Axis Bank will gain market share with Citi's deal but is that enough?

Axis Bank on Wednesday announced its proposed acquisition of Citibank’s consumer banking businesses in India for ₹12,325 crore.

According to Standard and Poor's (S&P), Axis Bank's acquisition of Citigroup Inc's consumer banking portfolio in India will only result in significant profitability gains starting in FY2025.

The acquisition and integration of the assets will take time. According to S&P, the transaction is expected to be completed in the next 9 to 12 months, with full integration taking another 18 months.

The Citi transaction would help Axis since it gives them access to 2.6 million Citi cards, which have a greater average expenditure than cards from competing Indian banks.

As part of the sale, 3,600 Citi employees would move to Axis. The deal follows a months-long auction process that included a rival bid from Kotak Mahindra Bank.

The acquisition will boost Axis Bank's retail market position and diversify its income profile, according to the rating agency, and is favourable for the bank's long-term profitability. Axis Bank's ability to retain acquired clients and successfully cross-sell its products and services to them will determine its earnings.

According to the ICICI Securities report, Axis Bank's credit card base will grow by 31%, with significant increases in customer spending. TheBank will be close to becoming the third-largest credit card issuer after the transaction.

At the same time, Citibank's credit card book is more profitable than Axis Bank's existing book due to higher spending led by the majority of its customer base's ultra-high net worth individuals. So, in the end, Axis Bank's credit card customer base will improve significantly as a result of the addition of wealthy individuals from Citibank, which will increase average spending and thus profit.

Citi has lost market share in the credit card biz

Citibank India has been losing market share in the credit card segment in recent years, both in terms of outstanding cards and spends, at a time when banks are engaged in a fierce battle to gain market share.

Still, average spending on Citi cards is higher than any other Indian bank.

Citi was one of the first international lenders to introduce credit cards to Indians in 1987, but its market share, according to Macquarie, has dwindled to 4% from 13% a decade ago.

The global banking behemoth announced last year that it was exiting its consumer banking franchises in 13 markets across Europe, the Middle East, and Asia, including India, citing a lack of scale.

In a span of almost four years, Citibank has lost 600-basis points (bps) in spends' market share. As of FY18, the bank commanded a market share of 10.6 per cent, with only HDFC Bank, State Bank of India, and ICICI Bank have a higher market share.

Citibank’s market share in outstanding credit cards has also seen a decline of 350 bps between FY18 and FY22 (as of February). As a result, Citi now has only 2.55 million credit cards as of February 2022.

During the same period, ICICI Bank has gained 900 bps in spends' market share and SBI Cards gained 260 bps.

HDFC Bank, which was under embargo, could not issue fresh cards for almost nine months. It has lost 230 bps in spends market share during this period.

Axis Bank, which initially gained market share in FY19 and FY20, saw its spends' market share decline by 100 bps between FY18 and FY22 (as of February). This is according to data compiled by Motilal Oswal.

According to a Motilal Oswal Institutional Equities report, over the past five years, Citi’s outstanding cards grew at a muted 0.4 per cent compound annual growth rate (CAGR) whereas the industry saw a 20 per cent CAGR.

Citibank had a market share of 13 per cent in outstanding cards and 19.5 per cent in spends' back in 2019. There has been a gradual decline in its market share since then.

The interest in Citi's assets underscores Indian banks' growing appetite for businesses such as credit cards and mortgages that could help lock in long-term income growth.

India's Growing Credit card spending

According to Worldline India's Annual Digital Payments Report for the previous calendar year, the total number of cards in circulation in India has reached 100 crore in 2021.

Outstanding credit cards increased by 14% to 6.9 crore in December 2021 from 6.4 crore the previous year, while outstanding debit cards increased by 6% to 94 crore from 89 crore during the same period, according to the report.

Of the total cards in circulation, credit cards accounted for 7 per cent market share while debit cards represented 93 per cent.

The value of credit card transactions in 2021 clocked in at ₹8.9 lakh crore, with the number of credit card transactions at Point-of-Sale machines standing at 108 crore and that for e-commerce at 106 crore, the report said.

The average ticket size of credit cards in 2021 stood at ₹4,122, higher than ₹3,653 a year ago.

The average ticket size of debit card transactions in 2021 was at ₹1,804 as against ₹2,568 a year ago, Worldline said, adding that even as the transaction value of credit cards was higher, debit cards remain the preferred payment mode due to a huge outstanding base.

SBI, HDFC Bank, Bank of Baroda, ICICI Bank and Union Bank were the top UPI Remitter banks in December 2021 while Paytm Payments Bank, State Bank of India, YES Bank, ICICI Bank and Axis Bank were the top beneficiary banks when it came to UPI volumes, the report said.