Maybank Securities analyst Thilan Wickramasinghe has kept “buy” on DBS Group with an unchanged target price of $37.03 after the Singapore-based lender announced that it was buying Citibank’s consumer business in Taiwan.
The bank will pay a total of $2.2 billion, which comprises a premium of $956 million in cash, plus $1.2 billion to support the risk-weighted assets and capital needs.
The way Wickramasinghe sees it, the cumulative pricing at 1.8 times price-to-book (P/B) is “not cheap”. But the deal can be “meaningfully synergistic” to DBS’s Greater China strategy.
“The purchase of Citi’s Taiwan consumer business should add scale to DBS’s own operations there. It could drive stronger growth from cross-selling opportunities and cost savings,” he writes. “The large low-cost deposit base DBS is inheriting should enhance its price competitiveness in Taiwan”.
As a result of the deal, DBS’s credit card loans are set to increase by 4.7 times and assets under management (AUM) by 3.5 times in Taiwan, as Citi’s business in Taiwan serves a more affluent client segment, which has 20% more credit card spend than that DBS’s. There is also a 50% higher balance for premier clients in Citi compared to DBS’s operations in Taiwan.
“Concurrently, low cost current account savings account (CASA) is rising from 39% to 53% giving DBS a significant funding advantage in their institutional banking business – which accounted for 69% of loans pre-deal,” says Wickramasinghe.
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Despite the synergies of the deal, it isn’t seen as “transformational” to Wickramasinghe, as Hong Kong and China are the key growth engines for DBS in North Asia.
There may be execution risks too, as DBS is still digesting the investment in India’s Lakshmi Vilas Bank (LVB) made in 2020. Another large deal could increase such risks.
On the flip side, DBS’s integration of ANZ’s retail businesses in five markets in 2016 was executed well, adds Wickramasinghe.
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“Client attrition during the combination is a key operational risk. Management has budgeted a range of 10-20% (15-17% for ANZ), so this needs to be watched. Of course, the geo-political risks between China and Taiwan add to the complexity vs. buying Citi’s franchises in Asean, in our view,” he writes.
While DBS’s management claims the deal could add some $250 million in earnings, the sum comprises just 3% of DBS’s estimated earnings in FY2022.
“Cost synergies and a larger platform should support stronger growth. Indeed, DBS Taiwan earnings have grown 24% compound annual growth rate (CAGR) [from] 2009 to 2020,” says Wickramasinghe.
“However, China and Hong Kong are the key North Asian engines for the group in the medium term, in our view,” he adds.
Ahead of DBS’s results, which will be released on Feb 14, Wickramasinghe has kept his earnings per share (EPS) unchanged.
That said he predicts DBS’s net interest margins (NIMs) should fall by 35 basis points by FY2021 from weaker interest rates, following a three basis-point y-o-y increase in 2019.
“Credit charges will range between 7-10 basis points between FY2021-2023 as Covid-19 provision building eases off. Gross non-performing loans (NPLs) should increase fall from 1.6% in 2020 to 1.5% in FY2022 as economies open up,” he says. DBS’s common equity tier-1 (CET1) ratio should remain above management’s comfort level of 12.5%, he adds.
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Looking ahead, Wickramasinghe has identified higher NIMs from rising rates, increasing fees from rising regional transactions and potential allowance write-backs as near-term potential catalysts for DBS.
Shares in DBS closed 44 cents lower or 1.25% down at $34.82, or an FY2021 P/B of 1.5 times and dividend yield of 3.3%.
Photo: Bloomberg
