Axis-Citi Deal: Short-Term Pain But Long-Term Positive, Say Analysts

Axis Bank Ltd's acquisition of the India consumer businesses of Citibank and Citicorp Finance India Ltd. is likely to hurt earnings in the January-March quarter. However, if executed well, the long-term gains outweigh this pain, said analysts.

On Wednesday, Axis Bank said that it had closed the Citi transaction, which was originally announced in March 2022. The local lender will pay Rs 11,603 crore to take over the customer base, employees, credit card portfolio, retail loans, and deposits. The transaction value is lower than the Rs 12,325 crore announced last year.

Axis Bank will take a hit of approximately 170 to 180 basis points on its capital adequacy ratio due to the transaction. The bank will also spend Rs 1,500 crore towards integration costs, the management said on Wednesday.

Here's what analysts said about Axis Bank's purchase of Citi's India retail business:

• The acquisition of Citibank India’s consumer business has added about 1.8 million credit cards to Axis Bank’s outstanding cards and increased its market share by 3%.

• While synergies in terms of cost savings and return-on-asset accretion will start to accrue from the next calendar year, the deal should result in a higher capital charge, to be done in 4QFY23, and high integration costs of Rs 1,500 crore to be absorbed over the next two years.

• In the long term, the deal’s success would depend on how well Axis Bank is able to cross-sell its banking products to Citi customers and gain from Citi’s well recognised digital and operational processes.

• The common equity tier-1 ratio is likely to moderate by 177 basis points to 13.8%.

• Estimates RoA of 1.9% and return on equity of 17.6% by FY25.

• Reiterate buy with a target price of Rs 1,130 per share for Axis Bank.

• Factor earnings changes from the merger, leading to a 53% cut to FY23 profit but raising the FY24–25 profit estimate by up to 3%.

• Axis Bank stock trades at a discount to other private banks, but drag on profits and potential share supply can limit an immediate re-rating.

• The one-time hit will push the bank into a one-time loss, but core profitability is likely to stay intact.

• Expect full breakeven around the second or third quarter of FY25.

• Maintains a buy rating but cuts its target price to Rs 1,100 per share from Rs 1,170, reflecting the knock on the book value.

• A better-than-expected CET-1 ratio post-transaction is a key positive.

• The capital position provides the bank with ample cushion and, importantly, flexibility on the timing of the next capital raise.

• Citi's customer base, both for credit cards and deposits, saw a 30% decline between June 2021 and January 2023. Deposit balances also declined sharply by 21%, with current account deposits declining sharply by 40%, even as loan balances remained almost unchanged.

• The transaction value, including the goodwill impact, will be charged to the profit and loss account in the current quarter.

• Harmonisation of the credit cost policy, given Axis Bank's conservative standards versus Citi, might lead to a one-off charge in the January-March quarter.

• Maintain 'outperform' on Axis Bank stock, with a target price of Rs 1,000.

• Axis Bank management believes that the reduction in customer balances at Citi could be due to some customers consolidating their banking relationships, while others have moved to other banks.

• Believe this could be partly owing to some corporate customers, including multi-national companies, moving their banking relationships, including employee salary accounts.

• The interest outgo on Citi’s retained savings customers would go up, as Axis Bank’s savings account rate is higher at 3-3.5% versus Citi’s 2.5%.

• Axis Bank believes that the bulk of the rundown, in terms of cards and deposits customers, is largely behind.

• Believes the higher deposit run-down, coupled with an optically higher loss in the fourth quarter, could weigh on the stock's performance.

• Remain long-term positive on Axis Bank stock, given its improving retail orientation, core profitability, healthy provisioning buffer, and reasonable valuations.

• Retains a buy rating with a target price of Rs 1,250 per share.