DBS

Kim Eng on 3 Apr 2012

Overall neutral on the deal. The acquisition of Bank Danamon would catapult DBS into Indonesia, with control over the country’s sixth-largest bank. Moreover, it would serve to diversify the geographical spread of the group’s earnings. For these reasons, we are positive over the longer term, but the deal, by our estimates, is neutral in the near term. We see little reason to revise our Sell call on the stock and our TP of SGD11.50 (2012 P/BV of 0.9x) is maintained.

Decent valuations. DBS’ proposed acquisition of Temasek’s 67.4% stake in Bank Danamon for 2.6x P/BV is decently priced, in our view. If its general offer is fully accepted, DBS will eventually hold a 99% stake in the bank which will have to pared down to 80% over 2 years. Of the entire acquisition cost of up to SGD9.1b, SGD6.2b is to be financed via the issue of new shares, and the balance via cash/debt.

Neutral on near-term fundamentals. We expect the deal to dilute 2013 EPS by a marginal 4%, It is generally neutral on DBS’ book value and slightly dilutive on DBS’ 2013 ROE, which should dip to 9.7% from
10.2%. RWCR is expected to decline to 14.8% to 15.8%. Management expects the acquisition to turn accretive from 2015 onwards.

Longer term synergies include DBS’ ability to enhance Bank Danamon’s funding structure, corporate banking position and treasury/money market operations. Present weaknesses that DBS would have to address, in our view, include Danamon’s weak deposit gathering franchise and high exposure to auto and micro financing.

Temasek will not be voting. A simple majority approval is required from other minorities at the EGM, and Bank Indonesia (BI) approval will be required - it is unclear whether BI’s plan for a foreign shareholding cap has been shelved indefinitely. Temasek will eventually hold a 40% stake in DBS but has been exempt from making a GO for the bank.

A 14% stake in Alliance Financial Group (AFG) too. DBS has proposed to acquire a 49% stake in Vertical Theme, which owns a 29% stake in AFG. This gives DBS an eventual foothold in Malaysia and we see the possibility of this stake eventually increasing to 29%. Impact to financials is nevertheless negligible at this stage, by our estimates.