The proposed takeover of troubled Indian bank, Lakshmi Vilas, by DBS India, is not large enough to affect DBS’s credit ratings, says Fitch Ratings, in a non-rating action commentary.
“Lakshmi Vilas’ balance sheets amount to less than 1% of DBS's risk-weighted assets (RWA), assets and equity, meaning it will not immediately affect the group's asset quality, profitability or capitalisation and, consequently, its credit ratings,” writes the team behind the report.
However, the bank’s credit profile could still be altered depending on its earnings and capitalisation risks over the medium term, added the ratings agency.
Once the takeover is completed, the transaction will add some 563 branches to DBS’s current total of 33 branches in India, which means DBS will have the highest number of branches among the other foreign banks in India put together.
Lakshmi Vilas’ network is focused in south India, with about three-quarters of its branches located in the states of Tamil Nadu, Andhra Pradesh and Karnataka.
“We regard Lakshmi Vilas’ branches as one of its most coveted residual assets for a foreign buyer and believe the ready-made platform that will enable deeper market penetration is the key draw for DBS,” the team adds.
According to Fitch Ratings, the proposed acquisition is in line with DBS India’s stated strategy as it pivoted to a hybrid physical-digital approach after incorporating a local subsidiary in 2019, and could accelerate its ambitions in India to help it reap growth opportunities in the medium term.
The bank aims to build out more than 100 physical touchpoints across India by the end of the year.
“India's banking system is under significant stress and we have a negative outlook on the operating environment, whose factor midpoint of 'bb' is eight notches lower than Singapore's 'aa-',” says the team.
“The net loans of DBS Bank India Limited, DBS's onshore subsidiary, made up less than 1% of the group's loan portfolio at end-June, but should this proportion increase materially in the next few years, it could weigh on the bank's blended operating environment factor score, on which we already have a negative outlook,” it adds.
RHB’s Singapore Research team, similarly, has maintained its “buy” call on DBS following its potential amalgamation with Lakshmi Vilas Bank, with the same target price of $25.20.
The move, according to the team, “will be a positive for long term growth prospects”.
“Although not a material boost to DBS group assets, Lakshmi Vilas would provide DBS Bank India with the opportunity to scale up its operations at a faster pace as well as boost digibank’s franchise. Near term, key challenges will be management of asset quality and retention of customer deposits,” it says.
Echoing the sentiments of the team at Fitch Ratings, the RHB team does not view the amalgamation as a “major transaction” as Lakshimi Vilas’ assets of INR244.2 billion ($4.52 billion) as at end March 2020 is smaller than DBS Bank India’s INR628.6 billion ($11.64 billion).
“The injection of $463 million capital into DBS Bank India would trim DBS’ CET-1 ratio by a very manageable 20 basis points (bps). DBS’s CET-1 ratio was a healthy 13.9% at end September 2020,” it says.
On that, the team has identified loan impairments and deposit run-offs as potential key risks to the move.
“According to news reports, LVB’s shareholders’ funds will be fully written off. If true, this would probably mean that DBIL would take over LVB at zero cost but bear the risks related to LVB’s loans portfolio and potential deposit run-offs. The capital injection of $463 million will be required to restore capital ratios.”
As at 12.36pm, shares in DBS are trading 2 cents higher or 0.08% up at $24.44.
