Axis Bank’s Retail, Cards Portfolio To Strengthen On Citi Deal: Analysts
Here’s what analysts have to say about the Axis Bank-Citi deal...
Axis Bank Ltd.’s Rs 12,325-crore ($1.6 billion) acquisition of Citibank’s India consumer business is seen to boost the private lender’s retail banking and cards franchise, as well as lead to better return on assets, according to analysts. But customer, employee retention is crucial.
The Axis-Citi deal includes a credit card portfolio of 25 lakh cards, deposits of Rs 50,200 crore, wealth management assets worth Rs 1.1 lakh crore, among other physical assets.
Axis Bank Chief Executive Officer CEO Amitabh Chaudhry, in a media briefing, said the deal was expected to receive all approvals in 9-12 months and the integration process to be completed in the fourth quarter of FY23.
India's third-largest private sector lender will also make an offer to about 3,600 Citi employees to join the bank.
Shares of Axis Bank gained as much as 1.8% in early trade on Thursday compared with a 0.2% rise in the Nifty 50. Of the 51 analysts tracking the company, 46 recommend a ‘buy’ and five suggest a ‘hold’, according to Bloomberg data. The average of 12-month price targets implies a 26.7% upside.
Here’s what brokerages had to say about the deal:
Macquarie
Maintains ‘neutral’ at a target price of Rs 790 apiece, implying a potential upside of 7.1%.
Good deal at a good price, it strengthens Axis’ retail franchise as it acquires Citi’s 3 million customers and augments Axis’ CASA ratio to 47% from 45% currently.
Macquarie’s model forecasts build 1.4% sustainable return-on-assets for Axis and hence the deal is RoA-accretive to Axis Bank, but it will play out only post FY25 due to integration expenses and transaction services agreements with Citi.
A key monitorable will be retention of customers and key personnel at Citi over the next 12 months.
Citi’s declining credit card market share is a key problem Axis will have to fix to derive maximum benefit from the transaction.
HDFC Securities
Maintains ‘buy’ at a target price of Rs 950, implying a potential upside of 26.6%.
Deal appears to be a bargain for Axis Bank but the value accretion over the medium term is contingent on a host of factors, including retention of existing customers, Axis Bank’s ability to continually add customers of such profile and its ability to up-sell and cross-sell.
The Citibank cards portfolio adds a superior customer base with higher unit spends and unit receivables, addressing a key handicap in Axis Bank’s portfolio.
The deal calls for an overhaul in management approach to see Axis Bank can emerge as a natural banker-of-choice for this superior customer profile. The retention of existing Citibank relationship managers is especially crucial.
Synergies are likely to be back-ended and are conditional on significant frontloading of investments.
Axis’ current market price provides a good margin of safety.
Emkay Global
Maintains ‘buy’ at a target price of Rs 1,050, implying a potential upside of 36%.
The purchase should provide a strategic thrust to the bank’s retail banking aspirations and otherwise lagging RoAs in the long run as synergy benefits kick in.
After the deal, Axis Bank's loan/deposit base will increase by just 4%/7%. However, its CASA ratio will improve by 200 basis points to 47%.
On the asset side, Axis will benefit meaningfully by acquiring the high-value card business, where the bank has been otherwise lagging behind its close peers.
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.
Nirmal Bang
Maintains ‘buy’ at a target price of Rs 1,013, implying a potential upside of 34%.
This acquisition should help Axis Bank further its retail banking agenda and increase its lead as the fourth-largest cards player over RBL Bank Ltd.
Besides gaining a cards portfolio and cards market share, Axis Bank gets future cross-sell opportunities through the acquisition of an affluent client base. This acquisition is in line with Axis Bank’s objective to increase its retail footprint across the country.
Despite multiple positives around this acquisition, investors will keenly watch Citi’s customer attrition rate. Over the last few years, Citi’s credit card market share has declined significantly.
Dolat Capital
Maintains ‘buy’, raises target price to Rs 970 from Rs 930, implying a potential upside of 29%.
Axis has paid for the Citi franchise—customer relationships, Citi phone banking and experienced team—which the bank would have taken a long time to put up together on its own.
Valued at 18x trailing price-to-equity ratio after factoring in estimated equity requirement, the valuations are fair.
The consolidated franchise will be able to generate healthy RoAs at 1.7-1.8%, given the business synergies.
However, the deal has a long gestation given the near-term addition of opex costs Axis needs to incur.
Motilal Oswal
Maintains ‘buy’ but cuts target price to Rs 930, implying a potential upside of 24%.
While synergies in terms of cost savings and RoA accretion will take more than two years to accrue, the deal makes limited economic sense from 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 two years.
However, 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 gain from Citi’s well recognized digital and operation processes.
The small acquisition size (about 4% of loans) will have a limited impact on overall profitability.
Jefferies
Maintains ‘buy’ with a target price of Rs 1,040, implying a potential upside of 41%.
The all inclusive cost of acquisition implies 21x price-to-earnings ratio on FY20 normalised earnings, which is at a premium as Citibank’s standalone growth has been modest in India.
The key risk will be churn in portfolio and staff, Jefferies’ checks point that attrition has been higher in recent months and staff awaits clarity.
Jefferies watch out for any blind-sided risks as 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).
Prabhudas Lilladher
Upgrades from ‘accumulate’ to ‘buy’, raises target price to Rs 975 from Rs 860, implying a potential upside of 30%.
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.
The deal is structurally positive given the cross sell potential however post closure it could be profit neutral owing to likely integration costs. Hence we do not see a material change in FY23/24 profitability.
Discount to ICICI Bank Ltd.’s stock should narrow.
ICICI Securities
Maintains ‘buy’ with a target price of Rs 1,050, implying a potential upside of 40%.
Citibank’s consumer business acquisition accretive, synergistic and at a reasonable valuation.
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.
Key risks: in the immediate term, it will not be financially accretive and, also, hit on net worth (due to goodwill amortisation) and CET1 (due to capital allocation) will make equity raise imminent. Also, retention of an acquired credit card and deposit customer base will be key.