Axis Bank’s Citi biz buy no game changer soon

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Axis Bank Ltd’s 12,325 crore acquisition of Citibank’s India consumer business is a shot in the arm for the Mumbai-based private sector lender. The transaction is expected to boost the retail banking and credit cards franchise of Axis because of the cross-selling opportunities and synergies. Consequently, its return on assets (RoA) is expected to improve.

However, extracting the benefits would be a gradual process, at best. Many things have to fall in place for Axis to achieve these benefits in a timely manner, according to Raghav Garg, analyst, Nirmal Bang Institutional Equities.

Gaining foothold

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Gaining foothold

A lot also depends on whether Axis is able to retain Citi’s customers and staff. Investors need to be watchful of risks in the form of a spike in integration expenses that may emerge during transition.

“We watch out for any blindsided risks as those that arose during Kotak Bank’s acquisition of ING Vysya Bank (higher staff pension costs, longer consolidation of corporate book and NPLs) and Bandhan Bank’s acquisition of Gruh (Bandhan decided to consolidate developer lending from Gruh),” said analysts of Jefferies India Pvt. Ltd in a report on 30 March.

Axis will make an offer to about 3,600 Citi employees to join the bank. Quick scaling up of Citi’s business largely depends on retention of Citi’s relationship managers. One of the conditions of this deal is that in a scenario where customer attrition is severe the purchase price will be reduced accordingly. “Even so, the risk of portfolio rundown remains by the time the transaction closes in Q4FY23,” said an analyst with a domestic brokerage house requesting anonymity.

The Axis management expects Citi’s business to deliver a steady 1.6% RoA. The deal is expected to be return on equity (RoE) accretive to Axis Bank in 2024. Against this backdrop, the valuations of the deal are discomforting on cost and capital that needs to be invested, which works out to 17,300 crore, according to Jefferies’ estimates. “The all-inclusive cost of acquisition implies 21 times price-to-earnings on FY20 normalized earnings, which, in our view, is at a premium as Citibank’s standalone growth has been modest in India,” said the Jefferies report.

As things stand, the deal doesn’t move the needle for Axis on earnings growth. “Citi’s credit card market share has declined over the years. So with a base of 2.6 million credit card customers, it remains to be seen how Axis arrests this fall in market share. So, we haven’t revised our FY24 earnings estimates for Axis Bank yet,” Garg said.

Simply put, the deal is small in the overall scheme of things for Axis and would have a limited impact on profitability in the near-term.

This also means that a rerating of Axis’ shares would essentially depend on the performance of its core banking vertical.

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