Axis Bank - Citibank deal: Good cross sell opportunities but customer retention a key

Mr. Gaurav Jani, Research Analyst at Prabhudas Lilladher

Quick Pointers:

- Axis Bank to acquire Citibank's consumer businesses for a total consideration of Rs123bn with an equity requirement of Rs34.5bn; hence the implied equity value is Rs158bn.

- Axis will acquire deposits of Rs502bn, assets of Rs274bn (of which Rs89bn is credit card portfolio) and remaining in form of liquid assets.

The much awaited Axis-Citi deal was announced yesterday, wherein Axis will acquire Citibank's self-funded consumer businesses for Rs123bn. Deposits/assets to be purchased will be Rs502bn/274bn with credit card portfolio of Rs89bn. Rationale for the deal is (i) building a premium base of customers and increasing granularity (ii) Citi's portfolio complementing that of Axis, as both entities have different customer profile and (iii) good cross sell opportunities for Axis which would eventually lead to synergies. In our view, the deal is positive for Axis Bank in medium term, however the key is customer retention. With systemic asset quality risk receding and credit growth prospects improving, Axis could be one of the main beneficiaries. We raise the multiple/TP to 2.3x/Rs975 as we roll forward to FY24E ABV. Upgrade to 'BUY' from Accumulate.

- Contours of the transaction: While deposits/assets to the tune of Rs502bn/274bn would be transferred, difference will arise in form of liquid assets implying that transaction would be balance sheet neutral. The deal is expected to close within 9-12 months i.e. Q4FY23 by when assets, liabilities, customers and employees will be transferred post which transition servicing might extend by additional 18 months to Q2FY25. Purchase consideration is likely to be self-funded and would be paid at the time of closing. However in case there is customer attrition leading to portfolio rundown, the purchase price would be reduced accordingly.

- Implications of the deal: Transfer of assets at closing would entail a capital charge of ~230bps which would be offset by profits accrued for Axis in FY23. On a going concern basis, PAT for consumer business in CY20 was Rs8.4bn. However during transitory period (i.e. post-closing), estimated integration costs may be ~Rs15bn spread across 2 years comprising of: 1) charges for Citi's services to the tune of Rs12bn and 2) additional cost of 3bn by Axis. Hence post closure normalised profits would be offset by integration costs. After integration, management expects cost optimization of 30-40% led by leverage benefits from Axis Channels and its technology. Hence RoA accretion might be possible from H2FY25 and RoA could range from 1.5-2.0%.

- Likely synergies in the near term: Citi's retail loan book stood at Rs274bn, while that of Axis is Rs3675bn. As at Dec'21, retail share of Axis would enhance by 1.5-2% to ~57%. Citi's deposit are Rs.502bn of which CASA is 81%, which implies Axis's CASA may also improve by ~200bps. As per RBI (Jan'22), Axis Bank's cards in force share stood at 11.9% (8.4mn) while Citi's was 3.6% (2.6mn) and the combined share would be ~15.5% (being the 4th largest player in credit cards). While HDFCB would continue to be the front runner with 23% share in Cards, followed by SBI (19%) and ICICI (18%). Citi's spend market share is 3.6%, while Axis Bank's is 8.4%, taking the combined share to ~13% (as of Jan'22) maintaining its 4th position. Axis could also cross sell its various products which would eventually be RoA accretive.

- Valuation and view: The deal is structurally positive given the cross sell potential however post closure it could be PAT neutral owing to likely integration costs. Hence we do not see a material change in FY23/24 profitability. Customer retention is the key for benefits to accrue earlier. Axis could be a beneficiary of upcoming growth cycle, as asset quality risk has receded. Discount to ICICI should narrow and hence rolling forward to FY24E ABV. We raise multiple from 2.1x to 2.3x increasing the TP from Rs860 to Rs975. Upgrade from Accumulate to 'Buy'.

Shares of Axis Bank Limited was last trading in BSE at Rs. 750.20 as compared to the previous close of Rs. 737.55. The total number of shares traded during the day was 326964 in over 8937 trades.

The stock hit an intraday high of Rs. 765.80 and intraday low of 741.20. The net turnover during the day was Rs. 246720560.00.

Source : Equity Bulls

Keywords

AxisBank INE238A01034 Citibank IndiaBusiness Acquisition PrabhudasLilladher