In today's Finshots we talk about the Axis-Citibank deal.

The Story

In the not too distant past, if you pulled out a Citibank credit card, people shot you envious looks. A signed Citibank cheque was a matter of prestige. And if you had a dedicated Citibank personnel managing your wealth, then everyone assumed you had made it in life.

Sure, you may not agree with this assessment. But there was a time when Citibank was seen as offering a premium banking experience — at least in select circles. And of course, everyone wanted to be part of this exclusive club.

But over the years, Citibank’s influence on India’s population has waned. Don’t get us wrong. Their corporate business is still going strong i.e. the kind of banking services they extend to companies and institutions. But the retail business is a different matter altogether. As we wrote in one of our articles earlier 

When you’re in this business you make most of your money through lending products. Now imagine you’re a bank with about 100 crores to spare. You could either disburse this money to 5 big corporates (via your institutional arm) or you could lend 1 lakh each to 10,000 retail clients. If you’re adopting the second route and lending in small chunks, then you need to expend sizeable resources. You need a presence on the ground. You need people to help your clients. Sales support, after-sales support — all that sort of stuff.

This can be a drag if you aren’t tending to a large population. And the retail segment in India is uber-competitive. There are a whole host of banks trying to compete with you. Everybody is vying for the same pie. They all want the salaried folk with good credit history. Those with a stellar record of paying back borrowed money. And for Citi, this wasn’t an easy nut to crack especially considering local banks in India seem to have sunk their teeth in quite deep.

Elsewhere its credit card business was losing steam. From a spending share of nearly 11% in 2018, it had dropped to about 6% in 2021. So in 2021, they made a tough call — to exit the “retail” banking business altogether and sell this division to some other bank in India.

Now, at the time, names of several potential suitors were thrown around — HDFC Bank, Kotak Mahindra Bank etc. But eventually, Axis Bank managed to snag the prestigious Citi business by paying a cool $1.6 billion or nearly ₹12,500 crores.

At this point, we must ask — “Why is Axis buying Citi’s retail business when even Citi doesn’t want it?”

Well, for starters, it’s not that Citi’s retail banking business is some loss-making proposition. It’s a profitable entity. Citi is exiting this business because they believe their resources are best spent elsewhere. They don’t want to pursue this cut-throat enterprise.

Axis bank on the other hand has a lot to gain. Their credit card business hasn’t set the world on fire. With the Citibank acquisition, they get access to another 2.5 million credit card users who on average spend 50% more than their own clientele. These are premium customers.

And it isn’t just that. Axis bank can even upsell products to these customers. Maybe tempt them with a new home loan? Finally, there’s Citi’s private banking and wealth management business. They currently host ₹1.1 lakh crore in assets and Axis Bank now has the chance to manage all this money under its “Burgundy” programme.

So this looks like a steal for Axis Bank no?

Well, there’s still the elephant in the room that we haven’t addressed yet. Actually, there are two elephants.

The first one is — will Citi’s customers want to be associated with Axis Bank now?

It’s not India’s largest bank. It isn’t really cool or prestigious. It may find it tough to keep up with the service standards that the affluent folks were used to at Citi. And there isn’t that added international oomph associated with the bank either. And Axis know this. It’s already wooing customers by taking out big newspaper advertisements — The City Never Closes. It Stays Open (a play on the Citi tagline —Citi Never Sleeps ).

The second one? Axis Bank isn’t just acquiring Citi’s credit card and wealth business, but it’s also opening its doors for Citi’s 3,600 employees. Now obviously Axis wants to retain these folks because they’ll be a conduit to the high paying customers. However, Axis Bank hasn’t quite aced the “company culture” playbook yet. There are reports talking about the company’s high attrition rates and a supposed toxic environment, that involves public humiliation of employees.

In effect, keeping Citi’s employees happy won’t be all that easy — at least considering Axis Bank’s record.

The only saving grace perhaps is a clause that Axis could use to limit their downside. Reports suggest that if Citi’s customers thumb their noses at Axis Bank and take their accounts elsewhere within 6 months of the merger, that $1.6 billion could quickly drop in value. That’s right, Axis Bank is willing to foot that price tag only if Citi can convince its customers to hang back too.

So yeah, with the way things are going currently, it seems Axis Bank has in fact managed to bag a great deal that could propel it into the next league of banking. But can it get a grip on the problems that we quoted here? We’ll probably know within 12–18 months.

Until then…

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