Citibank-Axis bank deal: CLSA, Morgan Stanley, others see up to 44% upside in the banking scrip

Shares of Axis Bank rose nearly 2 percent to Rs 763.90 a share on the BSE in Thursday's intraday trade after the company announced that it will acquire US-based Citi's consumer business in India for Rs 12,325 crore. One of the largest deals in the Indian financial services space, it will help Axis Bank close the gap with larger peers like ICICI Bank and HDFC Bank. 

"Axis Bank has grown organically all these years and has scaled well. But our aspirations are bigger. This deal gives us that strategic thrust to close the gap between us and some of our peers," its chief executive and managing director Amitabh Chaudhry told reporters.  

Post the deal, the brokerages were largely bullish on stock of the private sector's lender and have maintained buy and overweight ratings. JP Morgan and Macquarie, however, maintained neutral ratings. The most aggressive target price of Axis Bank on March 30 closing price was seen by CLSA, which sees around 44% upside from current levels.  

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Here is what global brokerages such as CLSA, Morgan Stanley and others make of the Axis-Citibank's deal.  

CLSA on Axis Bank  

Post the deal, CLSA maintained a buy rating on Axis Bank with Target price of Rs 1080, which translates into an upside of nearly 44% on CMP of Rs 750 that the banking stock recorded on March 30.  

It said Citi’s India retail business is very attractive business. "Customers retention will be key but some safeguards in place. Deal Valuation fair and not earnings dilutive. The deal will be 8-9% book dilutive but will be +150 bp ROE accretion," it underlined.  

Morgan Stanley on Axis Bank  

Maintaining Overweight rating on Axis Bank, Morgan Stanley sees an upside of over 21% on CMP Rs 750. The target price put out by the brokerage is Rs 910.   

Proposed price of $2bn", including estimated equity & excluding integration costs of $0.2bn, implies 18.7x P/E on normalized C20 financials, it noted.   

"Deal would help strengthen bank's franchise & reduce gap vs. peers. Managing customer attrition is key," said a note from the brokerage.  
 

Jefferies on Axis Bank  

Jefferies too maintained a buy rating on the banking stock with target price of Rs 1040 a share. This turns out a return of over 38% at CMP of Rs 750.  

Buying Citi's India consumer & wealth business lifts Axis Bank's credit-card base by 31% & wealth AUM by 42%, Jefferies said in a note.   

"Axis will pay $1.6bn + invest $450m in capital & $200m in costs — implies 21x PE on normal FY20 profit. Churn in staff, clients would be key risks," it says.   

Macquarie on Axis Bank  

Macquarie, however, maintained a neutral rating on the banking share stating that though it likes the deal, but sharper improvement in ROA is needed for the stock to re-rate. The brokerage sees a limited upside of 5% as the target set out by it is Rs 790.  

JP Morgan on Axis Bank 
JP Morgan too maintained a neutral rating on Axis Bank with target price of Rs 770, which is over 2% return on Wednesday's closing price of Rs 750. "Citi's Medium term strategic positive. EPS dilution of approximately 4-7% on our estimates in FY24 due to deal. Longer-term benefits of the transactions are positive. CET1 post the transaction will fall to 13%," it said.  

About the deal 

Earlier, the two lenders signed a definitive agreement for the sale, which will involve the third largest private lender taking over Citi's credit cards, personal loans and wealth management businesses that are focused on the affluent segment. 

Regulatory approvals are expected in nine months, after which the payment will be made and a complex integration process will begin. 

Axis Bank looks at this acquisition as a healthy strategic fit. "It will gain access to the large and affluent customer franchise of Citibank having a bouquet of fee-oriented and profitable segments that include quality credit card portfolio, affluent wealth management clientele, meaningful deposits with 81% being CASA, along with a strong consumer lending portfolio," said a statement from the company. 

Post the acquisition, Axis Bank will have ~ 28.5 mn Savings Accounts, 2.3 lakh+ Burgundy customers and 10.6 mn Cards. 

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)