Building wealth in Taiwan
? We think DBS’s acquisition of Citi’s Taiwan consumer book fits well within its geographical strategy. We estimate EPS +3% and ROE +0.5% in FY24.
? Key value proposition of Citi is its higher-spending credit card customers and lower-margin but affluent wealth book – allowing for cross-selling gains.
? Reiterate Add. The deal unlocks a valuable portfolio of customers otherwise unobtainable. A faster pace of rate hikes is a key catalyst. TP based on GGM.
Deal valued at 9x P/E – not expensive compared to Taiwan banks
DBS announced that it will be acquiring Citigroup’s (Citi) consumer banking business in Taiwan via a transfer of assets and liabilities, and will pay Citi cash for the net assets of this book plus a premium of c.S$956m. The pro-forma 70bp impact on DBS’s CET1 ratio is manageable (3Q21 CET1: 14.5%), and is based on a c.S$2.2bn capital injection into DBS Taiwan, a premium of c.S$956m paid to Citi and c.S$1.2bn to support incremental RWA and capital needs. As this is a piecemeal purchase of balance sheet items from Citi (and not a full bank), the notional 1.8x P/BV valuation is based on the total amount allocated
for this transaction compared to the capital requirement to support this new business (Figure 1) and not NAV, and as such is not directly comparable to other banks’ P/BV. The deal represents 9x P/E based on Citi’s pre-Covid net profit of c.S$250m (DBS group: c.12x FY22F P/E, largest Taiwanese banks: c.10-23x). DBS’s dividend policy (steady growth) will not be affected by this deal; w e expect c.33 Scts in 4Q21F.
Citi’s wealth book unlocks significant cross-selling opportunities
The appeal of Citi’s consumer portfolio lies in its affluent and HNW customer base which in turn drives the higher spending levels of its credit card customers and c.20% ROE preCovid (FY20: c.14%). DBS will gain c.S$11bn in loans (increases group loans by c.3%), c.S$9bn in investment AUM and S$15bn in deposits from this transaction, lifting its position to become the largest foreign bank (by assets) and foreign credit card issuer in Taiwan. For context, Citi’s credit card book has a c.20% higher average spend than DBS’s book. The value proposition of Citi’s wealth book is particularly alluring; it raises DBS’s affluent and HNW customer base by c.2-4x and allow s sizeable cross-selling opportunities. Citi’s wealth portfolio is largely focused on bonds which typically have lower margins vs. DBS’ s focus on structured products. We think that the combination of a larger affluent base and thicker margins from product cross-selling should ultimately drive stronger returns beyond c.20% ROE in a normalised interest rate environment.
Reiterate Add; Corporate book to drive longer-term synergies
Immediate synergistic benefits will be driven by cross-selling opportunities in the wealth segment. Beyond this, DBS’s stronger funding profile (CASA ratio lifted to c.53% from 39%) should allow for more deal-making opportunities in the SME and institutional space and earnings upside in the medium term. The deal is expected to be completed by mid-2023; we estimate c.3% EPS and c.0.5% ROE accretion in FY24F. DBS has passed on acquiring Citi’s other consumer banking businesses up for sale; India was deemed too expensive.