The merger has its pluses for the two banks but there are challenges ahead too
Shruti Ashok | April 6, 2022
Merger is a corporate strategy involving two companies to combine and form a new legal entity under a common corporate name. Merger deals between industry rivals have always attracted considerable attention from all stakeholders including customers, employees, and investors. Stakeholders place special emphasis on issues like expected synergies, economies of scale, increased market share and the impact of such announcements of stock price.
The Indian banking industry has witnessed many mergers over the last two decades – notwithstanding the most talked about merger of 10 public sector banks into large four, or the BoB, Dena and Vijaya bank merger or the Kotak Bank and Ing Vyasa bank merger. Never mind the scale and magnitude of merger, the prime objective of such an activity always revolves around these major areas: Greater access to newer markets, increased customer base, larger network of branches, geographical expansion, increased wallet share of customers, and finally better utilisation of capital.
The recent announcement of Axis Bank taking over Citibank’s retails business for $1.6 billion (Rs 12,325 crore) in India is one of the most talked about developments over the past few days. It was almost a year back that Citibank announced its intention to exit from the credit card, retail banking and home loan segments in India, while focussing on the more lucrative banking options like institutional banking. Axis Bank along with Kotak bank was one of the frontrunners in the race to acquire Citi’s businesses. Axis Bank views this move as a strategic fit in its long-term goals. A deal like this comes once in a lifetime and this is perhaps one of the best consumer banking franchises in the country, Amitabh Chaudhry, chief executive of Axis Bank, told reporters on March 30.
This write-up will assess the contours of the merger deal between Axis Bank and Citibank, evaluating its likely impact on various stakeholders.
While it is a no-brainer that Axis Bank would gain significantly from this deal, it is also a fact that through this deal, Citibank has ensured that an experienced Indian bank handles its businesses, besides safeguarding the interests of its 3,600-employee workforce in India. With the priority of securing their staff’s future, this deal with Axis Bank is a positive move by the bank, reinforcing Citi’s policy of keeping its employees first. As per the transition plan, Citibank’s employees will be redesignated at similar roles and compensation post-merger. Skills of these employees will help Axis Bank to structure its products better. Incorporating best global practices, the 900-strong call centre workforce of Citibank will create greater cross selling opportunities for the Axis Bank.
Synergies, in terms of both cost and revenue, are expected to bolster the image and improve customer experience of Axis Bank, post-acquisition. As per many analysts, this is a sweetened deal, set to favour Axis Bank. For payment of $1.6 billion, Axis Bank gets the credit card portfolio of 25 lakh customers from Citibank in addition to its loan bank of Rs 27,400 crore and deposit base of Rs 50,400 crore. With access to Citibank’s credit card and wealth management customers, Axis Bank will be able to offer larger bouquet of services to customers. Direct access to the affluent customer segment, which was seen as a gap in Axis Bank’s customer positioning, will catapult it ahead of its peers in these segments.
Citibank’s credit card customers would be entitled to receive all the privileges and applicable offers post-merger. Axis Bank’s wider geographical reach and wide range of product and service offerings would benefit Citibank’s customers. Axis Bank’s digital banking prowess through its highly rated Axis Mobile app will enhance customer experience for Citibank’s customers by allowing them to view and transact across various product categories. Not to miss, the world-class Citi Phone Banking will continue to provide service excellence for both Citibank and Axis Bank customers.
This acquisition would bolster Axis Bank's retail market position and diversify its revenue profile that would be positive for its long-term profitability. It is expected that the credit card base of Axis bank, post-acquisition would increase by 2.5 million (31% jump in the current market share), propelling Axis Bank to the top three players in Indian credit card market. Besides this, the addition of Citi’s experienced and high-quality workforce will help Axis Bank position itself as a premier financial services brand in the Indian banking space. These benefits would be reflected in the stock price over a period of time. Increase in earnings, however, will largely depend on Axis Bank's capability to retain Citibank’s customers and effectively cross-sell its products and services to them.
No matter the expected benefits from merger, for both the parties, it cannot be denied that the amalgamation process needs to be carefully implemented and might be fraught with many problems. However, it becomes imperative that the banks post-merger do not continue with the earlier policies and do their individual things. Instead, they should focus on building integrated strategies.
Some of the issues that need to be taken care of during the process of merger are outlined below:
Customer consent: The biggest threat to onboarding Citibank’s client to its customer base is that Axis Bank will need to take explicit customer consent before on-boarding them. Customer retention is the biggest threat and is the key to the success of this merger. The benefits of the merger would flow in provided Axis Bank is able to limit customer attrition, reduce cost leading to better ROAs and cross sell. Squashing this fear, Chaudhary told reporters, “We believe that once these customers migrate to Axis, we can become the primary provider to them of any asset needs they might have, for which they are not going to Citi today. That's what our hope is.” Relying on its customer service quality, Axis is confident that it will seamlessly convince Citi’s customers to move to Axis, post-merger.
Integration issues: History has it that integration issues post merger make the entire process rather messy and complicated. The first two years after the merger announcement are most tricky. Special emphasis must be placed on changes/upgradation in technology, alignment of processes of both banks and most importantly integration of people across the two different cultures. It is a proven fact that merger of any magnitude takes approximately more than a year to fructify and undergoes through the painful process of changed leadership, cross-culture management, with managements have reduced focus on chasing credit growth targets.
Cultural Issues: In any merger between companies, cultural integration becomes extremely crucial. Life for Citibank’s 3,600 employees will not be the same post acquisition. It is a fact that foreign banks have likely more relaxed business growth targets. In this case, India was never viewed as a primary geography for growth by Citibank and achieving a growth of 10% in Indian markets was good enough for Citibank. The same might not be true for Axis Bank, and it would expect more from the experienced workforce of Citi. This process might prove to be challenging both for Citibank’s employees and Axis Bank.
Notwithstanding the challenges, both Axis Bank and Citibank intend to work collaboratively to ensure smooth conduct of business across all customer channels. A focussed senior execution team has been identified for the task that would overlook smooth transition and continuous integration across all fronts. It is expected that Axis Bank would give due credit to the expertise that Citibank employees would bring to the table to drive synergy realization and achieve the objectives as outlined in the Integration Plan.
Shruti Ashok is an assistant professor at Bennett University, Greater Noida.
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