DBS diversifying past its Singapore core market: UOB

The bank's reliance on Singapore revenues will likely diminish to 49% from 62% as its regional clout rises.

Instead, DBS will source more of its revenue growth from Indonesia, a high-growth emerging market that its newly purchased stake in Bank Danamon should open up, as well as China and India. These three countries alone are expected to increase their revenue contribution to DBS to 30% from 11%.

Here's more from UOB Kay Hian:

DBS intends to merge Bank Danamon with PT Bank DBS Indonesia to create the fifth-largest bank in Indonesia. Indonesia will become a top-3 contributor after Singapore and Hong Kong.

The acquisition diversifies DBS’s geographical business mix and reduces the reliance on the core Singapore and Hong Kong markets. Contribution from South and Southeast Asia (mainly Indonesia and India) is expected to expand from 7% of revenue to 27% based on financial performance in 2011. Revenue contribution from high-growth markets, such as China, India and Indonesia, should increase from 11% to 30%. The reliance on Singapore will correspondingly be reduced from 62% to 49%.

DBS will be allowed to expand in an important high-growth emerging market. The Indonesian economy expanded by an impressive 6.5% in 2011. There are increasing signs that foreign direct investments (FDI) are coming back to Indonesia. The country has a population of 235m with a rapidly-growing middle class and growth in private consumption is expected to be resilient. It is an attractive and underserved banking market.

The acquisition would bolster Bank Danamon’s funding franchise to further propel growth in the microfinance and consumer businesses. Management estimated that cost of funding can be reduced by 200bp by leveraging on DBS’s credit rating (DBS: Moody’s Aa1, Standard & Poor’s AA- and Fitch AA-; Bank Danamon: Moody’s Baa3, Standard & Poor’s BB and Fitch BB+).

DBS could add value by building up Bank Danamon’s corporate banking, investment banking and treasury businesses. There are immense opportunities to mediate cross-border investment and trade flows in Indonesia, especially in the areas of mining and commodities. DBS could also participate in financing for infrastructure projects in Indonesia.

Management at DBS do not expect any job losses at Bank Danamon. The preoccupation appears to be on expanding the existing franchise and to add new businesses. Bank Danamon’s strong capital base with tier-1 CAR at 17.2% for 2011 will come in handy to support future growth.