DBS slips to one-month low following Shenzhen deal

Southeast Asia’s largest bank DBS saw a sell-off in its shares after announcing a stake acquisition in China.

  • DBS Group Holdings Ltd (SGX: D05) share price declines to S$28.40 per share
  • It will acquire a 13% stake in a Shenzhen commercial bank for S$1.08 billion
  • Investors may be concerned about how DBS’ dividends may be affected, analysts said
  • Buy and sell DBS shares with an IG account

DBS stock price sheds 2.5%

Shares of DBS lost ground on Wednesday (21 April 2021), falling as much as 2.5% to S$28.28 at around 11:00 SGT.

The counter went on to finish at a one-month low of S$28.40, down 2.1% day-on-day.

The previous evening, it announced a stake purchase in a Chinese bank, which would mark DBS’ second acquisition in five months.

Separately, Reuters reported that DBS and OCBC are among potential bidders for parts of Citigroup’s consumer business in Asia. Citi is exiting from its consumer franchises in 13 markets, ten of which are in Asia.

DBS to buy shares of Chinese bank

DBS has agreed to subscribe for a 13% interest in Shenzhen Rural Commercial Bank (SZRCB) for RMB 5.29 billion, or about S$1.08 billion.

DBS will become the Chinese bank’s biggest shareholder and have representation on the latter’s board of directors, it announced on Tuesday (20 April) after the stock market closed.

The Singapore-based lender will acquire 1.35 billion new SZRCB shares at RMB 3.91 apiece, representing 1.01 times of the Shenzhen bank’s book value per share as of end-2020.

The investment will have an impact of less than 0.2 percentage points to DBS Group’s capital ratios, and is expected to be immediately accretive to earnings and return on equity.

Will DBS’ dividends be affected?

Jefferies’ research team maintained ‘buy’ on DBS given the positive earnings outlook, but said the pricing for the SZRCB deal ‘seems a bit too good’. Its analyst Krishna Guha gave a S$33 price target.

Although the deal’s impact to DBS’ Common Equity Tier 1 is ‘minimal’, it comes at a time when debt moratoriums are expected to end and risk weights may increase, he wrote.

There has also been debate about the extent of banks’ dividend reinstatement and the growth in business volumes from the economy’s reopening. ‘While the (SZRCB) investment doesn’t put dividends at risk, it may elongate the time needed to fully restore dividends to pre-Covid levels, especially as other M&A (merger and acquisition) opportunities arise,’ Guha said.

Citi’s Robert Kong pointed out that the stake purchase follows the Lakshmi Vilas Bank deal in India last November, with both transactions giving DBS greater retail exposure.

Investor concerns may include how further M&A might affect DBS’ dividend policy, as well as its management bench depth to handle multiple deals, Kong said. He recommended ‘buy’ on DBS shares with a S$32.20 target.

RHB kept its ‘buy’ call intact, with a S$33 target. Although the SZRCB acquisition’s near-term impact on DBS’ earnings will be small, it will help accelerate the Singapore-based group’s expansion into the Greater Bay Area, said RHB.

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