Axis Bank - Citibank India deal - Opportunistic deal net positive for AXSB, Maintain BUY

Axis Bank (AXSB) announced a deal on Wednesday to acquire Citibank India’s (Citi) retail assets, which is net positive for AXSB from a business standpoint. Our view regarding the deal includes the following key aspects (1) The rationale for the deal makes sense for AXSB due to a variety of reasons (2) Integration of Citi’s business will be a key monitorable but importantly, there is some downside protection built into the deal for AXSB (3) We think that the deal will be RoE accretive in FY24E and raise our FY24E PAT estimate by 3.5%. We reiterate BUY rating on AXSB with a revised price target of Rs 1060.

The rationale for the deal makes sense for AXSB due to a variety of reasons

AXSB has flagged complementarity in its own existing credit card business and Citi’s credit card business from a perspective of geographical focus and client category. While Citi’s credit card business has been focused on the Top 8 cities, AXSB’s business has been more widely spread in this regard. Furthermore, customers at AXSB have been mass or mass affluent whereas those at Citi have been outright affluent. The credit card count, dues book and spend per card for the combined entity would be higher by 31%, 57% and 17%, respectively. Secondly, AXSB also gets Citi’s wealth management business, where it also sees complementarity. Here, AXSB’s Rs 2.67 trn wealth AUM stands to grow 42%. Thirdly, the deal provides a fillip to liability granularity as Citi’s Rs 502bn deposits book, with 81% CASA, would enhance CASA ratio by 201 bps to 47%. Apart from these, AXSB also stands to add a 3600-strong high-quality workforce and Citi’s world-class Citiphone services. In addition, management has also flagged synergies due to cross sell opportunities and on the cost side, due to scale and discontinuation of payout to Citi’s global parent.

Integration of Citi’s business will be a key monitorable but importantly, there is some downside protection built into the deal for AXSB

The cost to Axis Bank for integrating its target would be Rs 15bn. One part of the cost is the payout to Citi for providing services during the transition period, which would amount to Rs 12bn. The integration cost would be borne for 2 years post the closing of the deal and would be transitory in nature. There is protection built into the deal for Axis Bank if parameters deteriorate compared with pro forma date of June 2021 and Axis would pay a lower price. Axis Bank would make this comparison as the assets get transferred to it on the LD1 (Legal Date 1), 9 to 12 months later. The intention is not to pay a lower price and both parties are aligned and incentivized to retain customers.

We think that the deal will be RoE accretive in FY24E and raise our FY24E PAT estimate by 3.5%

The credit card business from Citi would help enhance yield on advances for the combined entity, while also aiding fee income stream. Some synergies would also start to flow in from FY24E due to cross sell to the Citi customer base.

We reiterate BUY rating on AXSB with a revised price target of Rs 1060

We value the standalone bank at 2.5x FY23 P/BV for an FY22E/23E/24E RoE profile of 13.7/16.3/17.1%. We assign a value of Rs 105 per share to the subsidiaries, on SOTP.