Axis Bank’s Purchase of Citi India’s Consumer Business to Enhance Franchise

8 Apr, 2022 15:17 IST

Fitch Ratings-Mumbai: Axis Bank Limited's (BB+/Negative/bb) retail franchise should benefit from the acquisition of Citibank India's (Citi India) retail business, provided execution risks and capitalisation are well-managed, says Fitch Ratings.

The acquisition will affect Axis' capitalisation directly due to increased risk-weighted assets (RWA) and indirectly from a one-off goodwill charge that will sharply reduce near-term profitability. However, this will not affect Axis’ Viability Rating as we expect earnings to sharply recover in the following year. The deal is expected to close in nine to 12 months subject to regulatory approval.

The acquisition will expand Axis' footprint in the highly competitive urban retail market. It will make Axis one of the three largest credit-card operators in India with over 10 million cards. Axis will also acquire Citi India's 1.2 million retail customers, including 40,000 wealth and private banking clients, which will expand its retail loans by 7.5% (credit-card loans: +57%), deposits by 6.5% (200bp improvement in low-cost deposit ratio), and assets under management by nearly 41%. The impact on Axis’ risk profile should be moderate as the loan mix is unlikely to significantly change.

Axis will make an upfront payment of roughly INR123 billion (USD1.6 billion), followed by additional integration costs of INR15 billion in the two years after the closing date. The purchase price is roughly 18.7 times the implied price-to-earnings on Citi India’s normalised FY20 standalone financials, but there are safeguards to enable a revision in the final consideration if customer and business attrition exceeds deal assumptions.

Axis estimates the transaction could reduce its common equity Tier 1 (CET1) ratio of 15.3% as of 9MFY22 by roughly 230bp. Fresh RWA from the deal will have a direct 50bp impact on capitalisation while the remaining 180bp will flow via earnings as Axis intends to take a one-time goodwill charge in the first year. Fitch estimates that the bank’s internal accruals should be adequate to absorb the goodwill charge but it will leave little internal capital for loan growth. To illustrate, the CET1 ratio could fall by 130bp if loans increased by 15% over 9MFY22 with an average 60% risk density. A CET1 ratio sustained closer to Fitch's 'bb(cat)' threshold of 12%, without steps to improve it, could result in downward pressure on Axis' capitalisation and leverage score. Management is open to raising fresh capital.

Operating profit/RWA, which stood at 2.3% at end-9MFY22 and 1.4% at FYE21, will fall sharply in the year goodwill is charged but should recover in the following year as integration costs should be manageable. Fitch has not considered any benefits of synergies with Citi India's business and cost optimisation in its estimate, although these factors could support better-than-expected profitability. Management estimates cost savings of 30%-40% of Citi’s operating expenses after the deal closure.

Axis's asset quality and funding should modestly benefit following the acquisition. Citi India's impaired-loan ratio of 1.4% at FYE21 was lower than Axis’ 4.0% at FYE21 and 3.4% at end-9MFY22, while the share of low-cost deposits in Citi India’s total deposits was higher at 81%, compared with Axis' 45%.

Axis' Long-Term Issuer Default Rating and Outlook are support-driven and unlikely to change as a result of this transaction. Fitch believes that Axis’ financial metrics will remain commensurate with the current scores of key rating drivers for its VR, although the deal’s long-term success will hinge on smooth completion of business integration while adequately mitigating risks of customer attrition. Fitch will review the deal's impact closer to the completion in case the terms or timelines change significantly.
 

whatsapp channel
Read More:
More News