This is how Axis Bank benefits from Citi deal, shares outlook positive ahead

The reason behind the strong rally in Axis Bank is due to the lender’s move to acquire Citibank’s consumer businesses in India. Axis Bank and Citibank both have received their board of directors’ approval. The proposed acquisition positions Axis Bank strongly for accelerated premium market share growth in India. The deal was announced on March 30 and since then Axis Bank shares are in a buying frenzy. The bank’s shares outlook is also positive post the Citibank deal.

Stock Performance:

On Friday, Axis Bank shares extended their gaining spree. The shares closed at ₹774.45 apiece up by ₹13.80 or 1.81% on BSE. The shares were near the intraday high of ₹775.70 apiece.

At the current market price, Axis Bank’s market valuation is ₹2,37,732.43 crore on BSE.

This week, Axis Bank shares have skyrocketed by at least 7.6%. The shares stood at ₹720.9 apiece on March 25 last week.

Axis Bank outperformed benchmarks BSE Sensex and NSE Nifty 50 as the indices advanced by around 3.5% this week.

The Mega Deal:

As per the agreement, Axis Bank will pay a consideration of ₹12,325 crore to Citibank for the acquisition of consumer business in India.

Citibank’s consumer business includes credit cards, retail banking, wealth management, and consumer loans. Also, the transaction includes the sale of Citi’s non-banking financial company, Citicorp Finance (India).

Through the acquisition, Axis Bank will gain access to the large and affluent customer franchise of Citibank having a bouquet of fee-oriented and profitable segments, that include a quality credit card portfolio, affluent wealth management clientele, meaningful deposits with 81% being CASA, along with a strong consumer lending portfolio. Post the acquisition, Axis Bank will have ~ 28.5 million Savings Accounts, 2.3 lakh+ Burgundy customers, and 10.6 million Cards.

Also, Axis Bank will gain access to 7 offices, 21 branches, and 499 ATMs across 18 cities.

Further, the acquired portfolio would lead to a rise in Axis Bank’s credit card customer base by ~31% with an additional 2.5 million cards, which will in turn bolster the Cards balance sheet position to be amongst the top 3 players in the Indian market. Moreover, the wealth and private banking portfolio will add great value to the Axis Burgundy business, further accelerating its growth ambitions in that segment. On an overall basis, the proposed transaction will add ~7% to the Bank’s deposit base (with ~12% increase in CASA) and ~4% increase in advances.

The transaction is expected to close between 9-12months.

How does Axis Bank benefit from the Citi deal?

Analysts at JM Financials in their report said, “We believe Axis Bank has acquired a quality franchise and gives it a strong presence in the

affluent, upwardly mobile retail consumer base in top 8 cities of the country. At the same time, we also note that such a franchise (normalized RoA >2.25-2.50% with a strong fee income proposition) would not have come at an inexpensive price (including integration costs and incremental equity allocation – we believe acquisition price values the business between 2.5-3.0x networth).”

In these analysts’ views, the business in its current state will accrete c.20bps to Axis Bank’s NIMs, aid quality of deposits/LCR management (+200bps CASA increase), and add 10- 12bps of RoA (excluding integration costs).

However, the JM Financials analysts added in the report that “these outcomes are subject to the quality of customer base/employees/engagement holding up as well as Axis Bank’s ability to manage a smooth transition and this remains a key monitorable. In the interim, we see Axis Bank

delivering a steady earnings recovery given a fortified balance sheet and expanding its organic retail franchise. We see the bank progressing well towards delivering RoA of 1.5% by FY24E on a pre-integration basis.”

Should you buy Axis Bank shares?

JM Financials analysts said, “We keep our earnings estimates unchanged and will update the same post the bank’s 4QFY22/FY22 earnings. However, if we were to incorporate the disclosed normalized earnings of the Citi portfolio, integration costs, and the impending goodwill discharge impact, our BVPS expectations for FY23E/FY24E would be revised to ₹373/434 per share vs ₹410/465 per share currently (-9%/-6% impact) and RoA/RoE of 0.5%/5.8% for FY23E and 1.6%/19.2% for FY24E. Maintain BUY with an unchanged TP of ₹950 (valuing the core bank at 2.0x FY24E BVPS).”

“We maintain our positive outlook on Axis Bank, post the Citi Bank consumer banking deal. The deal may cost around Rs123bn to Axis bank, which will be paid sometime between 9 – 12 months, subjected to regulatory approvals. The deal would help strengthen Axis Bank’s balance sheet and reduce the gap against its peers. The deal may have an impact of 180-200 bps on the capital where ROA accretion of 50bps is estimated We maintain BUY on Axis Bank with TP of 984, considering the valuation gap and positive growth outlook,” Ajit Kabi, BFSI Analyst at LKP Securities said.