Bolt-on Acquisition To Enhance Scale In Greater China
DBS has agreed to acquire Citi Consumer Taiwan via a transfer of assets and liabilities. It will pay Citigroup a premium of S$956m and also inject S$1.2b into DBS Taiwan to support incremental risk-weighted assets. Based on the total cost of S$2.2b, DBS paid PE of 9x for Citi Consumer Taiwan based on pre-pandemic earnings. Citi Consumer Taiwan generated ROE of above 20% pre-pandemic in 2018 and 2019 and has a high CASA ratio of 70%. Maintain BUY. Target Price: S$40.28.
WHAT’S NEW
• Scaling up in Taiwan. DBS Group Holdings (DBS) has agreed to acquire the consumer banking business of Citigroup in Taiwan (Citi Consumer Taiwan) via a transfer of assets (loans of S$11.3b) and liabilities (deposits of S$15.1b). Given that Citi Consumer Taiwan’s net assets are negative (deposits exceed loans by S$3.8b), Citigroup will transfer cash of S$3.8b to DBS. DBS will pay Citigroup a premium of S$956m (NT19.8b) and also inject S$1.2b (NTD24.5b) into DBS Taiwan to support incremental risk-weighted assets and future capital needs. Based on the total cost of S$2.2b (S$1.2b + S$956m), DBS paid PE of 9x for Citi Consumer Taiwan based on pre-pandemic earnings.
• Becoming the largest foreign bank in Taiwan. Citi Consumer Taiwan has 2.7m credit cards and unsecured accounts, 0.5m deposit and wealth customers and 45 branches. It has an earning asset base of S$20.3b, comprising loans of S$11.3b and investment AUM of S$9b. It has total deposits of S$15.1b, of which more than 70% are sticky low-cost deposits (high current and savings accounts (CASA) ratio of 70%), as of Sep 21. It generated annual net profit of S$250m on average and ROE of above 20% pre-pandemic in 2018 and 2019.
• Enlarge scale with acquisition of high-quality consumer franchise. The acquisition will expand DBS Taiwan’s credit card customer base by 5.7x to 3,280,000. The huge credit card customer base has a high spending per card, which is more than 20% above DBS’ average spending. For wealth management, DBS Taiwan will increase its affluent and high net worth customer base by 1.9x and 3.7x respectively to 139,000 and 5,700. The combined average total relationship balance will increase by 50% to S$224,000 for affluent customers and 120% to S$2.4m for high net worth customers.
STOCK IMPACT
• Acquisition is earnings and ROE accretive. This is DBS’ third strategic acquisition since the start of the COVID-19 pandemic. DBS Taiwan and Citi Consumer Taiwan on a combined basis will have the largest credit cards balance, investment AUM, loan book and deposit base among foreign banks in Taiwan. Excluding one-time transaction costs of S$200m, the acquisition is expected to be accretive to earnings and ROE immediately after completion.
• Ability to pay dividends not compromised. CET-1 CAR is expected to drop by 70bp but management does not expect any impact on DBS’ ability to pay dividends.
• Timeline. Completion and full integration of Citi Consumer Taiwan is anticipated in the middle of 2023.
EARNINGS REVISION/RISK
• We have factored in contributions from Citi Consumer Taiwan starting from 1Q23.
• The impact on DBS’ financial performance in 2023 is neutral due to the one-off transaction costs of S$200m. We estimate that the acquisition will increase net profit after tax by 2.3% to S$8,975m, enhance ROE by 0.2ppt to 13.7%, but lower CET-1 CAR by 0.6ppt to 14.1% in 2024.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$40.28 is based on 1.66x 2023F P/B, derived from Gordon Growth Model (ROE: 12.3%, COE: 8.0%, growth: 1.5%).
SHARE PRICE CATALYST
• DBS to benefit from NIM expansion in 2H22 and 2023 due to higher interest rates.
• We expect DBS to reward shareholders by paying dividends at 35 S cents per quarter in 2022 and 38 S cents per quarter in 2023.