AXSB has entered into an agreement to acquire Citibank’s consumer businesses in India. AXSB will pay cRs 123.25 bn ($1.6 bn) to acquire the businesses. This will lead to the acquisition of c3mn unique customers; AXSB will leapfrog into top 3 by credit cards loans at Rs 244 bn; it would acquire Rs 1.1 trn from Citi Wealth and Private Banking (WPB); and deposits of Rs 502 bn (81% CASA). The acquisition also leads to a c230bps decline in CET 1 to c13% (c180bps due to expensing the deal premium) which has been AXSB’s stated threshold to trigger a capital raise. The deal is subject to regulatory approvals.

What are the critical success factors for deal to become value accretive? (i) Retention of potentially the most intensively-banked customer profile in India and of employees to prevent a meaningful run-off of assets, liabilities and AUM by the time the deal consummates. (ii) Succeeding in cross-selling to an affluent/super-affluent customer base which is already well-banked. (iii) Realising the 30-40% cost synergies that mgmt estimates currently (the normalised cost/assets at 4.3% compares with 2.2% for AXSB). (iv) Finding a way to redeploy the excess cash into loans.

Acquisition would be EPS, RoA accretive but BVPS dilutive: In a blue-sky scenario, assuming each of the above critical success factors endures, we estimate the current portfolio could add 2-4% to AXSB’s FY24/25e EPS, 2-5bp to its FY24/25e RoA and 175-187bp to its RoE. We have assumed (i) no attrition in the current portfolio, (ii) a 40% cost reduction over two years, and (iii) portfolio growth of 10% CAGR and revenue growth of 13% CAGR over FY23-25e. This is offset by normalisation of cost of funds to AXSB’s levels and of credit costs (30bps higher).

Deal value is not expensive, leaving estimates/TP unchanged: There are no negatives to the deal in our view. We are leaving our estimates/TP unchanged at this time. We think the deal value is inexpensive considering AXSB is getting a well established wealth business and high RoA consumer business at Rs 123.25 bn.

WPB: Benchmarking it to IIFL Wealth, the only large listed peer, helps us impute a normalised PAT of c`1.6 bn to Citi WPB. IIFL Wealth trades at 30x trail. profits. At 20-30x, imputed value of WPB would be Rs 30-50 bn.

Consumer banking: By deduction, the rest of the businesses would be valued at Rs 73-93 bn, or 11-13x trailing profits, as per our estimate.