Axis Bank-Citi deal: Brokerages list key positives & negatives for the bank

The affluent credit card segment was seen as a gap in Axis Bank's customer positioning and will fit in the lender's retail portfolio.

Axis Bank, on Wednesday, made a historic acquisition of Citibank N.A. and Citicorp Finance's entire consumer business in India, gaining instant access to the affluent customer segment. The segment, analysts said, was seen as a gap in Axis Bank's customer positioning and will fit in the lender's retail portfolio.

The all-cash transaction of around $1.6 billion (Rs 12,300 crore) values the deal at 18.7x CY20 Adjusted PAT of Rs 840 crore for consumer finance business. The bank has to pay another Rs 1,500 crore as integration cost spread over two years from date of closing of transaction. The deal is expected to be completed by Q4FY23.

On the bourses, the stock of the private lender advanced nearly 2 per cent to a high of Rs 763.90 in the intra-day trade.

What Axis gains?

It will acquire loans/deposits worth Rs 27,400 crore/Rs 50,900 crore, including the Credit Card book of Rs 8,900 crore. This will increase its Credit Card book by 57 per cent to Rs 24,400 crore and propel it to among the top three players. CASA deposits will rise by nearly 12 per cent and CASA ratio will grow 222bp to 47 per cent. Retail loans are likely to increase by 7.5 per cent. As a result, the mix of Retail loans will rise by 177bp to 57 per cent from 55.3 per cent at present.

Wealth Management AUM will rise nearly 42 per cent to Rs 3.8 trillion, making it the third largest player on combined AUM.

Besides, Axis Bank will acquire approximately 3 million unique customers, complemented by Citibank's Affluent Customer segment. Post-acquisition, it will have 28.5 million savings accounts, more than 0.23 million Burgundy customers, and 10.6 million cards. CHECK DETAILS HERE

Key risks

Analysts will watch out for any churn in portfolio and staff as the bank has seen higher attrition in recent months. That said, there is a clawback/protection clause in the deal. If the attrition rate in the retail portfolio is higher than the threshold, between the pro forma date of the merger, which is June 2021, and the effective date of the merger, which would be 9–12 months from now, then Axis Bank has the right to lower the value of the deal.

How brokerages view the deal

Macquarie | Neutral | Rs 790

The management expects Citi's business to deliver 1.6 per cent steady-state return on asset (RoA) (after eliminating Citi's global overheads and on normalised credit cost basis). However, the management estimates that it can also achieve 30-40 per cent savings on Citi's opex, which provides Axis an additional RoA upside. 

However, since Axis has to incur additional charges (Rs 1,500 crore) over two financial years post consummation, the full impact of RoA accretion may play out only post FY25. Our model forecasts build 1.4 per cent sustainable RoAs for Axis and hence the deal is RoA-accretive to the company.

Jefferies | Buy | Rs 1,040

Management sees the acquisition to breakeven in CY24 (almost FY25); this implies limited upside till then, with potential capital raise in 12-15 months. This may be a slight overhang on further valuation re-rating as its discount to ICICI Bank has narrowed to 27 per cent until ROA gap narrows — Axis at 1.3 per cent in Q3 vs ICICI at 1.9 per cent and HDFC Bank at 2.2 per cent. 

Edelweiss Securities | Buy | Rs 1,000

Axis Bank's organic growth in total loans and credit cards has accelerated in the last six months. The acquisition will strengthen this growth journey. The all-in cost of the deal results in a price-to-earnings multiple (P/E) of 25x. However, after baking in cost synergies and excluding one-off integration cost of Rs 1,500 crore, the P/E works out to 14x, which is attractive for the premium and difficult-to-replicate customer franchise that Citi brings. 

Emkay Global | Buy | Rs 1,020

The purchase should provide a strategic thrust to the bank's retail banking aspirations and otherwise lagging RoAs in the long run as synergy benefits kick in. 

Factoring in the bank's estimated return on equity (RoE) of 21.7 per cent (based on low implied acquisition cost at ~5 per cent) and the Net Worth of Rs 3,900 crore, the implied price-to-book value (P/BV) works out at 4.1x, which is not too high for a readily available profitable retail business. That said, Axis will have to deliver on business retention/upscaling and drive cost/revenue synergies after the acquisition, leading to better RoAs and thus justifying high valuations paid for the acquisition.

ICICI Securities | Buy | Rs 1,050

The synergy benefits will be partially offset by additional interest outgo as Axis Bank aligns its deposit rates for Citibank customers as well. Axis Bank offers a 3 per cent savings rate to its customers with balance of less than Rs 5 million and 3.5 per cent for customers with savings a balance of Rs 5-100 million. On the other hand, Citibank offers 2.5 per cent to all its savings deposit customers. On overall savings deposits of Rs 36,600 crore, an additional 50bps would imply additional interest outgo of Rs 180 crore per year.

Motilal Oswal Financial Services | Buy | Rs 930

While the deal can be margin accretive as the mix of Retail/Unsecured loans is likely to increase, overall synergies in terms of cost savings will take around two years to accrue as the management expects the deal to be RoA accretive in CY24. CET-I ratio is likely to moderate by about 230bp to roughly 13 per cent, the lowest in the past three years, and may necessitate another round of capital raise over FY23.

JM Financial | Buy | Rs 950

If we were to incorporate the disclosed normalized earnings of the Citi portfolio, integration costs and the impending goodwill discharge impact, our BVPS expectations for FY23/FY24 would be revised to Rs 373/434 per share relative to Rs 410/465 per share currently (-9 per cent/-6 per cent impact) and RoA/RoE of 0.5 per cent/5.8 per cent for FY23 and 1.6 per cent/19.2 per cent for FY24.