IGI Logo

Citibank’s consumer business acquisition; accretive, synergistic, at reasonable valuation

Axis Bank shells out a purchase consideration of Rs123bn for Citibank’s India consumer business to acquire: 1) loan portfolio of Rs274bn (accretion of 4% to its advance base) across credit cards, mortgage, personal & ready credit loans, assetbacked finance and small business banking; 2) 2.5mn credit card customer base (addition of 31% to its base); 3) granular deposit base of Rs502bn, of which 81% is CASA (increase of 7% in its deposit base and 12% to its CASA); 4) AUM of Rs1.1trn across Citi’s Wealth & Private Banking products to augment Axis’ Burgundy brand.

The implied equity value of Rs158bn (including notional capital allocation of Rs34.5bn) suggests the deal is to be consummated at 18.7x normalised CY20 earnings and 4x book value. Even adjusting for the estimated integration cost of Rs15bn (of which Rs12bn will be paid to Citibank), the deal appears favourable as it gives Axis Bank access to Citibank’s huge retail deposit base, affluent and profitable consumer franchise and strategic synergy benefits over the medium term. Maintain BUY with an unchanged target price of Rs1,050. Key risks: in the immediate term, it will not be financially accretive and, also, hit on networth (due to goodwill amortisation) and CET1 (due to capital allocation) will make equity raise imminent. Also, retention of an acquired credit card and deposit customer base will be key.

What do proforma financials suggest in terms of accretion to earnings?

Citibank’s existing India consumer business on normalised basis (adjusting for group overhead cost and covid impact on stress) has potential to generate NII of Rs20.7bn (NIMs of 3.9%), fee income of 3.6% to assets, operating profit of Rs17.5bn and PAT of Rs8.47bn. This would translate to RoA of 1.6% and RoE of 21.7% in CY20. Accretion on acquisition will be to the tune of 6% to Axis’ Bank’s net revenues and earnings (prior to integration cost).

What is the implied equity value and at what valuation is the deal consummated?

Axis Bank shells out Rs123bn as purchase consideration for Citibank’s India consumer business. Also, there will be notional capital requirement of Rs34.5bn assuming 13% CET-1 on the acquired RWA. The implied equity value including the purchase consideration (of Rs123bn) and notional capital requirement (of Rs34.5bn) suggests deal is consummated at 18.7x CY20 earnings and 4x book value.

How should one read the transitory integration cost paid to Citibank?

Axis Bank has indicated integration cost (post tax) expectations of Rs15bn over the next two financial years post closure of the deal. Of this, Rs12bn is to be paid to Citibank for servicing of customers during the transition period. This is done with the strategic intention to effectively retain and create value from the Citibank customer franchise it is acquiring. Ideally, we can structure it as a part of deal value since it is being paid to the seller for smooth transitioning.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer