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Moody's: DBS acquisition of Societe Generale's Asian private banking business is credit neutral.

Moody's Investors Service says that DBS Bank Ltd's announcement on 17 March 2014 that it will acquire the Asian private banking business of Societe Generale in Singapore and Hong Kong as well as some parts of its trust business as credit neutral for the Singapore-based bank.

"The transaction is credit neutral because its size -- relative to DBS' capital base -- is modest. At the same time, it will further grow the Singapore bank's wealth management business, which experienced a compound annual growth rate (CAGR) of 12 per cent between 2010 and 2013," says Gene Fang, a Moody's Vice President and Senior Analyst.

According to DBS Bank (DBS, deposits 1 stable, BFSR B/BCA 3 stable), the acquisition from Societe Generale (deposits A2 stable, BFSR C-/BCA b2 stable) will cost $220 million (SGD 279 million) in cash. It will likely be completed by end-2014, subject to legal and regulatory approvals, as well as customary closing conditions.

Societe Generale Private Banking Asia (SGPB Asia) had assets under management (AUM) of $12.6 billion (SGD16.0 billion) compared to DBS' $86.3 billion (SGD109.0 billion) at end-December 2013.

"By integrating SGPB Asia into a larger platform, DBS could achieve a combined portfolio with greater cost efficiencies, given the potential to reduce expenses related to infrastructure, information technology, and other redundancies. In terms of geographies, client bases and products, SGPB Asia and DBS will also complement each other," adds Fang.

Geographically, SGPB Asia's client base is more heavily weighted towards North Asia, while DBS' client base is generally biased towards South and Southeast Asia.

From a client perspective, SGBP Asia has a greater focus on ultra-high net worth clients. The transaction includes a memorandum of understanding which would prove DBS clients access to Societe Generale's private bank offerings in Europe and Societe Generale's clients would receive identical benefits from DBS in Asia.

In terms of products, SGPB Asia demonstrates expertise in structured products and equity derivatives, complementing DBS' strengths in fixed income, currency and commodities.

"We believe that the transaction has the potential to further grown on-interest income for DBS. For calendar 2013, DBS increased non-interest income by 21 per cent, including a 37 per cent increase in fees and commissions from wealth management," says Fang.

Growth in income also largely depends on DBS' ability to retain SGPB Asia's key relationship managers. If these managers join competing firms, they could take AUM to competitors. However, Moody's notes that DBS has acted quickly to mitigate the risk of departures and allay concerns over uncertainty by offering retention packages to such managers.

As indicated, Moody's does not expect this transaction to materially affect DBS' capitalization, given its sound Common Equity Tier 1of 13.7 per cent as of December 2013. Additionally, the consideration is equivalent to about 0.85 per cent of DBS' CET1, or 13 per cent of its net income after dividends for December 2013.

As such, DBS should have the capacity to support the acquisition from internally generated capital.

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Publication:CPI Financial
Geographic Code:9SING
Date:Mar 18, 2014
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