• DBS Bank India Ltd’s (DBIL) potential amalgamation with Lakshmi Vilas Bank (LVB IN), we believe, will be a positive for long term growth prospects. Although not a material boost to DBS group assets, LVB would provide DBIL 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.

A Proposed Merger With Lakshmi Vilas Bank (LVB), a Distressed Indian Bank

• The Reserve Bank of India (RBI) announced on 17 Nov 2020 a draft scheme to amalgamate Lakshmi Vilas Bank (LVB) with DBS Bank India Ltd (DBIL), a wholly-owned subsidiary of DBS (SGX:D05). The RBI is stepping in due to the serious deterioration in LVB’s financial position and measures had to be taken to protect depositors.
• To support the amalgamation, DBS (SGX:D05) will inject INR25.0bn (S$463m) into DBIL – fully funded from DBS’ existing resources.

Rescue = Opportunity to Build Scale

• In DBS's announcement, it said that “the proposed amalgamation will allow DBS Bank India (DBIL) to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore.”
• It is no secret that DBS has identified India as one of the six core markets for the banking group. While the strategy is to have full service and diversified franchise across all customer segments and business lines in the core markets, DBS faced challenges in efforts to build the required scale in India. This led to the launch of its mobile-only offering, digibank, in 2016 and the establishment of DBIL in Mar 2019 as a locally incorporated wholly-owned subsidiary of DBS.

Physical Network to Boost Digital Franchise

• DBS’ digibank in India, while quick to garner new customers, did not attract the right ones in the initial years due to poor brand presence. With DBS Bank India (DBIL), which is present in 24 cities with 34 branches, management plans to accelerate its growth plans through a hybrid model – a physical overlay to boost its digital franchise. A merger with LVB, which has 563 branches, should enhance that strategy.

Not a Major Transaction

• Lakshmi Vilas Bank (LVB)’s total assets of INR244.2bn (S$4.52bn) at as end-Mar 2020 is smaller than DBS Bank India’s (DBIL)’s (INR628.6bn or S$11.64bn), and is only 0.9% of the banking group’s total assets of S$643.01bn (Mar 2020). The injection of S$463m capital into DBIL would trim DBS’ CET-1 ratio by a very manageable 20bps. DBS’ CET-1 ratio was a healthy 13.9% at end-Sep 2020.

Key Risks – Loan Impairments and Deposit Run-offs

• According to various news reports, the draft amalgamation scheme put out by RBI will result in LVB’s entire shareholders’ funds being written-off. LVB’s shares and debentures on any stock exchange will be delisted without any further action. If true, this would probably mean that DBS would take over LVB at zero cost but bear the risks related to LVB’s loans portfolio and potential deposit run-offs. Capital injection of will be required to restore capital ratios.
• Based on LLR of 71.25% as at end-Mar 2020, a full write-off of NPAs would mean additional provisions of INR12.17m (S$225.4m). This is equivalent to 4% of our projected FY21F net profit of S$5,703m for DBS. There is also the risk that DBIL may have to kitchen-sink to clean up LVB’s loan portfolio.

DBS' Past Rescue Experience

• DBS is not entirely new to rescuing a distressed bank. Back in 2008, DBS successfully bid for the takeover of Bowa Commercial Bank, a failed Taiwanese bank. Then, the acquisition was part of management’s strategy to bolster DBS’s expansion beyond its core markets in Singapore and Hong Kong.

Source: RHB Invest Research - 19 Nov 2020