For Axis Bank, benefits from Citi deal would accrue gradually

Analysts note that this announcement has come earlier-than-expected and points to Axis Bank’s robust execution capability.

Among positives, apart from the likely synergy benefits, Axis Bank’s improved capital position after the merger removes a key overhang of immediate need for capital raising.

But the stock’s reaction to this development was rather unexciting. Shares of Axis Bank have been range bound in the last two trading sessions. One reason could be that investors understand that benefits in terms of cost saving and cross-selling from this deal will reflect gradually.

For now, there are some pain points. “What disappointed us more was the sharp dip in customer base given that merger rationale was hinged on strong customer base, solid card franchise, and granular deposits,” said analysts at Elara Securities (India) Pvt Ltd. In terms of overall deposits of Citibank, it dropped 21% at the end of January 2023 from March 2022. Management attributed this to customers consolidating their banking operations. Secondly, credit card customer base saw decline of near 28% in January 2023 versus March 2022. The management hopes that dilution of customers and deposits is largely behind.

Furthermore, in Q4FY23, a key adverse one-time impact on the bank’s P&L would be goodwill amortization and other intangibles. Some analysts are concerned that it could make the bank report loss. Note that Axis Bank is to incur ₹1,500 crore (post-tax) as integration costs, which will be spread over two financial years. While core profitability stays at ₹800-842 crore, this near-term P&L hiccup is sentiment dampener.

Meanwhile, in the last year, Axis Bank stock has risen by 12%, largely in-line with benchmark index Nifty Bank. But this acquisition alone doesn’t change much for the stock’s outlook. Also, the size of this transaction won’t move the needle on Axis Bank’s earnings estimates. “Re-rating triggers for Axis Bank are consistency in earnings performance given its relatively higher exposure to SME-lending, the pace of improvement in RoA, and trends in fee-income,” said Kaitav Shah – BFSI research analyst at Anand Rathi Share and Stock Brokers Ltd.