Emkay Global Financial's report on AXIS Bank
Axis Bank has announced the acquisition of Citi Bank’s (incl subsidiaries) top-notch retail banking portfolio. 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. Following are the key takeaways from the call and our view: Axis would acquire consumer banking assets to the tune of Rs502bn, including loans worth Rs274bn (Mortgages: Rs100bn, Cards: Rs89bn, other retail/small banking loans: Rs85bn) and liquid assets of Rs228bn, against the liabilities/deposits of Rs502bn (including 81% CASA), making the transaction NAV neutral. Moreover, Axis will get wealth management, private banking and Insurance distribution businesses. The bank will make an offer to 3,600 Citi Consumer employees to join Axis, which will be essential for a smooth transition and scaling up of the business. After the deal, Axis Bank's loan/deposit base will increase by just 4%/7%. However, its CASA ratio will improve by 200bps to 47%, leading to some benefit on CoF, partly offset by a higher savings rate of 3% vs. 2.5% offered by Citi (will help with customer retention). The bank will also get access to a strong and affluent retail customer base for cross-selling, and thus driving in revenue gains (including fees) in the long run.
Outlook
That said, 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. Currently, we have a Buy rating on Axis with a TP of Rs1,020 (based on 2x Dec’23E ABV + subs value of Rs73).