Inside The Axis Bank-Citi India Deal: Who Dares Wins

"The City Never Closes. It Stays Open"—read a front page advertisement by Axis Bank Ltd. on March 31, a take on Citibank's old tagline 'The Citi Never Sleeps'.

A day earlier, the private sector lender announced the acquisition of Citi India's local consumer finance businesses for Rs 12,325 crore. The Axis-Citi deal, in the works for close to 11 months, saw one of India's early success stories in retail finance change hands.

For Citi, this marks a clean exit from the India consumer business. For Axis, it's a well-priced bet that the Citi clientele, particularly its affluent credit card holders, will give it a leg up in the retail banking business, where it stands third in the pecking order among private banks.

"A deal like this comes once in a lifetime. This is perhaps one of the best consumer banking franchises in the country," said Amitabh Chaudhry, chief executive of Axis Bank, on March 30, while talking to reporters.

A Rs 12,325-crore price tag for a credit card portfolio of 25 lakh, alongside a loan book of Rs 27,400 crore and a deposit base of Rs 50,200 crore, was mostly seen by analysts as a good deal. The eventual cost, though, with capital charges included may be higher.

"A good deal at a good price," is how Macquarie described it. Jefferies, however, saw it as "costly on price and capital" and said that holding on to the Citi customer base is all important.

Citi had announced its plans to exit the India retail business in April 2021, as part of a wider global call. Investment bankers started the process of finding buyers almost immediately.

By August 2021, HDFC Bank Ltd., DBS Bank India Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd. and Axis Bank were willing to come to the table to talk.

Citi India expected a valuation of $2-2.5 billion for the retail book, three people with direct knowledge of the matter said, speaking on the condition of anonymity. Due diligence and negotiations followed.

Slowly, a number of potentially interested lenders backed out. Each for its own reason, said the first person quoted above. HDFC Bank was in the midst of a large technology upgrade; DBS India still digesting the acquisition of stressed Lakshmi Vilas Bank; IndusInd Bank cleaning up concerns at its microfinance unit.

To begin with both tried to outbid each other. But by February 2022, Kotak Mahindra Bank decided to back out of the deal, the first person quoted above said.

Why?

First, as part of the deal, Citi was seeking an additional Rs 1,500 crore as a fee for transition services. This is largely aimed at technological integration at the back-end.

Kotak did not want to pay this.

The second, and more important reason, was that Kotak, led by Uday Kotak, who is known to be a tough negotiator, did not see the economics of the deal working out, said the second person quoted above.

Much of the value of the Citi portfolio was in the affluent customer base which could have helped Kotak Mahindra Bank's retail portfolio expand quicker in the years to come. But what if the customers didn't stay on?

The transaction requires the buyer to take explicit customer consent before on-boarding them. Kotak Mahindra Bank felt that the customers may not provide this consent, preferring instead to move to other foreign banks with their business, the second person quoted above explained.

Axis Bank was more confident that it could retain a bulk of Citi's customers after the transition.

"We believe that once these customers migrate to Axis, we can become the primary provider to them of any asset needs they might have, for which they are not going to Citi today. That's what our hope is," Chaudhry told reporters on March 30.

Chaudhry is also expecting that Axis Bank's service quality may prompt Citi customers to convince their affluent friends to move there.

To better protect the business it will acquire, Axis Bank has built in a clause where the price is directly linked to the business run-off. If by the time the transfer of assets is initiated, which may take upto nine to 12 months, a higher-than-expected share of customers exit the Citi portfolio, the deal value could be brought down, the first two of the three people quoted above confirmed.

"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 Global analysts said in a report on March 31.

The immediate benefit will come from the Citi credit card customer base, which is expected to add to spends. Axis' wealth management business called Burgundy will also get a strong fillip from the new Citi India customers.

"If you look at the AUM-wise growth in the wealth management sector that we get, under Burgundy, it is a clear 40-45% uptick. There is a clear substantial chunk of the business which is coming from the very well developed Citi franchise," Ravi Narayanan, group executive-branch banking, retail liabilities and products at Axis Bank, said on March 30.

While Axis Bank is still reviewing Citi's 21 branches which are coming to it as part of the deal, Chaudhry said that these branches are mostly in high density locations, with great placement. In certain situations, Axis Bank may even prefer shutting its own branch and merging the staff at the Citi branch location, he said.

"Our model forecasts build 1.4% sustainable RoAs (return on assets) for Axis and hence the deal is RoA-accretive to the company," Macquarie analysts said in a report on March 31, adding that the full impact of RoA accretion will play out after FY25.

In any consolidation, culture is an important part in determining how smooth the integration is.

The Citi team, which Axis Bank will acquire, includes 3,600 employees. According to the transition plan, these employees will be offered similar positions and compensation.

Once these employees are on-boarded, their skills as retail banking experts will be used to better structure Axis Bank's products. The relationship managers will also have to ensure that the existing customer base continues to bank with Axis Bank, the third person quoted above said.

Of the employee base which will enter Axis Bank, about 900 belong to the in-house call centre at Citi. This group will help push more cross-sell opportunities at Axis Bank, this person said.

"They have incorporated global practices in that particular service centre of theirs. We are expecting to learn a lot from their global practices and take it to other parts of Axis," Chaudhry had said.

But life will undoubtedly change for Citi's employees.

According to the person quoted above, foreign banks tend to have more relaxed business growth targets as India is not a core geography for growth. For these lenders a 10% growth in a market like India is good enough. Axis Bank will expect more.

The lender can't have a situation where the compensation is in dollar terms, but the productivity is in rupee terms, the person quoted above said.

It will be a challenging integration.

"Axis Bank has had attrition problems for some time," said Hemindra Hazari, an independent banking analyst. "Moreover, Citi's India consumer business has been declining for the last few years. It is this very team that has been at the helm during this period. So to expect them to suddenly do wonders and perform at growth rates expected out of private banks would be extremely optimistic."