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Announces the acquisition of Citibank’s Consumer business

Credit Card positioning to strengthen; Wealth AUM to get a major thrust

AXSB announced the acquisition of Citibank India's Consumer Banking business for a cash consideration of ~INR123b. The deal includes the Credit Card, Wealth, and Retail Banking operations of both Citibank India and Citicorp Finance.

It will acquire loans/deposits worth INR274b/INR509b, including the Credit Card book of INR89b. This will increase its Credit Card book by 57% to INR244b and propel it to among the top three players. Wealth Management AUM will rise ~42% to INR3.8t, making it the third largest player on combined AUM.

AXSB will acquire ~3m unique customers, complemented by Citibank's Affluent Customer segment. Post-acquisition, it will have ~28.5m savings accounts, more than 0.23m Burgundy customers, and 10.6m cards.

While synergies in terms of cost savings and RoA accretion will take more than two years to accrue, the deal, at 18.7x P/E on CY20 normalized earnings, makes limited economic sense from medium term perspective given the declining revenue profile /cards base of Citi’s business, higher capital charge and high integration cost to be absorbed over the next 2 years. However, over the long term, the success of deal would depend on how well AXSB is able to cross sell its entire bouquet of banking products to Citi customers and also gain from Citi’s well recognized digital and operation processes. CET I ratio is likely to moderate by ~230bp to ~13%, the lowest in the past three years, and may necessitate another capital raise over FY23.

However, the small acquisition size (~4% of loans) will have a limited impact on overall profitability. We maintain our Buy rating, but reduce our TP to INR930/share (2x FY24E P/ABV).

AXSB to acquire Citibank’s Consumer business for INR123b

AXSB announced the acquisition of Citibank’s Consumer business in India, including its Credit Cards, deposits, Wealth Management, loans, customer guarantees business, Insurance distribution, and Small Banking business. It also proposed to acquire the Commercial Vehicle and Construction Equipment asset backed financing facilities, Assigned Asset backed financing portfolio, Personal loan portfolio, and servicing of Assigned Mortgages loan portfolio of Citicorp Finance (India). The total consideration of ~INR123b, along with the estimated equity requirement of INR34.5b, implies a P/E multiple of 18.7x on CY20 normalized earnings. AXSB is likely to incur an integration cost of INR15b (over two years) and expects the deal to be completed by 4QFY23

Citibank has a strong presence in cards; AXSB’s positioning to strengthen

Citibank is the seventh largest player in the Credit Cards business, with a card base of ~2.6m as of Feb’22. Over the past five years, outstanding cards grew at muted 0.4% CAGR (v/s 20% for the industry), while spends clocked 11% CAGR over FY15- 20 (v/s 31% for the industry), before declining by 30% in FY21. Though spends have picked up in FY22 till date (up 21% YoY), it remains lower than the industry (55%). Post-acquisition, AXSB’s Credit Card book will rise by ~57% to INR244b and propel it to among the top three players. Outstanding cards are likely to rise by ~31% to 10.6m. Its market share in outstanding cards/spends will grow 3.6%/4.6% to 15.6%/13.1%. Average spends per card will rise ~17%, indicating a higher value proposition and may strengthen its presence in the overall market.

Loans/deposits to rise by 4.1%/6.5%; Wealth AUM to get a significant boost

The acquisition will increase AXSB’s loans/deposit book by 4.1%/6.5% to INR6.9t/ INR8.2t. CASA deposits will rise by ~12% and CASA ratio will grow 222bp to ~47%. Retail loans are likely to increase by 7.5%. As a result, the mix of Retail loans will rise by 177bp to 57% v/s 55.3% at present. Wealth AUM is likely to increase by ~42% to INR3.8t, making it the third largest player by combined AUM in the Wealth Management space. AXSB will acquire ~3m unique customers, complemented by Citibank’s Affluent Customer segment, creating product and branch footprint synergies. Post-acquisition, AXSB will have ~28.5m savings accounts, more than 0.23m Burgundy customers, and 10.6m cards.

Synergies to take time to accrue; CET-I to be impacted by ~230bp

Over the recent months, growth in Retail loans has picked up for AXSB, particularly in Unsecured products. AXSB has added ~1.3m cards over the past six months, with the highest card additions in Feb’22. While the deal can be margin accretive for AXSB 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 ~230bp to ~13%, the lowest in the past three years, and may necessitate another round of capital raise over FY23.

Valuation and view

The acquisition of Citibank’s Consumer business will add ~2.6m Credit Cards to AXSB’s outstanding cards. It will increase its market share by 3.6% to 15.6%. While synergies in terms of cost savings and RoA accretion will take more than two years to accrue, the deal, at 18.7x P/E on CY20 normalized earnings, makes limited economic sense from medium term perspective given the declining revenue profile /cards base of Citi’s business, higher capital charge and high integration cost to be absorbed over the next 2 years. However, over the long term, the success of deal would depend on how well AXSB is able to cross sell its entire bouquet of banking products to Citi customers and also gain from Citi’s well recognized digital and operation processes. CET I ratio is likely to moderate by ~230bp to ~13%, the lowest in the past three years, and may necessitate another round of capital raise over FY23. However, the small acquisition size (~4% of loans) will limit the impact on overall profitability (integration cost of INR15b to be incurred over two years). We maintain our Buy rating, but reduce our TP to INR930 per share (2x FY24E P/ABV for the standalone bank).

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