the assumption that the deal would be around $2 billion. The lower value of the takeover should make investors happier. The Axis share closed at Rs 755, up 2.25 per cent for the day and the stock is up only 1.6 per cent for the month so this is clearly seen as a positive deal. Most analysts had valuations that suggested an upside, prior to the deal which was announced post market hours on Wednesday. In the longer-term, apart from customer retention, Axis will have to figure out possible synergies and it will also have to integrate the Citi workforce into its own corporate culture.