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Southeast Asia’s largest lender, DBS, could make further inroads into the tough Indian market if the proposed acquisition of liquidity-strained Lakshmi Vilas Bank (LVB) goes through, although it will have to face the costs of reversing a crisis. Asset struggling for years to come, analysts said.
While the impact is unlikely to be significant to the group’s earnings now, it could still weigh on DBS’s dividend trajectory and the road to recovery, as the bank is still setting aside considerable provisions for credit losses due to the consequences of the pandemic, they added.
This is believed to be the first time that India’s central bank has turned to a foreign lender to rescue a failing local bank, in a move that took the industry by surprise.
In an announcement late on Tuesday, DBS said LVB could potentially join its wholly owned unit in India, under a preliminary Reserve Bank of India (RBI) scheme. DBS will inject 25 billion rupees (S $ 463 million) of fresh capital into DBS India if approved, to be financed internally.
Even before Covid-19, LVB has been suffering losses for the past three years, with the Indian bank on the hunt for a white knight since last year amid governance issues and mounting delinquencies. It faces the need for an urgent capital injection and has been subject to a moratorium from November 17 to December 16. In this period, withdrawals per client are capped at Rs 25,000. The bank also cannot pay more than 25,000 rupees to any creditor without prior approval from the RBI.
Reactions have been mixed, with some analysts believing that India’s central bank was the main force behind the decision.
Tay Wee Kuang, an analyst at Phillip Securities Research, said: “Although DBS was not forced to do so, I don’t think DBS intended to go out and acquire the bank.”
Beyond the attractive valuation, there are likely more considerations in the deal, given that India’s regulators were the ones who organized it, he added.
In response to skepticism from some quarters that DBS was pushed into the deal, the lender told The Business Times that this was not the case.
DBS reiterated that the proposed merger will allow it to scale its customer base and network, particularly in South India, which has long-standing and close business ties with Singapore.
DBS has been in India since 1994, but it was only in March 2019 that it converted its Indian operations from a branch to a wholly owned subsidiary.
India contributed less than 10 percent of the group’s revenue in 2019, but is considered one of DBS’s six priority markets in Asia.
According to a report by Citi analyst Robert Kong, the impact on the group “is probably not material.”
This is because LVB has loans of around 165.9 billion rupees and deposits of 214.4 billion rupees, which is small relative to DBS Group’s balance sheet and similar in size to the operations of DBS India wrote.
The capital injection of S $ 463 million is also small relative to the group’s Common Equity Tier One (CET-1) base of about S $ 44 billion, representing about 15 basis points, it added. Kong.
Among analysts who view this move positively is Maybank Kim Eng analyst Thilan Wickramasinghe.
“This is driven by regulators to ensure there is stability in the financial system, but there is also a business angle,” he said. “There are a lot of banks in India, and the incorporation of DBS India probably means there are synergies.”
Analysts noted that the merger with LVB will add 563 branches, mainly in South India, to the current 34 branches of DBS India in 24 cities, which could accelerate DBS’s expansion plans in the region.
“DBS has been steadily increasing its branch network in India, but with this move, it immediately provides them with a much wider distribution network at an attractive price,” said Wickramasinghe.
JPMorgan analysts Harsh Wardhan Modi and Saurabh Kumar also view the development as positive, with expectations that the LVB franchise will likely start to regain share of the deposit market once a credible controlling shareholder enters.
Given that DBS is likely to use digital capabilities to enhance its physical footprint in India, the proposed deal could lead to a 30-40 percent increase in DBS’s Indian assets, they said.
This would be linked to DBS’s plans to increase its physical presence in India.
In early 2019, DBS had said that the bank intends to establish more than 100 points of contact with customers, through a combination of branches and electronic kiosks, in 25 cities by 2020.
According to Jefferies, the merged entity will have the largest number of bank branches in the country and will rank fifth for loans among foreign banks, with a CET-1 ratio of 9.6 percent.
If successful, the deal will strengthen DBS’s presence in South India, said its analyst Krishna Guha. In particular, Singapore real estate companies have recently stepped up their presence there.
However, the expansion will affect DBS’s profitability and efficiency, as a one percentage point increase in the group’s cost-to-income ratio will reduce earnings per share by 2.5% in the short to medium term, Guha said.
It also raises some questions about DBS’s dividend trajectory, considering the imminent migration of credit risk related to the pandemic.
Although the estimated impact on DBS’s CET-1 capital will be negligible initially, an assessment of the book, risk management practices, and subsequent growth may require a continuous infusion of capital, given high NPAs and equity. negative of LVB said.
JPMorgan said the advantage for DBS will depend on its ability to consolidate the franchise and attract deposits, and to generate consistent returns while maintaining credit risk.
Provisions will also have to be cut “drastically” in the short term, which JPMorgan analysts see as likely because almost all of the NPLs will be written off.
“We believe that DBS has developed underwriting or risk management capabilities in India and at group level in recent years. That has led to a relatively resilient NPL result.
“These attributes, combined with the digital offerings, should allow the bank to deliver PPoP RoA (pre-provision operating profit, return on assets) at least in line with its historical result,” they added.
DBS said it will await the final decision from the RBI and the Indian government on the proposed scheme before announcing further details.
The members, depositors and other creditors of LVB and DBIL have until 5 pm this Friday to send to RBI their suggestions or objections, if any, on the draft scheme.
DBS shares closed at S $ 24.63 at the end of Wednesday trading, 2 Singapore cents or 0.08 percent.
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