THE formal nod from India's central bank for DBS to take over cash-strapped Lakshmi Vilas Bank (LVB), announced on Wednesday, will pave the way for South-east Asia's largest lender to gain full control of a sizeable branch network in India.
With this deal triggered by the Reserve Bank of India (RBI), LVB will cease to exist when its amalgamation into DBS India takes effect. All LVB branches will operate under the DBS brand name from Nov 27. This is unlike a typical acquisition, which, under India's Banking Regulation Act, limits foreign investment in a local banking company to 74 per cent.
"Willingness may have been expressed by both sides," said a Jefferies report this week, pointing to hopes of a union from both 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, more than 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 (S$3.8 billion) in deposits 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.
"Various investments in digitalisation should lower the cost growth for existing business."
Sanford C Bernstein analyst Kevin Kwek earlier said 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. This merger could facilitate a more meaningful push into both retail and SME customers, Mr Kwek had said.
This is likely 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 seeking rescue since last year, given its urgent need for capital infusion. Besides posting losses over the last three years, the Indian bank has also 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. LVB assets make up less than 1 per cent of DBS' group assets, while India itself makes up just 1 per cent of group loan and profit.
DBS chief executive officer Piyush Gupta had earlier said too that the takeover will not have a material impact on DBS' dividend payment.
Investors favourable of the deal believe that LVB's chunky, bad assets may already have been recognised, Mr Guha wrote. But he also noted that the rapid swelling of LVB's loan book, which grew more than five times from 2007 to 2019, had prompted some scepticism.
There are also concerns over how LVB had five CEOs come and go in the last decade, as well as ongoing litigation issues.
DBS shares closed at S$25.50 on Thursday, down 0.7 per cent, or 18 Singapore cents.