RBI nod for DBS' LVB takeover paves way for branch expansion: analysts

THE formal nod from India's central bank for DBS to take over cash-strapped Lakshmi Vilas Bank (LVB), as announced on Wednesday, will pave the way for South-east Asia's largest lender to scoop up a sizeable branch network in India.

"Willingness may have been expressed by both sides," said a Jefferies report this week, pointing to hopes of a union from both Reserve Bank of India (RBI) and DBS.

The merger with LVB will add 563 branches - mostly in southern India - to DBS India's current 34 branches in 24 cities, over two million retail accounts and over 150,000 non-retail clients and about 4,400 employees, DBS said in a bourse filing on Wednesday night.

Under the scheme, its India unit will take over LVB's 20,973 crore rupees in deposits (S$3.81 billion) and 13,505 crore rupees in net advances.

"Can DBS grow branches organically? Yes, but it may take time," said Jefferies equity analyst Krishna Guha.

As it is, DBS management had recently earmarked S$30 million annually for India expansion - doubling branch presence from the then-12 branches and setting up 60 kiosks to complement DBS' digibank in small and medium-sized enterprise (SME) business hubs and corporate business parks, Mr Guha wrote in a report this week.

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"Various investments in digitalisation should lower the cost growth for existing business," he added.

Sanford C Bernstein analyst Kevin Kwek earlier told BT too that while the brokerage is not "particularly optimistic" on the ability of any foreign players to do well in India, this LVB deal may be the "bite-sized" approach for DBS to push the agenda harder. "If we were to look for positives, this merger could facilitate a more meaningful push into both retail and SME customers," Mr Kwek had said.

The amalgamation of LVB with DBS Bank India will be effective as at Nov 27, said DBS on Wednesday.

This is believed to be the first time the Indian authorities have turned to a foreign lender to bail out a failing local bank.

Foreign banks with a wholly-owned subsidiary in India are rare. DBS in March 2019 converted its India operations from a branch to a wholly-owned subsidiary. In doing so, DBS, which has been in India since 1994, became the second foreign bank other than State Bank of Mauritius to get approval in recent years to have a wholly-owned subsidiary in India.

The deal is structured such that existing shareholders of LVB are wiped out fully on their equity. LVB has been on a hunt for a rescue since last year, given its urgent need for capital infusion. Besides posting losses over the last three years, the Indian bank has been hit with governance issues and mounting bad debt.

DBS will inject 2,500 crore rupees into its wholly-owned India unit to support the transaction.

It is a small-scale takeover at this point, said Jefferies' Mr Guha. He noted that LVB assets makes up less than 1 per cent of DBS's group assets, while India itself makes up just 1 per cent of group loan and profit.

The proposed takeover will not have a material impact on DBS's dividend payment, DBS's CEO Piyush Gupta had earlier said.

"If you look at the scale, (the deal) is very small in the big scheme of things. So it is not material to our dividend or balance sheet," Mr Gupta had said last week in a Bloomberg TV interview.

Investors favourable of the deal believe that LVB's chunky, bad assets may already have been recognised, Mr Guha wrote.

But Mr Guha also noted that rapid swelling of LVB's loan book, which grew more than five times from 2007 to 2019, has prompted some scepticism. There are also concerns over how LVB had five chief executive officers come and go in the last decade, as well as ongoing litigation issues.

Shares in DBS ended trading at S$25.68 on Wednesday, up eight Singapore cents or 0.31 per cent.

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