Earnings will also depend on Axis Bank’s (BB+/Positive/B) ability to retain acquired customers and successfully sell its products and services to them, he said.
Axis Bank should be able to absorb any additional risk given the small size of Citi’s portfolio, he said, adding that the acquired portfolio is equivalent to about 4% of Axis Bank’s loans and that it includes credit cards, mortgages, personal loans, asset-backed financing and small business bank loans.
Citi’s portfolio consisted primarily of affluent customers, where credit quality tends to be better than that of mass market customers. Citi’s credit card spend is higher than Axis Bank as well as the average Indian bank.
The acquisition is positive for Axis Bank’s long-term profitability, he said, adding that much of the portfolio is unsecured, where yields are higher than mortgages.
Axis Bank’s credit card customer base will grow by 2.5 million with the acquisition, a 31% jump that strengthens its market position in this segment, according to the report.
Also, the deposits acquired are mostly low-cost savings accounts with good quality corporate payroll accounts, where cross-selling can be profitable.
“The acquisition will reduce Axis Bank’s capital cushion, as it plans to use excess capital to fund the deal. The bank’s S&P Global Ratings risk-adjusted capital ratio (RAC) was 8.5 % as of March 31, 2021,” he said.
According to initial estimates, this acquisition can reduce the RAC ratio by approximately 100 basis points. “Despite the deterioration, we expect the RAC ratio to remain sufficient for its rating,” he said.
The bank’s earnings will continue to support its capital position, and it enjoys good access to markets and can raise additional capital to restore buffers and fund organic growth, he added.