The proposed amalgamation of loss-making Lakshmi Vilas Bank (LVB) into DBS Bank's Indian unit may weigh on the Singapore lender's profitability in the medium term.
It also raises questions about DBS' dividend trajectory given the impending pandemic-related credit risks, said Jefferies Equity Research yesterday.
Jefferies analyst Krishna Guha has downgraded DBS from "buy" to "hold" and lowered the estimates for its dividends per share by about 10 per cent.
He cut the target price from $26 to $22. DBS shares closed down 0.08 per cent to $24.63 yesterday.
LVB may be folded into DBS' Indian unit under a scheme devised by India's central bank, DBS said on Tuesday night.
DBS will inject 25 billion rupees (S$452 million) of fresh capital into DBS Bank India if the scheme is approved. This will be fully funded from existing resources.
JPMorgan's research team noted yesterday that the proposed deal will likely be positive: "Effectively, DBS is buying the (LVB) business at about 10 per cent of current deposits."
Moreover, as soon as a credible controlling shareholder comes in, the LVB franchise will likely start regaining deposit market share. JPMorgan also expects DBS to use its digital capabilities to enhance its physical footprint in India, which could lead to a 30 per cent to 40 per cent increase in its Indian assets.
The deal will boost DBS' footprint in southern India, which has longstanding and close business ties with Singapore, Mr Guha said.
Singapore real estate firms in particular have recently deepened their presence in southern India.
DBS has also noted the need to scale up its branch presence to target small and medium-sized enterprise lending.
LAKSHMI VILAS BANK
Number of branches across India .
Number of LVB ATMs.
Approximate number of branches in India.
However, scaling up will weigh on DBS' profitability and efficiency, Mr Guha said.
LVB has not been able to raise adequate capital to address issues around its negative net worth and continuing losses and is experiencing continuous deposit withdrawals and low levels of liquidity.
The government has also temporarily capped withdrawals.
LVB has been looking for a partner since last year amid surging bad loans that come on top of "governance issues", Reuters said.
JPMorgan said the upside for DBS will rest on its ability to consolidate LVB, attract deposits and generate consistent returns while maintaining credit risk.
Provisions will also need to be reduced "dramatically" soon, which the JPMorgan analysts see as likely because almost the entire amount of non-performing loans (NPLs) will be written off.
"We believe DBS has built underwriting or risk management capabilities in India in the last few years. Those have led to a relatively resilient NPL outcome," they noted.
"These attributes, combined with digital offerings, should allow the bank to deliver (results) at least in line with its historical outcome."
If this thesis plays out, DBS will see value accretion from the proposed transaction, JPMorgan said.
Jefferies said the new entity will have the most branches in the country - 598 - and rank fifth by loans among foreign banks.
"We understand DBS may have the flexibility to rationalise branch footprint and avail other concessions," Mr Guha said.
DBS said on Tuesday that it will wait for the final decision from the Indian authorities before announcing further details.
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