DBS to buy Citi's Taiwan consumer banking business with S$956m premium

DBS D05 is acquiring the consumer banking business of Citigroup in Taiwan, Citi Consumer Taiwan, via a transfer of assets and liabilities.

Under the transaction, DBS will pay Citi cash for the net assets of the business, plus a premium of S$956 million, said Singapore's largest lender on Friday (Jan 28) morning.

As at end-September 2021, Citi Consumer Taiwan had an earning asset base of S$20.3 billion and total deposits of S$15.1 billion -- of which more than 70 per cent are sticky, low-cost deposits.

DBS also intends to make offers of employment to all 3,500 employees of Citi Consumer Taiwan.

At a media briefing on Friday (Jan 28), DBS chief executive Piyush Gupta said the acquistion will extend DBS's leadership in Taiwan as it cements its position as the largest foreign wealth manager in Taiwan based on assets under management.

"It accelerates our overall Taiwan strategy very meaningfully -- catapults us to being not only the largest foreign bank, but now one of the leading banks in the market. It gives us effectively what we think is almost a 10-year acceleration in terms of our growth path," he said.

Following the acquisition, DBS's assets under management will more than treble to S$13 billion.

While some people think Taiwan is a tough market to crack, Gupta said the wealth and technology sectors there have outperformed and contributed meaningfully to DBS.

Of the core markets where DBS operates (excluding mainland China), Taiwan has the largest number of high-net-worth individuals -- at over 500,000. Taiwan has also benefited from the fast-growing tech industry, accounting for over 20 per cent of global chip production capacity.

Citi Consumer Taiwan's strong low-cost deposit base will also support the expansion of DBS Taiwan's institutional and SME (small and medium-sized enterprise) banking business, said the bank.

This business generated annual net profit of S$250 million on average in the 2 years before Covid-19, with a return on equity of above 20 per cent.

"The fact that DBS is getting access to a large, low-cost deposit franchise should enable them to increase competitiveness on its loan offerings. At the same time, the Citi franchise brings with it a large, affluent client base. We think this could open up wealth management cross-selling opportunities," said Maybank Securities Singapore regional head of banks and financials research Thilan Wickramasinghe.

However, this is not a "transformational transaction" to the group, given that Hong Kong and China are the key growth engines in North Asia, Wickramasinghe said in a report.

Still, he maintained a "buy" call on DBS, with target price of S$37.03, citing rising net interest margins, fees and reserve write-backs as near-term catalysts.

DBS said it intends to fund the acquisition with excess capital, with no impact to its ability to pay dividends.

Assuming a capital injection of S$2.2 billion into DBS Taiwan, DBS expects the acquisition to have a 70-basis-point impact to the group's capital ratio.

This consideration, which remains subject to change, also represents a price-to-book value of 1.8 times and a price-to-earnings ratio of 9 times price (based on a pre-Covid profit average).

Given that this is a single-market transaction, the costs are manageable, said Gupta, adding that such acquisitions are not new to the group.

This is DBS' third acquisition since the start of the Covid-19 pandemic. It had acquired a 13 per cent stake in Shenzhen Rural Commercial Bank (SZRCB) for 5.3 billion yuan (S$1.1 billion) last year, and the ailing Indian lender Lakshmi Vilas Bank in November 2020.

"It's consistent with a pathway we've now followed over the last couple of years to use the discontinuity from Covid-19 to build our scale and position that we might not have been able to do otherwise," said Gupta.

This large deal, however, could pose execution risks given that DBS is still "digesting" the Lakshmi Vilas Bank acquisition, Wickramasingh noted.

That said, the integration of Australia and New Zealand Banking Group's (ANZ) retail business across 5 markets was "executed well", according to Wickramasingh. DBS had in 2016 announced the acquisition of ANZ's portfolio of businesses in Singapore, Hong Kong, China, Taiwan and Indonesia.

Glenn Thum, analyst at Phillip Securities Research, said that key risks include a higher-than-expected customer attrition rate and customer overlaps.

In response to media queries at the briefing, Gupta said that based on customer profiles, the bank is likely to see a 10-20 per cent customer attrition rate.

But Thum said that there is still a possibility that this figure may be higher.

"Nonetheless, DBS would be able to combat this by ensuring the integration is smoothly completed and the existing Citi's customers do not lose out," he added.

DBS' acquisition of Citi Consumer Taiwan comes after Citi announced last year that it will exit from 13 retail markets to focus on wealth management. The markets are: Australia, Bahrain, Indonesia, South Korea, Malaysia, the Philippines, Poland, Russia, Taiwan, Thailand, Vietnam, India and China.

Earlier this month, UOB announced that it will acquire Citi's consumer banking assets in Indonesia, Malaysia, Thailand and Vietnam for almost S$5 billion to scale up its retail franchise in Asean.

Following the announcement, shares of DBS ended Friday S$0.44 or 1.2 per cent lower at S$34.82.

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