A year after Citibank India’s consumer banking business was put on the block, a private sector lender, which was then its closest competitor in the credit cards segment, was almost ready to announce that it had closed in on a deal with Citi. “Hotel was booked and everything was ready when we packed up for the week,” said a person aware of the deal.

The following Monday morning, the industry was taken by surprise when an unexpected name walked away with the deal. Axis Bank declared the acquisition on Wednesday, March 30, 2022.

A year later, the consideration has also exchanged hands. The bank has paid ₹11,603 crore, around ₹722 crore lower than the original consideration.

Axis Bank attributes the decline in value to factors such as certain customers not consenting to move, deposits for the banking sector being at its peak when Citibank announced its exit, consolidation of bank accounts and blocking or deactivation of some zero balance accounts, inactive accounts, and those that fell short on KYC or other regulatory compliance.

In return, Citi is expected to make ₹800-840 crore of normalised PAT for Axis, excluding one-time integration cost and writing-off goodwill. Yet, the question doing the rounds is whether Axis Bank has overpaid for the deal.

The number of retail depositors and aggregate deposits were lower than the earlier indicated levels, suggesting that HNIs and NRI customers may have shifted preferences to known names reckoned to provide international transaction ease and services standards. Credit cards, once Citibank’s forte, also saw the number giving apart.

Total cardholders fell to 1.8 million when the deal was closed from 2.1 million when the announcement was made. The number of cards also fell to 2.2 million from 2.5 million during this period.

Closure of inactive cards, cardholders not consenting to shift to Axis, and normal attrition are reasons provided by Axis Bank. There may also be a layer of duplication between the two banks, which is yet to be analysed.

Overall, around 20 per cent of Citibank customers haven’t moved to Axis Bank – a number higher than anticipated. While the bank did not spell out the customers segments, had it been the upper tier or HNI segment that had resisted, then it would have been quite a loss.

But Amitabh Chaudhry, MD and CEO of Axis Bank, isn’t perturbed by these numbers. “While it is a good franchise which commands value, it is largely due to the strong network and does not have very much to do with Citibank itself,” he said while addressing the media on March 1.

Then again, Citibank was struggling with its retail business for a while, and it became apparent in FY19 when it started sharply reflecting across parameters such as market share, NPAs, return ratios and declining interest income. It was losing ground to private banks, payments banks and fintechs that have a stronger edge over foreign banks, especially in the retail space.

Citi’s customers, deposits and cardholders declined 21-28 per cent in the 21-month period after it announced exit from the retail segment in India. Against this, the purchase value for Axis Bank was lower by about 6 per cent, setting the ground for the question on overpaying for the deal.

Further, Axis has disclosed an implied P/E (price to equity) of 17.7x based on net profits of March 2022, while the final cash consideration, according to the January 2023 figures, works to about 18-19x P/E, says a report by Macquarie Research.

Also, Axis Bank plans to retain the Citi brand for a while. Will there be another round of attrition if customers don’t fully understand the extent of the transition and start dealing exclusively with Axis is something we need to wait and watch.

In September 2022, Chaudhry told businessline that the bank had plans to raise upfront capital in FY24 post Citibank acquisition, to neutralise the impact on core capital. Cut to March 2023, he rules a capital raise as the outflow is lower than expected. It still doesn’t mean there won’t be capital burn.

The bank is factoring 180 bps hit to its CET-1, lower than the earlier estimated 230 bps impact. Did the ₹700-crore saving swing the needle? Then again, the acquisition may turn ROE-accretive only from FY26.

In the near- to medium-term, Axis Bank’s costs may spike by about ₹2,000 crore (annualised) due to integration costs. Also, against 2.5 per cent rate offered by Citibank to its Suvidha accounts, Axis Bank have to shell out 100 bps more.

As an immediate impact, Macquarie Research expects Axis Bank to post an accounting loss of ₹5,000-6,000 crore in Q4 FY23, against an anticipated profit of ₹6,000 crore due to the deal.

Axis Bank stock has gained about 18 per cent since it announced the Citibank deal. It’s valuations are on a mend, though a little far from its historical highs. Why then dilute valuations when deal-related uncertainties, including value-accretion, isn’t fully known. There’s also the new provisioning guideline that is likely to kick in from FY25.

Chaudhry admits that this is “one of the most complex acquisitions in the history of banking sector in India”. It’s only fair then to give him the benefit of doubt and wait and watch how Axis makes a big deal out of Citi.

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