DBS Group Holdings Ltd (DBS SP) – Acquiring Citi Taiwan Consumer
• Total purchase consideration to be based on net assets at completion and premium of SGD956mn, and represents 1.8x p/b and 9x PER based on SGD250mn net profit (preCovid average).
• Third strategic acquisition since start of the pandemic. Citi Taiwan Consumer is expected to be EPS and ROE accretive post acquisition, with synergies to be reaped from an expanded scale.
• Post integration in mid-2023, DBS will likely be the largest foreign bank in Taiwan by assets.
• Constructive outlook maintained given multiple earnings drivers from higher rates and favourable macro backdrop.
DBS has announced it would be acquiring the consumer banking business of Citigroup in Taiwan, which will be funded via cash for the net assets of Citi Consumer Taiwan and a premium of SGD956mn (~NTD19.8 bn). The transaction is subject to regulatory approval and migration, with completion targeted middle of 2023. This acquisition also marks the third strategic transaction for DBS since the start of the pandemic, further to the earlier amalgamation of LVB into DBS India and minority stake taken in Shenzhen Rural Commercial Bank as the bank continues to expand its regional footprint.
Key highlights of Citi Consumer Taiwan’s business: Citi’s Consumer Taiwan is a high-returns business, which generated annual net profit of SGD250mn on average (more than 20% ROE) in the two years prior to the pandemic. The consumer business currently has about 2.7mn credit cards and unsecured accounts, 0.5mn deposit and wealth customers and 45 branches. Its earnings asset base and deposits were estimated at about SGD20.3bn and SGD15.1bn respectively (~70% are estimated to be low cost deposits which should support the expansion of DBS’ institutional and SME business post integration).
Full integration is expected by middle 2023, and should complement DBS’ existing Taiwan operations which comprise of 35 branches that focuses on institutional, SME and consumer banking franchise.
The transaction makes strategic rationale, given the increased scale and expanded high quality customer base, which will propel DBS to be the largest foreign bank by assets in Taiwan. Management highlights that the acquisition is expected to accelerate its Taiwan growth by at least 10 years, with synergies expected to be realised from the expanded scale (revenue upside from opportunities to cross sell to a larger customer base), cost savings from lower global and regional costs, as well as economies of scale in technology and operations.
In terms of financials, the acquisition will be funded by excess capital, and is expected to have 0.7% impact on the group’s capital ratio. Total purchase consideration to be based on net assets at completion and premium of SGD956mn, and represents 1.8x p/b and 9x PER based on SGD250mn net profit (pre-Covid average). The acquisition will not affect the bank’s ability to pay dividends.
Buy rating is maintained, given multiple earnings drivers ahead from rates and favourable macro backdrop as regional economies ease towards a post-Covid-19 world. We remain positive on the bank’s ongoing efforts on various new business drivers, which bodes well for its medium term growth prospects and should support continued improvement in ROEs as the economic recovery strengthens further.
As highlighted in our earlier reports, the Fed’s new rate hike cycle starting this year has positive implications for rate sensitive Singapore banks’ net interest margins and earnings outlook – For 2022, we
retain our constructive stance on the sector in view of attractive dividend yields and higher Fed funds
rate expected from March, which should translate to higher SG/HK interbank rates and sector NIM expansion over the course of 2H22. Costs should be largely controlled as banks continue to scale up their digital capabilities and adopt ESG principles. 9M21 credit cost for the sector was low at 23-25bps. Credit costs has already normalized with ample general provisions/GP buffer (GPs made up 70- 100bps of total loans within the sector, which is close to 30bps higher than pre-pandemic year 2019 – this suggests room for banks to write back in 2022 assuming the macro environment continues to progress and loans under moratoriums remain low.
Singapore banks (and in particular DBS) are highly geared to rising rates, with high exposure to currencies that correlate to Fed funds rate. In addition, banks have a relatively high mix of floating rate assets, which should be repriced higher as interbank rates increase. This positioning should benefit the sector in 2022 as the next rate hike cycle kicks off. As of end 3Q21, DBS is estimated to have about 79% of its loan books exposed to SGD, HKD and USD. The bank also has a sector lead in SGD CASA ratio (~94% as of mid 2021) while its CASA ratios for HKD and USD are estimated at 77% and 65% respectively. Next reporting date for DBS is expected on 14th February 2022.
ESG updates
Its ESG performance pegging above the average scoring for global peers. DBS’s subsidiary has become a signatory to the Equity Principles in November 2019 (better focus on environmental strategies in its project finance loans) and has robust corporate governance practices as well as financial inclusion initiatives that involves underbanked segments and small medium enterprises, which is driven by a clear digitalization strategy (digibank app to open accounts, algorithmic models to approve small ticket sized loans etc). Its board is majority independent, supporting risk management oversight and executive remuneration practices are aligned well with shareholders’ long term interests. Our fair value has also incorporated a premium for its relatively better rating compared to global peers’ median score. BUY. (Research Team)