The acquisition of Citi’s Indian consumer business is a positive for Axis Bank, but the lender will have to succeed in retaining Citi’s customers and personnel in order for the deal to yield benefits, analysts said on Thursday. While most analysts took the view that the deal was reasonably valued, a few saw it as expensive.
Axis Bank intends to acquire Citi India’s credit cards, lending and wealth management businesses for Rs 12,325 crore, subject to regulatory approvals. It will shell out another Rs 1,500 crore in transition costs, most of which will go to Citi to handhold their customers over a two-year transition period.
Macquarie Capital Securities said that the deal will be return on assets (RoA)-accretive to Axis Bank from 2024, while valuing Citi’s business at 2x book value, which is reasonable. “As per the management, the transaction will be consummated by Q4FY23 – a key monitorable in our view will be retention of customers and key personnel at Citi over the next 12 months,” Macquarie said.
Since Axis Bank had a relatively weaker franchise on various fronts than peers, the deal fits quite well for the bank, said Kotak Institutional Equities (KIE). “The fear is always that as an acquirer of a valuable asset, there are tendencies to overpay. Hence, the deal at US$1.6 billion excluding other transition costs appears to be quite attractive,” the broking firm said. Apart from the risk of employee attrition and run-off of customers, KIE anticipates there could be a delay in merger or other regulatory challenges that are less understood today.
Axis Bank’s management has said that the transaction with Citi incorporates appropriate clawback arrangements. The bank has factored in a conservative attrition rate and if the portfolio loses more customers than expected, the deal price would be renegotiated.
There are concerns around the deal resulting in a significant hit to Axis Bank’s capital ratios. According to analysts at Jefferies, the acquisition will imply 250 basis points (bps) of capital consumption upon completion, with 180bps from the acquisition cost, 50bps from capital infusion and 20bps towards integration cost. With this, Axis’s common equity tier-1 (CET1) capital adequacy ratio will slip to 12.8% from 15.3% in December 2021, which is materially lower than the 16-17% average for other private banks. This may trigger a need to raise capital over the next 12-15 months, close to the integration timeline.
“The all-inclusive cost of acquisition implies 21x PE (price-to-earnings) on FY20 normalised earnings, which, in our view, is at a premium as Citibank’s standalone growth has been modest in India,” Jefferies said.
Citi’s credit card business has seen continuous decline in spend market share to 4% from 10% over the last four years, along with a decline in spend-per-card to Rs 14,000 from Rs 16,000. At the same time, Citi still enjoys a premium clientele and its spend-per-card remains above the industry average of Rs 12,000 and Axis’s own Rs 9,000, Macquarie pointed out.
Motilal Oswal Financial Services also found the deal making limited economic sense from a medium-term perspective, given the declining revenue profile of Citi’s business, higher capital charge and the high integration cost. However, over the long term, the success of the deal would depend on how well Axis Bank can cross-sell its bouquet of banking products to Citi customers and also gain from Citi’s digital and operational processes.
