Axis Bank’s Citi purchase to improve profits long-term: S&P

Positive effects will only be felt starting fiscal year 2025 and onwards.

Axis Bank’s planned acquisition of Citi’s consumer banking portfolio in India is a win for the Indian lender, although effects will be felt only through 2025 onwards, according S&P.

The purchase is expected to strengthen Axis Bank’s retail market position as well as diversify its revenue profile–but it will take three years for it to take effect.

“We expect significant profitability improvements to only accrue from fiscal 2025 onwards as it will take time to complete the acquisition and integrate the assets,” S&P wrote in a report, estimating that the acquisition will be completed over the next 9 to 12 months, whilst full integration will take another 18 months.

Earnings will ultimately depend on Axis Bank's ability to retain acquired customers and successfully cross-sell its products and services to them.

On the upside, Axis Bank is expected to be able to absorb any incremental risks given the small size of Citi's portfolio. The acquired portfolio is equivalent to about 4% of Axis Bank's loans, and it comprises credit cards, mortgage loans, personal loans, asset-backed finance and small business banking loans. 

The new portfolio is also composed mainly comprised affluent clients, another positive for Axis, as the credit quality with these clients tend to be better than mass-market customers. 

Citi's spending per credit card is also higher than Axis Bank's as well as the average for Indian banks.

On short-term downsides, the acquisition will reduce Axis Bank's capital buffer because it plans 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 S&P’s 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. 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,” S&P said.