March 6, 2023
analysis123 analysis123
AXIS BANK, Citi deal completed; integration to play out in 18 months
Call & Research Report by ICICI Securities
Sector: Bank – Private
CMP Rs. 846, Target Rs. 1100 (30% upside potential)
Target Period: 12 Months
Axis Bank is the third largest private sector bank in India with a balance sheet size of Rs 12.2 lakh crore as on December 2022.
● The bank has a large footprint across India with 4849 branches
● Retail and SME comprise ~67% of total loans
Key Highlights:
● Axis bank has completed the deal with Citi bank ahead of estimated time line. The deal closed for a cash consideration of Rs 11,603 crore vs 12,325 crore mentioned earlier. The cash consideration was subject to contractual and customary true up and/or true down adjustments and changes in the customer count from January 31, 2023 to February 28, 2023.
● With this acquisition, bank will add Rs 27300 crore assets (~3.5% of Axis Bank’s asset base) & Rs 40000 crore liabilities. Axis Bank’s credit card customer base to increase by ~19%, with addition of 18 lakh cards. In addition, ~34 branches and ~3200 employees will be part of Axis Bank.
● There will be an 18-month (by Sept’24) integration period during which Citi customers will be migrated to Axis’ technology platforms and the integration cost of Rs 1500 crore will be amortised by Axis Bank over 18 months. This will offset normalised PAT run-rate of Rs 800-850 crore. The purchase consideration impacted the CET 1 capital by ~177 bps.
● Management mentioned that the acquisition will be funded through internal accrual. Merger being effective from 1 March 2023, the bank will charge Q4FY23 for one time amortisation, provisions and transaction charges.
What should investors do? Axis Bank’s stock has given ~1.4x returns over the past two years. Acquired asset base is RoE accretive, however, synergy benefits seen to get accrued from 2HFY25E amid integration expense to be paid in next 18 months. Continued strong growth coupled with margin expansion to aid return ratios andsustainability of performance to drive valuation ahead.
● Thus, we maintain our BUY rating
Target Price and Valuation: We continue to value Axis Bank at ~2.1x FY25E ABV and maintain our target price at Rs 1100 per share.
Key triggers for future price performance:
● Incorporating acquisition, expect advances to grow at 16-18% CAGR, with consequent earnings trajectory at 29% CAGR and RoA at 1.7%.
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