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DBS aims for moderate M&A diet to avoid indigestion

CEO says group will shy from acquisitions that distract it from digital transformation, which requires energy and bandwidth

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Reuters reported on Thursday that DBS remains among the interested suitors for Indonesia's Bank Permata, valued at about US$2.7b.

Singapore

SINGAPORE'S largest bank DBS will focus on bolt-on acquisitions - deals valued at about 5 per cent of its market cap - and shy away from large buys that distract it from "the battleground of the future".

Its chief Piyush Gupta said in a wide-ranging interview with The Business Times: "The general thesis for us is that we still think that the digital transformation requires energy and bandwidth.

"If I did a bigger deal and I wound up saying that I'm going to lose two years' worth of tech work … that would be quite a cost to pay."

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With the bank's current market valuation at about S$68 billion, it means that a deal exceeding roughly S$5 billion is likely to seem unpalatable.

The bank dropped the purchase of Bank Danamon in 2013, after Indonesia changed regulations and restricted single ownership in domestic banks.

The acquisition that Mr Gupta often returns to as a benchmark of sorts is the S$110 million acquisition of most of ANZ's wealth and retail business in Asia. Announced in 2016, the deal allowed DBS to scoop up "very quick returns", in part as the productivity of bankers scooped up by DBS from the acquisition jumped by almost twice, he said.

The purchase gave DBS access to nearly a million ANZ retail customers in Indonesia and Taiwan.

Even so, the ANZ deal took just over a year to complete as well.

"We realised that if you get a core customer base at a sensible price, and then overlay our digital capabilities and tools on top of that, it can actually be very accretive very quickly," said Mr Gupta.

"So we are open to exploring those, but again, it's a fine call. When does it become too big - one that is going to subsume everything else?"

To be sure, DBS is looking to ramp up its Asean focus. Tan Su Shan, DBS' head of institutional banking group, told BT separately just this month that the bank will look to boost its coverage of Asean, to more actively cover the regional supply chains of global multinational corporations.

This comes as Reuters on Thursday reported that DBS remains among the interested suitors for Indonesia's Bank Permata, which is valued around US$2.7 billion or about S$3.7 billion.

But the Reuters report said Japan's SMFG and DBS' Singapore peer OCBC are deemed as frontrunners for the mid-sized Indonesian bank.

As a comparison, OCBC's US$5 billion Wing Hang acquisition in 2014 took about three years before taxiing off the runway for growth.

Over the last five years, OCBC tripled its Greater China earnings contribution off that purchase, but the bank also took pains to digest the enlarged franchise, with the acceleration of growth in the customer franchise from 2017; this was disclosed during its Greater China corporate presentation in August.

Citi Investment Research said in a note last month that a bid for Indonesia's Bank Permata "conflicts" with Singapore banks' strategy of using digital banking to capture opportunities in South-east Asia.

Citi analyst Robert Kong said: "While there is no doubt that Bank Permata could boost the assets and distribution presence of any of the three Singapore banks' Indonesia operations, our concerns include a likely multi-year rationalisation to manage network duplication and derive cost synergies to drive a meaningful return on investment."

He added that workforce rightsizing is "particularly sensitive".

On Friday, shares of DBS - which will close out the banking trio's Q3 results session on Monday - closed at S$26.61, down five cents. Shares of OCBC closed unchanged at S$11.13.

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