• Based on local Indian media reports, Religare Finvest Limited (RFL) has filed a petition with the Delhi High Court to substitute DBS Bank India (DBI) as the defendant instead of Lakshmi Vilas Bank (LVB) for the lawsuit involving misappropriating of fixed deposits. The subsequent investigation is said to have uncovered grave irregularities and severe violation of regulations at LVB.
• We are concerned that the two ongoing lawsuits would create legal uncertainties for DBS Bank India.
• Maintain HOLD for DBS. Entry price: S$25.20.

More Legal Woes for DBS in India

• Religare Finvest Limited (RFL) has filed a petition with the Delhi High Court to substitute DBS Bank India (DBI) as the defendant instead of Lakshmi Vilas Bank (LVB) for the lawsuit involving misappropriating of fixed deposits worth Rs750 crore (S$137m). The amount has swelled to Rs900 crore (S$164m) due to compounding of interest.
• Two senior employees of Lakshmi Vilas Bank were alleged to have conspired with two former owners of RFL, Malvinder Mohan Singh and Shivinder Mohan Singh, to illegally siphon off and misappropriate RFL’s fixed deposits.

Next Hearing Scheduled on 25 Feb 21

• Religare Finvest Limited (RFL) had filed a complaint with the Delhi Police in May 19 and the two senior employees of Lakshmi Vilas Bank (LVB) were arrested in Sep 20. The investigation is said to have uncovered grave irregularities and severe violation of regulations.
• Delhi High Court has issued a notice to DBS Bank India. The next hearing for the case is scheduled on 25 Feb 21.

Previous Shareholders Have to be Compensated?

• The Madras High Court has directed DBS Bank India to provide an undertaking of cash compensation to previous LVB shareholders and to create a reserve fund amounting to face value of LVB shares (estimated at Rs781 crore or S$143m). This is a negative surprise as previous LVB shareholders were supposed to be wiped out under the scheme of amalgamation.
• The amalgamation was alleged to be on a fast track and was completed within 10 days. Previous shareholders supposedly were not given sufficient notice.

Credence to Allegation of Mismanagement at LVB

• The two ongoing lawsuits create legal uncertainties for DBS Bank India. According to local Indian media reports, LVB is alleged to have serious governance issues and lacked internal control.
• LVB’s loan book is said to have expanded five times from 2007 to 2019. Bad lending practices and aggressive expansion into corporate loans have led to NPL ratio spiking to 31%.
• LVB has suffered losses over the past three years. It had experienced continuous withdrawal of deposits prior to the amalgamation.

DBS's Expansion in South India

• The amalgamation of LVB with DBS Bank India under special powers of the Reserve Bank of India (RBI) has 563 branches and 974 ATMs, of which 88% are injected Rs2,500 crore (S$463m) into DBS Bank India.

LVB Provides New Platform for Growth

• LVB has performing loans of retail and SME customers. Management expects LVB to turn profitable in 12-24 months’ time with estimated profits of S$20m-30m per year.

DBS Hit by Double Whammy of Twin Lawsuits in India

• It is unfortunate for DBS to be hit by two India and LVB. We believe DBS has not made provisions relating to potential damages that may arise from the two lawsuits in India.

Target Price and Recommendation

• We keep our DBS's earnings forecast unchanged. Our target price of S$29.20 is based on 1.34x 2022F P/B, derived from Gordon Growth model (ROE: 10.4%, COE: 8.0%, growth: 1.0%).
• We have conservatively reduced BVPS by S$143m for the potential compensation to previous LVB shareholders and S$164m for RFL’s fixed deposits that were allegedly misappropriated when valuing DBS.
• Catalysts to DBS's share price:
  • Recovery in earnings and dividend due to decline in credit costs in 2021 and 2022.
  • Continued recovery of the Singapore economy accompanied by improvement in business easing of safe distancing measures.

Source: UOB Kay Hian Research - 19 Feb 2021