Axis Bank-Citi deal: Synergies seen FY25 onwards on deposit, AUM attrition

The higher deposit run-down, coupled with optically higher loss in Q4, could weigh on the stock performance in the near-term

With a double-digit attrition in Citi's deposits and wealth asset under management (AUM), since the announcement of the merger, analysts expect Axis Bank seeing merger synergies playing out only by the second half of financial year 2024-25 (H2FY25).

Moreover, the lender's management has indicated that it will write-off Rs 11,600 crore as goodwill/ intangibles, along with other costs, in the January-March (Q4) quarter of the current financial year (FY23) itself. This, analysts warned, will likely push the bank into one-time loss, or sharply lower the net profit, in Q4. The one-time adjustment could also hit the lender's net worth in the quarter.

According to Prakhar Sharma and Vinayak Agarwal of Jefferies, Axis Bank's earnings for FY24/H1FY25 will see negligible lift from the acquisition as the bank will amortise Rs 1,500 crore (post tax) of integration cost during the period.

“This will offset normalised profit run-rate of Rs 800-840 crore per annum even with 25 per cent growth through synergies. We expect full breakeven around Q2/Q3FY25," they said in a note.

Axis Bank, on Wednesday, announced that it has consummated the merger of Citi's various businesses into the bank. The final acquisition price was lower at Rs 11,600 crore vs Rs 12,300 crore expected earlier.

The loan book (credit cards, mortgages and others) was largely unchanged, while there is a decline in deposits (20 per cent year-on-year), and wealth management AUM (15 per cent YoY).

"The Citibank India acquisition, while important, leads us to estimate earnings per share (EPS) increases of just 1.5 per cent/5.4 per cent for FY24/25, an overall loan book addition of 3.6 per cent, deposit accretion of 4.5 per cent, and CASA increase of 100bps. Any return on asset (RoA) uplift is likely to come from H2FY25," Abhishek Murarka of HSBC said in a co-authored note with Rahil Shah and Priyesh Jain.

Given the one-time hit, analysts have cut EPS estimates for Axis Bank for FY23. Nuvama Institutional Equities, for instance, has cut EPS for the current financial year by 105 per cent (to Rs 34.2), but increased FY24 EPS by 54 per cent (to Rs 71.8).

Kotak Institutional Equities, meanwhile, has cut FY23 EPS by 53 per cent to Rs 32.2, but increased FY24 EPS by 118 per cent to Rs 78.5. FY25 EPS estimate has been increased by 2.5 per cent to Rs 84.3.

On the bourses, the higher deposit run-down, coupled with optically higher loss in Q4, could also weigh on the stock performance in the near-term, analysts said.

Shares of Axis Bank fell 2.4 per cent in the intra-day trade on Thursday, before settling 2.29 per cent lower at Rs 845 per share. In comparison, the Nifty50 ended 0.7 per cent down. So far in calendar year 2023, the stock has declined 6 per cent as against 4.34 per cent dip in the Nifty50 index, and 6 per cent decline in the Nifty Bank index.

That said, the deal's success, in the long-term, would depend on how well Axis Bank is able to cross-sell its entire bouquet of banking products to Citi customers, and gain from Citi’s well recognized digital and operation processes.

“The business in current state will be return on equity (RoE) accretive, and also aid quality of deposits. However, these outcomes are subject to quality of customer base/employees/engagement holding up as well as Axis Bank’s ability to manage a smooth transition, and this remains a key monitorable,” said analysts at JM Financial in a note.