Axis Bank - 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, asset-backed 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 CET-1 (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.

How does the deal strategically create and add value to its franchise?

- Proposed transaction will add ~4% to the Axis Bank's advance base, ~7% to deposits, ~12% increase in CASA and 31% addition to credit card base.

- Post the acquisition, Axis Bank will have ~ 28.5mn savings accounts, 0.23mn Burgundy customers and 10.6mn cards (not adjusting for any overlap). Key will be retention of an acquired customer base. It also gets access to relationship managers, Citi's phone banking services, experienced retail team, robust processes and operations.

- Axis Bank will be able to consolidate and gain meaningful share in credit card space with >31% addition in card base of 2.5mn and 17% increase in average card spend. Credit card receivable portfolio will accrete by almost 57% to Rs244bn getting into the top-3 league.

- The acquisition aligns well with Axis Bank's premiumisation strategy as it gives access to a large, affluent and profitable consumer franchise.

- It gets access to a sizable granular deposit base with deep corporate salary relationships (>1,600 Suvidha corporates and 1.2mn retail customers) improving CASA ratio on a proforma basis by couple of percentage points to ~ 47%.

- The acquisition is a natural fit for its wealth management franchise. It will be able to leverage the Burgundy platform to serve an affluent customer base (40k+ affluent wealth customers and 100+ ultra HNI families). It will further strengthen Axis Bank's franchise through 42% addition to overall Burgundy AUM making it third-largest wealth manager by combined AUM.

- It has potential to cross-sell Axis Bank's product offering to Citibank's affluent customer base.

What would be the potential revenue and cost synergies?

- Revenue upside would flow from cross-sell and up-sell of differentiated products to a larger combined customer base and attracting new-to-bank customers with a wider product bouquet.

- Management indicated cost synergies of 30-40% of Citibank's expenses - to be realised over 2 years post deal closing. This would primarily be attributable to the savings from global shared services, global oversight, infra, technology cost, etc.

- The synergy benefits will be partially offset by additional interest outgo as Axis Bank aligns its deposit rates for Citibank customers as well. Axis Bank offers 3% savings rate to its customers with balance
- Also, 3.6k in-scope consumer employees of Citibank will be absorbed in Axis Bank and there is no intention to save on employee cost.

- Networth will be knocked down at the time of integration of assets and liabilities due to upfront amortisation of goodwill created from purchase premium of Rs123bn. This hit will be equivalent to ~10% of Axis Bank's FY23E book value.

Objective of acquisition is to consolidate its position and gain access to large and affluent customer base

- Axis Bank will be able to consolidate its position amongst the private lenders by incremental accretion to loans, credit cards, wealth management and retail banking operations in India, in line with its growth ambitions.

- Axis Bank's large loanbook would be complemented by Citibank's affluent customer segment, creating product and branch footprint synergies.

- It will gain access to Citibank's large and affluent customer franchise having a bouquet of fee-oriented and profitable segments, that include quality credit card portfolio, affluent wealth management clientele, meaningful deposits with 81% being CASA, along with a strong consumer lending portfolio.

- Citibank's customers will benefit from Axis Bank's augmented scale, larger geographical reach and width of products and offerings.

Acquisition will hit CET-1 by ~230bps; equity raise imminent

Deal will knock down Axis Bank's CET-1 from 15.3% to 13.0% attributable to ~180bps towards purchase premium and ~50bps towards incremental RWA requirement. Inching towards CET-1 threshold of 13%, which generally triggers evaluation of capital raise, will make equity raise imminent over next 3-4 quarters as it integrates balance sheet by FY23-end. Management highlighted that it does not need to raise capital immediately to fund the deal and will raise equity at an appropriate time.

How does it ensure continuity in customer servicing?

- Axis Bank and Citibank together will ensure continuity of superior customer service levels, even post-closing of transaction, across all customer channels.

- Citibank's customers will continue to avail all the rewards, privileges, and offers to which they were previously entitled.

- Further, Citibank's customers will specifically benefit from Axis Bank's wider geographical reach and comprehensive service offerings, along with One Axis capabilities that extend across all its subsidiaries.

- Digital banking and the highly rated Axis Mobile app offering 250+ services will be an added advantage for Citibank customers, having immediate access to view and transact across product categories such as deposits, investments, payments and protection solutions. Moreover, the world-class Citi Phone Banking will ensure service excellence for both Citibank and Axis Bank customers.

Closing is expected to be achieved in Q4FY23, subject to regulatory and/or other customary conditions

Management expects transaction closure in 9-12 months and another 18-24 months for integration into Axis Bank platform. Transfer of Citi India Consumer Business' assets, liabilities, customers, and employees to Axis Bank is expected by Q4FY23 and transfer of all customers, products, data and partner connections to Axis Bank's systems by Sep'24.

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 CitibankDeal ConsumerBusiness India ICICISecurities