• DBS (SGX:D05) has announced the acquisition of a 13% stake in Shenzhen Rural Commercial Bank (深圳农村商业银行) for 1.01x P/BV.
• The transaction is expected to be immediately accretive to earnings.
• Reiterate ADD. ROE of ~12% for DBS’s stake is in line with China banks. We anticipate positive share price movement on this announcement.

DBS Is Expanding Into the Greater Bay Area

• DBS announced that it will be acquiring a 13% stake in Shenzhen Rural Commercial Bank Corporation Limited (SZRCB, 深圳农村商业银行) for S$1.1bn. DBS will acquire 1.35bn new shares in SZRCB at RMB3.91 per share, representing 1.01x P/BV.
• Impact of the acquisition on DBS’s capital ratios is estimated to be less than 0.2% pt – which we deem to be minimal given its robust CET-1 ratio of 13.9% in 4Q20.
• The investment is expected to be immediately accretive to earnings, and will be funded using internal cash resources.
• DBS has already obtained approvals from both the Monetary Authority of Singapore (MAS) and China Banking and Insurance Regulatory Commission (CBIRC), and the transaction is expected to be completed upon approval from China Securities Regulatory Commission (CSRC).

A Glance at Shenzhen Rural Commercial Bank Corporation Limited’s Books

• Shenzhen Rural Commercial Bank Corporation Limited (SZRCB) operates one of the largest deposits, and S$976m in NPAT. Average ROE since 2005 stood at over 17%.
• The China Banking Association reported SZRCB’s NPL ratio was ~1.1%, cost-to-income ratio ~30% and capital ratio ~14% at end-2020.

In Line With DBS's Strategy of Pursuing Growth in China and India

• This announcement comes in line with DBS’s strategy to further expand its DBS Bank India with Lakshmi Vilas Bank. This allowed DBS to scale up its business, diversifying its funding streams (retail deposits rose 3x) and franchise value (visibility from LVB’s 563 branches and 974 ATMs) in India.

Headline Figures for the Transaction Are Assuring

• We think that the headline figures above are positive. The acquisition price is comparable to valuations of China banks (weighted average of ~0.7x-0.8x FY21F P/BV). ROE of ~12% for DBS’s stake in SZRCB is in line with China banks. We anticipate positive share price movement on this announcement. Our target price for DBS is based on GGM.
• Downside risks are larger-than-expected impairments from potential asset quality deterioration following the expiry of regional moratoriums.

Source: CGS-CIMB Research - 21 Apr 2021