What Singapore analysts say about DBS takeover of Lakshmi Vilas Bank

By Lee Kah Whye
Singapore, November 23 : Last week, news emerged that DBS Bank (DBS), Southeast Asia's largest lender, has proposed to fold Indian Bank Lakshmi Vilas Bank (LVB) into its Indian subsidiary, DBS Bank India Limited (DBSIL).
In a statement on last Tuesday (November 17) reported by media, the Reserve Bank of India (RBI) noted "the rapidly deteriorating financial position" of LVB in terms of liquidity and capital. The bank, which has been losing money for the past three years, has been placed under a moratorium by the RBI with customers withdrawals temporarily capped at Rs 25,000.
On the same day, in a regulatory filing, DBS which has a market capitalisation of USD 47 billion said it would inject Rs 25 billion (USD 337 million) into its Indian unit if the RBI plan is approved. This will be funded by DBS's existing resources. DBS will announce further details after a final decision on the proposed scheme from RBI and the Government of India.
Analysts say that the merger of the 94-year old LVB and DBS Bank India Limited will benefit both parties.
JPMorgan analysts Harsh Wardhan Modi and Saurabh Kumar were quoted by Singapore's Business Times as saying that the LVB franchise will likely start regaining deposit market share once a credible controlling shareholder comes in.
"With DBS likely to use digital capabilities to enhance its physical footprint in India, the proposed deal could lead to a 30-40 per cent increase in Indian assets of DBS," they concluded. It would tie in with DBS' plans to grow its physical presence in India.
JP Morgan noted that the upside for DBS will depend on its ability to consolidate the franchise and attract deposits and to generate consistent returns while maintaining credit risk.
If approved, the scheme will fast-track DBS' expansion ambitions in India. While it has been in India since 1994, it only converted its Indian operations from a branch to a wholly-owned subsidiary in 2019. During that time, it has grown its presence to 24 cities across 13 states, exploiting its digital capabilities to extend its reach. Currently, DBSIL has a footprint of about 30 branches.
In the plan, DBS will absorb the assets and liabilities of the Chennai-based lender but in return, it will gain over 560 branches, a network of about 970 ATMs and a strong base of retail and SME customers with Rs 210 billion of deposits in the state of Tamil Nadu where most of Singapore's early Indian immigrants originated.
Fitch Ratings, in a non-rating action commentary stated that the proposed takeover of troubled Indian bank, LVB by DBS India, is not large enough to affect DBS credit ratings.
"We regard Lakshmi Vilas' branches as one of its most covered residual assets for a foreign buyer and believe the ready-made platform that will enable deeper market penetration is the key draw for DBS," said Fitch in Singapore. "The branches are the crown jewels and offer a readymade network at a very affordable price."
Malaysian bank RHB's Singapore Research team also believes the move "will be positive for long term growth prospects."
"Although not a material boost to DBS group assets, LVB would provide DBS Bank India with the opportunity to scale up its operations at a faster pace as well as boost digibank's franchise. Near term, key challenges will be management of asset quality and retention of customer deposits," RHB added. It does not view the amalgamation as a "major transaction" as LVB assets of Rs 244.2 billion (USD 3.3 billion) as at the end of March 2020 is smaller than DBS Bank India's Rs 628.6 billion (USD 8.48 billion).
"The injection of SGD 463 million (Rs 25 billion) capital into DBS Bank India would trim DBS's CET-1 ratio by a very manageable 20 basis points (bps). DBS CET-1 ratio was a healthy 13.9 per cent at the end of September 2020," RHB reasoned. "According to news reports, LVB's shareholders' funds will be fully written off. If true, this would probably mean that DBIL would take over LVB at zero cost but bear the risks related to LVB's loans portfolio and potential deposit run-offs. The capital injection of SGD 463 million will be required to restore capital ratios."
Also positive about the move is Maybank Kim Eng analyst Thilan Wickramasinghe."This is driven by regulators to make sure that there is stability in the financial system, but there is also a commercial angle," he was quoted by Singapore's Business Times as saying. "There are a lot of banks in India, and the fact that DBS India is brought in likely means that there are synergies to be had. DBS has been steadily growing its branch network in India, but with this move, it immediately gives them a much broader distribution network at an attractive pricing."
However, US Equity Research firm Jefferies raised some questions about DBS's dividend trajectory, considering impending pandemic-related credit risk migration. Jefferies further noted that: "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 call for continued capital infusion, given LVB's high non-performing assets and negative equity. If successful, the deal will strengthen DBS's footprint in southern India, which has long-standing and close business ties with Singapore."
Furthermore, some analysts expect some bumps along the way to a successful merger expressing concerns about the large cultural differences between the two organisations. DBS staff are trained in digital skills withstrong underwriting processes of a multinational bank, while LVB which has about 4,000 staff has a more traditional client-focused approach.
"Prima facie, there will be challenges in terms of cultural integration as well as process-orientation of people who've not worked in a new-age bank," said Venkat Iyer, partner at recruitment firm Aventus Partners was quoted by media as saying.
"DBS employees will have far better capability in terms of digital banking, credit appraisals and underwriting," said Macquarie analyst Suresh Ganapathy.
"The key unknown at this stage is execution especially for a turnaround acquisition like this where Lakshmi Vilas Bank, which appears to have been operating under a different risk appetite and intensity of internal controls, will need to be aligned with DBS's prudent and conservative culture," said Ng Xin-Yao, Asian equities investment manager at Aberdeen Standard Investments. He feels that there is a strategic fit but a potential cultural clash.
Following its analysis of the proposed deal, Jefferies downgraded DBS from a "buy" to a "hold", while RHB has maintained a "buy" call on DBS Bank and JPMorgan as an "overweight" rating on DBS.
DBS shares trading on the Singapore Exchange closed last Friday up about 2.5 per cent for the week at SGD 24.60.