Taiwan Deal Positive, But Not Transformational

• The purchase of Citi’s Taiwan consumer business should add scale to DBS (SGX:D05)’s own operations there. It could drive stronger growth from cross-selling opportunities and cost savings. The large low cost deposit base DBS is inheriting should enhance its price competitiveness in Taiwan. However, this is not a transformational transaction to the Group, where HK and China are the key growth engines in North Asia.
• Maintain BUY call on DBS with near term catalysts from rising NIMs, fees and reserve write-backs.

Synergistic to the Franchise

• DBS is paying ~S$956m premium for Citi Group’s consumer assets in Taiwan. In addition, it is injecting ~S$1.2bn of capital to support incremental RWA. The cumulative pricing (~1.8x PB) is not cheap, but the deal is meaningfully synergistic to its Greater China strategy (14% of loans). As a result, credit card loans are set to increase by 4.7x and AUM by 3.5x in Taiwan.
• Citi’s business serves a more affluent client segment (20% higher credit card spend than DBS, 50% higher balance for premier clients). As such, significant cross-selling opportunities could open for the combined entity.
• Concurrently, low cost CASA is rising from 39% to 53% giving DBS a significant funding advantage in their institutional banking business – which accounted for 69% of loans pre-deal.

Watch for Execution Risks

• DBS is still digesting the LVB between China and Taiwan adds to the complexity vs buying Citi’s franchises in ASEAN, in our view.

Maintain BUY. Rising NIMs, Fees Near Term Catalysts

• DBS's management claims the deal could add S$250m of earnings in a COVID normalised environment. At Group level, this is just +3% in 2022E. Cost synergies and a larger platform should support stronger growth.
• Indeed, DBS Taiwan earnings have grown 24% CAGR 2009-20. However, China and Hong Kong are the key North Asian engines for DBS Group in the medium term, in our view.
• We keep our EPS and multi-stage DDM (9.3% COE, 3% terminal) target price for DBS unchanged ahead of results on Feb 14.

• Higher NIMs from rising rates, increasing fees from rising regional transactions and potential allowance write-backs are near term positive catalysts.

Source: Maybank Kim Eng Research - 28 Jan 2022