DBS to scoop $13m in net profit from latest acquisition

A small impact on earnings, says analyst.

According to CIMB, DBS announced its acquisition of Societe Generale’s Asian private-banking business, which should lift its wealth-management AUM by 15% to S$125bn.

Assuming a 90% cost-income ratio for SocGen in FY15, in line with the smaller private banks in Asia, CIMB estimates that the acquisition will add S$13m to DBS’s FY15 net profit (+0.3%).

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Since DBS did not pay a high price, the acquisition should not create a share-price overhang, though it may also not add to DBS’s profits much in the near term.

We maintain our Add rating and GGM-based target price (COE 9.5%; implied 1.39x CY14 P/BV), with catalysts still expected from its growing trade-finance and trade-related fees. We adjust our EPS only marginally for higher contributions from the wealth management franchise.

What We Think
Positive. At 1.75% of SocGen’s AUM, the purchase price is lower than the 5.8% of AUM that OCBC paid for ING’s Asia private-banking business in 2009. This is justifiably so, as SocGen is smaller than ING and smaller private banks tend to have higher cost ratios and lower profitability.

DBS should be better positioned to derive economies of scale and make SocGen’s WM operations profitable. For that, we are positive on the deal, especially as a “catch-up” with OCBC.

But small impact on earnings. WM accounts for only 4.6% of DBS’s income and 21.9% of its fee income. CFO, Chng Sok Hui, has guided that fee income from WM is about 1% of the private bank’s AUM. Based on this figure, the additional S$16bn in AUM should bring in S$160m of WM fee income.

Assuming a 90% cost-income ratio for SocGen in FY15, in line with the smaller private banks in Asia, we estimate that the acquisition will add S$13m to DBS’s FY15 net profit (+0.3%).