Axis Bank to make significant gains from Citi deal only from FY2025

Standard and Poor’s (S&P) on Friday said Axis Bank’s acquisition of Citigroup Inc's consumer banking portfolio in India will bring in significant profitability improvements only from FY2025 onwards.

It will take time to complete the acquisition and integrate the assets. The acquisition is likely to be completed over the next 9 to 12 months, while full integration will take another 18 months, S&P said in a statement.

Axis Bank on Wednesday announced its proposed acquisition of Citibank’s consumer banking businesses in India for Rs 12,325 crore.

The rating agency said the acquisition will strengthen Axis bank's retail market position and diversify its revenue profile and is positive for it's long-term profitability. Earnings will depend on Axis Bank's ability to retain acquired customers and successfully cross-sell its products and services to them.

A large part of the portfolio is unsecured, where yields are higher than mortgages. Indian private lender’s credit card customer base will increase by 2.5 million through this acquisition--a 31 per cent jump which enhances its market position in this segment.

Axis Bank should be able to absorb any incremental risks given the small size of Citi's portfolio. The acquired portfolio is equivalent to about four of Axis Bank's loans, and it comprises credit cards, mortgage loans, personal loans, asset-backed finance and small business banking loans.

Citi's portfolio mainly comprised affluent clients, where credit quality tends to be better than mass-market customers. Citi's spending per credit card is higher than Axis Bank's as well as the average for Indian banks.

The acquisition will reduce Axis Bank's capital buffer because it plans to use excess capital to fund the deal. The bank's S&P Global Ratings risk-adjusted capital (RAC) ratio was 8.5% as of March 31, 2021.

“As per our initial estimates, this acquisition can reduce the RAC ratio by about 100 basis points. Despite the deterioration, we expect the RAC ratio to stay sufficient for its rating,” S&P said.

The bank's earnings will remain supportive of its capital position. Axis Bank enjoys good access to markets and can raise additional capital to restore buffers and fund organic growth.