SINGAPORE - A reported move by DBS to throw in a bid for Indonesia's Bank Permata, as OCBC is reportedly set to do, "conflicts" with Singapore banks' strategy of building out digital banking to capture opportunities in South-east Asia, said Citi Investment Research.
Responding to a Bloomberg report on a possible bid by DBS for Bank Permata, the brokerage in a note on Thursday (Oct 10) pointed out that DBS's Digibank is already in Indonesia.
"While there is no doubt that Bank Permata, a mid-sized Indonesia bank, could boost the assets and distribution presence of any of the three Singapore banks' Indonesia operations, our concerns include a likely multi-year rationalisation to manage network duplication and derive cost synergies to drive a meaningful return on investment," added Citi analyst Robert Kong. He pointed out that workforce rightsizing is "particularly sensitive", too.
Mr Kong said that the Indonesia bank sector revenue outlook faces headwinds from sluggish GDP (gross domestic product) growth and system liquidity constraints which have hampered non-interest income growth even for the Big 4 banks. This comes on top of rising concerns over asset quality.
"Even setting aside the dominant Big 4, strong entrants to the mid-cap space such as MUFG-Danamon and SMBC-BTPN could make the competitive landscape even more challenging," said Mr Kong.
"At this part of the cycle we argue that Singapore banks' price support is premised on strong CET1 (common equity tier 1) ratios and commitments to high dividends, which a sizeable M&A (merger and acquisition) could jeopardise."
Shares of DBS were trading at $24.63, up three cents as at 12.30pm on Thursday.