DBS

Kim Eng on 12 April 2012

Regional expansion continues. The aggressiveness of DBS’ regional drive is admittedly a surprise, because of the simultaneous push across various geographies. The overall cost of the 99% stake in Bank Danamon, the 14% stake in Alliance Financial Group (AFG) and the CNY2.3b (SGD460m) injection into its China operations could work out to be an estimated SGD9.9b. We maintain that these moves are positive in the long-term but neutral to marginally dilutive in the nearterm. Our Sell call is maintained, with the TP of SGD11.50 (based on 2012 P/BV of 0.9x).

Capital injection into DBS China. DBS will inject CNY2.3b (SGD460m) into DBS China, raising the latter’s registered capital by close to 60%. This is the first time DBS has injected capital into the bank since the infusion of CNY4b upon its incorporation 5 years ago.

About DBS China. Incorporated in May 2007, DBS China today has 10 branches and 15 sub-branches in China, with staff strength of over 1,600. Its growth has been rapid and the bank’s net profit doubled last year to more than CNY500m (SGD100m or 3% of group net profit). The capital injection would thus be necessary to sustain this pace of growth.

Total cost of about SGD9.9b, Of the total, SGD9.1b is related to the cost of the 99% stake in Bank Danamon. The total also assumes the 14% stake in AFG at a P/BV of 1.8x.

Neutral to slightly dilutive to near-term fundamentals. Cumulatively, we expect the recent proposals to dilute FY2013E EPS by 5% and project a decline in FY2013E ROE to 9.7% from 10.2%. We estimate a decline in the group’s Tier 1 capital ratio to 12.1% from 12.9%.