Is This a New Avenue of Growth for DBS Group Holdings Ltd?

DBS Group Holdings Ltd (SGX: D05) has some interesting recent updates for investors.

The first concerns the big change happening today to Singapore’s stock market, namely the reduction in the board lot size from 1,000 units to just 100 units.

The reduction has just made DBS’s shares a lot more affordable for retail investors as a capital outlay of tens of thousands of dollars for the purchase of one lot (one share of DBS is worth almost S$20) has now been reduced to ‘just’ a few thousand dollars.

The second update though is more important as it concerns the bank’s future growth potential.

A new opportunity in China

DBS announced last Thursday that it will be setting up a joint-venture with Postal Savings Bank of China (PSBC) and five other Chinese companies.

The JV, called China Post Consumer Finance Company Limited, will be based in Guangzhou, China and will provide personal consumer financial services in the giant Asian country. It has already obtained approval from the China Banking Regulatory Commission to set up preparatory work.

DBS is the second largest investor in the JV after PSBC; the Singapore-based bank would be investing a total of RMB120 million for a 12% stake in the JV. Meanwhile, PSBC holds 61.5% of China Post Consumer Finance Company.

DBS’s new business partner, PSBC, is considered to be one of the largest banks in China with total assets of RMB 5,579 billion at the end of 2013 (that’s more than S$1,000 billion!). The Chinese bank also has about 40,000 branches spread across China and serves more than 470 million customers.

So, it seems logical to ask: Why would PSBC need additional investors for a new financial services firm that requires start-up capital of only RMB1 billion, a mere token sum in relation to the Chinese bank’s total asset?

This might be speculation on my part, but one way to see it is that PSBC needs other investors to spread risks. Personal consumer finance can be considered as a riskier business to run as compared to traditional banking services. Therefore, having other investors help to cough up capital is a way for the Chinese bank to diversify its risks.

Foolish Summary

But, it is not a bad deal from DBS’s point of view as well. The Singapore bank would be getting an investment that has huge upside-potential (given the sheer size of China’s economy) if successful; if the JV fails, it would hardly be damaging too. After all, DBS is only investing RMB 120 million into the venture, a mere 0.06% of its shareholders’ equity.

Put another way, DBS’s new JV is a matter of “Heads I win, Tails I don’t lose much.” That sounds like a smart bet to me.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.