Axis Bank | Citibank consumer business calls for upping the game

-Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

Axis Bank announced the acquisition of Citibank’s cards, consumer lending, and wealth businesses in a transaction that is likely to be closed over the next 9-12 months. At an acquisition cost of US$1.6bn, while the deal appears to be a bargain for Axis Bank, the value accretion from Citi’s portfolio 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. Although the Citibank transaction adds significant heft to Axis Bank’s competitive positioning across cards and wealth management businesses, we believe that Axis Bank will need to up its game in order to create sustainable value from the Citibank portfolio.

Superior customer profile to complement existing portfolio: 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. Axis Bank’s’ CC franchise has historically been inferior compared to peers with higher share of self-employed, and Tier II/III cities.

Adding heft to liabilities and wealth management business: Citibank’s wealth management and Private banking portfolio, along with its lucrative deposit base (1.2mn customers, 81% CASA) are also part of the deal. These portfolios complement Axis Bank’s ongoing build-out of its private wealth business (Burgundy) aside from improving its low-cost franchise.

Valuations a definite bargain; near-term equity raise in the offing: Our back-of-the-envelope SoTP analysis, based on valuation benchmarks for each individual business (credit cards, wealth business and other lending), suggests an attractive acquisition cost. However, the all-in integration cost is likely to drag CET1 by ~230bps, with CET1 likely to drift closer to 13%.

Proof of the pudding: We believe the key challenge for Axis Bank post the transaction would be the retention of Citi’s existing customer base as well as organically adding customers with similar profile. This is likely to entail several operational changes such as revamp of customer services, better tech integration etc. – more importantly, this calls for an overhaul in management approach and whether Axis Bank can emerge as a natural banker-of-choice for this superior customer profile. In this context, we believe that the retention of the existing Citibank relationship managers is especially crucial.

Wait and watch on synergies; maintain BUY: Especially given the distinct and superior customer profile that gets added through this transaction, we believe that synergies are likely to be back-ended and are conditional on significant frontloading of investments. At CMP, Axis Bank provides good margin of safety; we maintain BUY with TP of INR950.