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Acquires Citi’s India consumer business – quality franchise in its fold; upsides contingent to customer retention

Axis Bank today announced the acquisition of Citi’s India consumer business for cash consideration of USD 1.6bn. Axis Bank will pay INR 123.25bn in cash and will in turn receive INR 274bn in loans of which 32% is credit cards, 36% is mortgages, balance is PL, Small business loans and CVs). Axis also gets INR 502bn of deposits (of which 81% is CASA) and a wealth AUM of INR 1.1trn. The acquisition gives Axis access to 1.2mn retail customers and makes it the 3rd largest credit card player (though overlap with Axis Bank’s own customers unknown). The transaction is expected to close in 9-12months and purchase consideration is subject to protection clauses for Axis Bank depending on the portfolio parameters holding within desired levels till then. The loan book forms c.4% of Axis Bank’s loan book and will also entail onboarding 3600 employees of Citibank. The transaction is likely to result into 180bps of impact on CET1 of Axis Bank (15.3% as of 3Q22) due to charge-off of goodwill created due to the acquisition. Additionally, another 50bps of capital requirement will be towards the increase in asset base.

We believe Axis Bank has acquired a quality franchise and gives it a strong presence in the affluent, upwardly mobile retail consumer base in top 8 cities of the country. At the same time, we also note that such a franchise (normalized RoA >2.25-2.50% with a strong fee income proposition) would not have come at an inexpensive price (including integration costs and incremental equity allocation – we believe acquisition price values the business between 2.5-3.0x networth). In our view, the business in current state will accrete c.20bps to Axis Bank’s NIMs, aid quality of deposits/LCR management (+200bps CASA increase) and add 10- 12bps of RoA (excluding integration costs). 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. In the interim, we see Axis Bank delivering a steady earnings recovery given a fortified balance sheet and expanding its organic retail franchise. We see the bank progressing well towards delivering RoA of 1.5% by FY24E on a pre-integration basis.

We keep our earnings estimates unchanged and will update the same post the bank’s 4QFY22/FY22 earnings. However, 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 FY23E/FY24E would be revised to INR 373/434 per share vs INR 410/465 per share currently (-9%/-6% impact) and RoA/RoE of 0.5%/5.8% for FY23E and 1.6%/19.2% for FY24E. Maintain BUY with an unchanged TP of INR 950 (valuing the core bank at 2.0x FY24E BVPS).

What does the acquisition bring to the table? Axis Bank will get INR 274bn in loans of which 32% is credit cards, 36% is mortgages, balance is PL, Small business loans and CVs). Axis also gets INR 502bn of deposits (of which 81% is CASA) and access to 1,600+Suvidha corporates. The acquisition makes it the 3rd largest credit card player increasing its credit card loans market share to 15.52% (+372bps due to Citi). Further, Axis gets access to Citi’s 1.2mn retail customers and strong wealth management franchise with an AUM of INR 1.1trn

What does it cost? In addition to the cash consideration of INR 123.25bn (charge of to net worth in form of goodwill), Axis bank will also need to consider an incremental equity allocation of INR 34.5bn (@13% of incremental RWAs). The goodwill write-off and increase in asset base will lead to impact of 180bps and 50bps to CET1 of Axis bank. Further, Axis also has estimated a post-tax integration cost of INR 15bn (c.80% due to Citi support services post-merger) over 2 year post the transaction is completed. Axis bank will also have to incur higher interest expenses on the SA balance taken over from Citi (Axis base SA rate at 3.0% vs 2.5% for Citi).

Our view: We believe Axis Bank has acquired a quality franchise and gives it strong presence in the affluent, upwardly mobile retail consumer base in top 8 cities of the country. At the same time, we also note that such a franchise (normalized RoA >2.25- 2.50% with a strong fee income proposition) would not have come at an inexpensive price (including integration costs and incremental equity allocation – we believe acquisition price values the business between 2.5-3.0x networth). In our view, the business in current state will accrete c.20bps to Axis Bank’s NIMs, aid quality of deposits/LCR management (+200bps CASA increase) and add 10-12bps of RoA (excluding integration costs). 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. In the interim, we see Axis Bank delivering a steady earnings recovery given a fortified balance sheet and expanding its organic retail franchise. We see the bank progressing well towards delivering RoA of 1.5% by FY24E on a pre-integration basis. Maintain BUY with an unchanged TP of INR 950 (valuing the core bank at 2.0x FY24E BVPS).

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