DBS Group (SGX: D05) is on a roll.
Singapore’s largest lender just announced that it will acquire Citigroup’s (NYSE: C) consumer banking business in Taiwan for a total of around S$2.2 billion.
This purchase is set to catapult DBS into the big league in Taiwan as the country’s largest foreign bank by assets.
It will also bring together DBS’ Taiwan division and Citi’s franchise and help to accelerate DBS’ Taiwan growth by at least a decade.
This acquisition is the third for DBS since the onset of COVID-19.
In late 2020, it announced the acquisition of India’s Lakshmi Vilas Bank for around S$463 million.
This was followed by DBS’s move to acquire a 13% stake in Shenzhen Rural Commercial Bank last year for around S$1.1 billion.
The deal size for this Taiwan acquisition is almost double that of its China purchase and looks set to add positively to DBS’ top and bottom lines.
Here are four highlights from this game-changing acquisition.
1. Taiwan is a meaningful contributor
Taiwan has proven to be a strong growth market for DBS over the years. It currently has 35 branches and an institutional, SME and consumer banking franchise.
Outside of China, the country has the highest number of high net worth (HNW) individuals among DBS’ core markets.
Taiwan also boasts a greater than 20% market share in global chip production capacity, making it an attractive market to service.
DBS shared some impressive numbers to illustrate the rapid growth of its Taiwan division.
From the fiscal year 2009 (FY2009) to FY2020, profit before tax jumped nearly 11-fold from S$13 million to S$140 million.
Assets under management (AUM) more than quadrupled from S$0.8 billion to S$4 billion, while its loan book grew nearly six-fold from S$4 billion to S$23 billion.
2. Attractive financial characteristics
The acquisition also comes with attractive financial numbers.
Citi’s Taiwan franchise generated over S$250 million in net profit per annum pre-pandemic and CEO Piyush Gupta envisions that this acquisition can add at least this amount or more to DBS’ bottom line post-COVID.
Based on DBS’ net profit of S$5.4 billion for the first nine months of 2021 (9M2021), annualised net profit for 2021 stands at S$7.2 billion.
This acquisition will boost the lender’s net profit by around 3.5% once it is completed by the middle of 2023.
The franchise also generated a return on equity of more than 20% pre-pandemic, higher than DBS’ 9M2021 ROE of 13.4%.
3. Boosting AUM and loan book
The acquisition will immediately boost DBS’ Taiwan division’s AUM and loan book.
The lender will become Taiwan’s largest foreign wealth manager with AUM more than tripling from S$4 billion to S$13 billion.
DBS Taiwan’s loan portfolio will also jump from S$23 billion to S$35 billion while its deposit base will nearly double from S$18 billion to S$33 billion.
DBS Taiwan’s credit card franchise will also see a surge from just S$1 billion to S$5 billion.
4. Acquiring high-quality customers
DBS will also acquire a group of high-quality customers belonging to Citi’s prized franchise.
DBS Taiwan’s credit card customer base will soar five-fold to 3.28 million.
Furthermore, Citi’s customers incur more than 20% higher average spend than DBS, potentially increasing fee income for Singapore’s largest lender.
Meanwhile, the number of affluent customers will also nearly double to 139,000 while HNW customers will more than triple from 1,600 to 5,700.
Get Smart: Accelerating the bank’s growth
There is a wrinkle in the deal, and it’s the price tag.
The bank will be paying around 1.8 times book value for a piece of Citi’s consumer banking franchise, slightly higher than its valuation of around 1.65 times book value.
Although the ratio may lean on the expensive side, investors should remember that the acquisition of Citi’s franchise adds not just profits for the bank, but also helps to grow its customer base and propels it into the league of Taiwan’s largest foreign banks.
The onus is on DBS to prove that it can make the most out of this acquisition.
Meanwhile, DBS has reiterated that the acquisition is funded using excess capital and will not impact its ability to pay out dividends.
This detail should be music to the ears of DBS’ shareholders who can look forward to more good news from the bank when it releases its full fiscal 2021 earnings on the morning of 14 February.
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Disclaimer: Royston Yang owns shares of DBS Group.
