Analysts from CGS-CIMB Research and RHB Group Research are positive on DBS Group Holdings’ 13% stake in Shenzhen Rural Commercial Bank on April 20.
See: DBS to acquire 13% stake in Shenzhen Rural Commercial Bank for RMB5.29 bil
This is DBS’s second acquisition in five months, after India’s central bank proposed that troubled local lender Lakshmi Vilas Bank (LVB) be amalgamated into DBS India on Nov 17, 2020.
See also: India's central bank matchmakes troubled Lakshmi Vilas Bank with DBS, dowry of $463 million ready
CGS-CIMB analysts Andrea Choong and Lim Siew Khee have kept their “buy” call on the bank with an unchanged target price of $28.35, while the Singapore Research team at RHB Group Research has also maintained “buy” on the bank with the same target price of $33.
DBS said that it will subscribe to a 13% stake in the Shenzhen bank for a consideration of RMB5.29 billion ($1.08 billion).
In the near-term, RHB’s team says that impact on DBS’s earnings will be small, but in the long-run, the acquisition will help accelerate the bank’s expansion into the Greater Bay Area (GBA).
“Overall, we are positive on DBS’s strategic acquisitions in India and China – both countries with strong prospects,” notes the team in a report dated April 21.
The sentiment is echoed by CGS-CIMB’s Choong and Lim, who view the investment as being “immediately accretive” to DBS’s earnings.
Analysts from both brokerages agree that the impact of the acquisition on DBS’s capital ratios would be “minimal” given the bank’s robust CET-1 ratio of 13.9% in 4QFY2020.
Shenzhen Rural Commercial Bank is a privately-owned commercial bank that has built a unique niche in serving local communities that have grown in wealth since the city’s rapid growth.
The bank has total assets of RMB519 billion, and operates one of the largest branch networks in Shenzhen. The city itself has 210 of its 217 branches and over 2,100 self-service terminals. The bank has over five million active retail customers and over 170,000 active corporate clients.
About 40% of its total loans are in the retail segment, and the remaining 60% in the corporate segment, which comprises largely Shenzhen-based small and medium enterprises (SMEs).
“Shenzhen Rural Commercial Bank will allow DBS to increase its exposure to China – one of DBS’ six core markets. It will also accelerate DBS’ strategy to expand and grow in the GBA and it creates a mutually beneficial collaboration between Shenzhen Rural Commercial Bank and DBS’ Hong Kong and China franchises,” writes the RHB team.
For more stories about where the money flows, click here for our Capital section
“Management believes there will be [the] opportunity to raise DBS’ stake given liberalisation of China’s financial services sector. GBA refers to the Chinese Government's scheme to link the cities of Hong Kong, Macau, Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing into an integrated economic and business hub,” it adds.
Shenzhen Rural Commercial Bank posted a net profit of RMB4.8 billion in the FY2020 ended December.
“A 13% share of Shenzhen Rural Commercial Bank’s FY2020 earnings would add 2.5% to DBS’ FY2020 net profit. In FY2020, Hong Kong and Greater China accounted for 24% of DBS’ earnings,” says the team at RHB.
“We think that the headline figures above are positive. The acquisition price is comparable to valuations of China banks (weighted average of [around] 0.7 times to 0.8 times FY2021 price-to-book value or P/BV). Return on equity (ROE) of 12% for DBS’s stake in Shenzhen Rural Commercial Bank is in line with China banks. We anticipate positive share price movement on this announcement,” write Choong and Lim.
As at 4.47pm, shares in DBS are trading 60 cents lower or 2.1% down at $28.42, or 1.26 times P/B according to RHB’s estimates.
