Private sector lender Axis Bank is set to acquire Citibank’s India consumer business for ₹12,325 crore. After acquiring Citibank's India business, Axis Bank will gain access to 7 offices, 21 branches and 499 ATMs across 18 cities.
The transaction comprises the sale of the consumer businesses of Citibank India, which include credit cards, retail banking, wealth management and consumer loans.
The deal also includes the sale of the consumer business of Citi’s non-banking financial company, Citicorp Finance (India) Limited, comprising the asset-backed financing business, which includes commercial vehicle and construction equipment loans, as well as the personal loans portfolio.
What is means for Axis Bank
The acquisition will add nearly 7 percent to the Bank’s deposit base, with a nearly 12 percent increase in CASA (current account savings accounts) and a nearly 4 percent increase in advances.
As highlighted by the brokerage firm Motilal Oswal Financial Services, Axis Bank will acquire loans and deposits worth ₹27,400 crore and ₹50,900 crore, respectively, including the credit card book of ₹8,900 crore. This acquisition will increase Axis Bank's credit card book by 57 percent to ₹24,400 crore and propel it to among the top three players. Wealth management assets under management (AUM) will rise nearly 42 percent to ₹3.8 lakh crore, making it the third-largest player in combined AUM, the brokerage underscored.
Besides, Axis Bank will acquire nearly 30 lakh unique customers, complemented by Citibank's 'Affluent Customer' segment. Post-acquisition, it will have nearly 2.85 crore savings accounts, more than 2.3 lakh Burgundy customers, and 1.06 crore cards.
Brokerages positive but show some caution too?
Brokerages see this development as a positive one for Axis Bank and most of them have buy calls on the stock.
Global brokerage firm Jefferies has a buy call on Axis Bank's stock with a target price of ₹1040 and said that this deal will consume 250 bps in capital and will be earnings-accretive in the calendar year 2024.
CLSA also has a buy call on the stock with a target price of ₹1080, terming the deal as a good one. As reported by CNBC-TV18, CLSA said the deal will be 8-9 percent book dilutive but there will be a more than 150 bps RoE-accretion.
RoE stands for return on equity which is the ratio of a company's profit in relation to the equity. In simple terms, it shows how much profit each rupee of stockholder money generates.
Morgan Stanley has maintained an overweight view on the stock with a target price of ₹930. As per CNBC-TV18, Morgan Stanley said the deal will help Axis Bank in strengthening its franchise and reduce the gap versus peers but managing customer attrition will be the key.
Among the domestic brokerages, Motilal Oswal has a buy call on the stock with a target price of ₹930.
Motilal Oswal believes while synergies in terms of cost savings and RoA-accretion will take more than two years to accrue, the deal, at 18.7 times P/E on the calendar year 2020 normalised earnings, makes limited economic sense from a 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.
Over the long term, the success of the deal would depend on how well Axis Bank 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, Motilal Oswal said.
Brokerage firm Emkay Global has a buy call on the stock with a target price of ₹1020.
"Axis will have to deliver on business retention/upscaling and drive cost/revenue synergies after the acquisition, leading to better RoAs and thus justifying high valuations paid for the acquisition," Emkay said.
Brokerage Nirmal Bang also has a buy call on the stock with a target price of ₹1,013. It said the acquisition is expected to be EPS/ROE-accretive from FY24E onwards. "Despite multiple positives around this acquisition, investors will keenly watch Citi’s customer attrition rate. Over the last few years, Citi’s credit card (CIF) market share has declined significantly," said Nirmal Bang.
Phillip Capital has a buy call on the stock with a target price of ₹950. It said the premium deal is justified as it solidifies Axis’s retail franchisee, provided the customer attrition is restricted. The ability of the bank to improve sustainable margin will be key for further re-rating, Phillip Capital said.
Brokerage firm Prabhudas Lilladher has upgraded the stock to a 'buy' from an 'accumulate' with a target price of ₹975.
"In our view, the deal is positive for Axis Bank in the 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," said Prabhudas Lilladher.
JM Financial has a buy call on Axis Bank with a target price of ₹950. It said Axis Bank’s ability to manage a smooth transition will remain 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 percent by FY24E on a pre-integration basis," JM Financial said.
Kotak Securities has a buy call on the stock with a target price of ₹960.
"With the key overhang behind, further re-rating of the franchise will be driven by the performance of the core bank. We think the levers (NIM, loan growth and asset quality) are still quite healthy to deliver closer-to-its peers on operating metrics," Kotak said.
ICICI Securities has also maintained a buy call on the stock with a target price of ₹1,050.
"Even adjusting for the estimated integration cost of ₹1500 crore (of which ₹1200 crore 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," ICICI said.
"However, 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," ICICI Securities added.
CET-1 stands for Common Equity Tier 1 which compares a bank's capital against its assets to determine its ability to withstand financial distress.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.