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Citi deal completed; integration to play out in 18 months

About the stock: Axis Bank is the third largest private sector bank in India with a balance sheet size of | 12.2 lakh crore as on December 2022.

* The bank has a large footprint across India with 4849 branches

* Retail and SME comprise ~67% of total loans

Key Highlights:

* Axis bank has completed the deal with Citi bank ahead of estimated time line. The deal closed for a cash consideration of ?11,603 crore vs 12,325 crore mentioned earlier. The cash consideration was subject to contractual and customary true up and/or true down adjustments and changes in the customer count from January 31, 2023 to February 28, 2023.

* With this acquisition, bank will add ?27300 crore assets (~3.5% of Axis Bank’s asset base) & ?40000 crore liabilities. Axis Bank’s credit card customer base to increase by ~19%, with addition of 18 lakh cards. In addition, ~34 branches and ~3200 employees will be part of Axis Bank.

* There will be an 18-month (by Sept’24) integration period during which Citi customers will be migrated to Axis’ technology platforms and the integration cost of ?1500 crore will be amortised by Axis Bank over 18 months. This will offset normalised PAT run-rate of ?800-850 crore. The purchase consideration impacted the CET 1 capital by ~177 bps.

* Management mentioned that the acquisition will be funded through internal accrual. Merger being effective from 1 March 2023, the bank will charge Q4FY23 for one time amortisation, provisions and transaction charges.

What should investors do? Axis Bank’s stock has given ~1.4x returns over the past two years. Acquired asset base is RoE accretive, however, synergy benefits seen to get accrued from 2HFY25E amid integration expense to be paid in next 18 months. Continued strong growth coupled with margin expansion to aid return ratios and sustainability of performance to drive valuation ahead.

* Thus, we maintain our BUY rating

Target Price and Valuation: We continue to value Axis Bank at ~2.1x FY25E ABV and maintain our target price at | 1100 per share.

Key triggers for future price performance:

* Incorporating acquisition, expect advances to grow at 16-18% CAGR, with consequent earnings trajectory at 29% CAGR and RoA at 1.7%.

Alternate Stock Idea: Apart from Axis Bank, we like Kotak Bank.

* Kotak Mahindra Bank is led by strong promoter led management. It has a presence across financial services value chain

* BUY with a target price of | 2175

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