South East Asia’s largest bank by assets, DBS Group Holdings (SGX: D05), announced earlier today that it would be acquiring the Asian private banking business of French bank Société Générale in Singapore and Hong Kong in addition to selected parts of its trust business. The deal would see DBS acquire US$12.6 billion in assets under management (around S$16.0 billion) for a price of US$220 million. The newest addition to DBS’ wealth management business would increase its assets under management of high net worth customers (those with assets under management of more than S$1.5 million) to S$85 billion from…
South East Asia’s largest bank by assets, DBS Group Holdings (SGX: D05), announced earlier today that it would be acquiring the Asian private banking business of French bank Société Générale in Singapore and Hong Kong in addition to selected parts of its trust business.
The deal would see DBS acquire US$12.6 billion in assets under management (around S$16.0 billion) for a price of US$220 million.
The newest addition to DBS’ wealth management business would increase its assets under management of high net worth customers (those with assets under management of more than S$1.5 million) to S$85 billion from S$69 billion and “accelerate DBS’ ambition of becoming a leading wealth manager in Asia.” All told, the transaction would bump up DBS’ total wealth assets under management from S$109 billion to S$125 billion.
Back in 2010, local newswire The Straits Times had reported on how DBS had set its sights on growing its wealth management business. Since then, the growth in high net worth assets under management has been stellar, more than doubling from S$39 billion in 2010 to S$85 billion today – assuming the purchase of Société Générale’s private banking business goes through without a hitch as it’s still “subject to legal and regulatory approvals as well as certain customary closing conditions.”
The deal, if cleared, is pencilled in for completion by the last quarter of 2014 and would be funded by the bank’s internal cash resources. With a balance sheet holding S$18.73 billion in cash, this US$220 million acquisition would likely not stretch DBS’ finances in any noticeable way.
DBS expects the purchase to be able to help improve its earnings “one year after completion” so that’s good for the bank. In addition, there are a number of strategic rationales for the bank’s actions: 1) The acquisition is “in line” with DBS’ ambitions to be a leading wealth manager in Asia; 2) Société Générale’s private banking business complements DBS’ private banking activities “in terms of clients, geographical coverage” and “product and service offerings” and; 3) Most stakeholders in the bank – clients, employees, shareholders – stand to benefit from the acquisition.
As part of the deal, there would be “significant revenue synergies” as the clients from the acquired-business will be able to utilise DBS’ universal banking platform. In addition, clients of DBS would be able to access a number of Société Générale’s suite of banking services; the converse is also true, with the French bank’s clients gaining access to some of DBS’ banking services in Asia. Lastly, there are “cost synergies” for DBS from the “pooling of infrastructure, IT and other support services.”
Piyush Gupta, chief executive of DBS, sums up the benefits of the deal nicely with his comments: “We believe that acquiring Société Générale’s private banking franchise in Aisa will strengthen our wealth management value proposition and further entrench our position as a leading bank in this region. The transaction will create value for high net worth customers from both banks and present employees with expanded career development opportunities. It is expected to be earnings accretive one year after completion, and we look forward to working closely with Société Générale to ensure a seamless integration.”
Banks earn their keep from two main sources, namely, net interest income, and non-interest income. The former deals with the difference in interest rates between what the bank receives from the loans it has made and the cost of its funding (i.e. deposits and borrowings). As of the end of 2013, net interest income is still by far the most important income source for DBS, accounting for 62.4% of the bank’s total income of S$8.93 billion.
But, growth from net interest income has been slow for DBS: From 2009 to 2013, net interest income grew by only 5.7% per year on average from S$4.45 billion to S$5.57 billion. Over that period, it’s been the bank’s non-interest income that has grown much faster, at a rate of 11.8% annually from S$2.15 billion to S$3.36 billion.
Currently, the income from wealth management activities by DBS only makes up 12% of non-interest income at S$412 million. This suggests ample headroom for growth at DBS’ wealth management business and ambitious targets by the bank to expand that business might yet create a new strong pillar of income for it. But at the same time, it’s also cognizant for investors to realise that wealth management is still a tiny part of DBS’s overall business and it needs to grow seriously for it to be able to move the proverbial needle at the bank in the future.
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