Jefferies has deemed the proposed merger between DBS Bank India and Lakshmi Vilas Bank (LVB) as a win-win situation for both banks.
It will allow DBS Bank India to expand into SME and retail banking, while bailing out LVB in the process, notes the brokerage.
DBS Bank India is a wholly owned subsidiary of DBS Group Holdings.
The merger was proposed by the Reserve Bank of India after the central bank on Nov 17 took over LVB due to a major deterioration in asset quality.
According to Jefferies, DBS Bank India had only 35 branches in India in FY19.
This was far fewer than the number of branches of other leading foreign banks in India, such HSBC, Citibank and Standard Chartered, the brokerage says.
But if the proposed merger goes through, it will transform DBS Bank India into the largest foreign bank in India by branches and the fifth largest by loans, the brokerage adds.
The key concern, however, is the assessment of LVB's stress loans, which will be “key” for DBS's profitability, says Jefferies.
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According to the brokerage, there are no haircuts for depositors / bond holders, but the moratorium will imply that withdrawals will be limited to Rs 25,000 for 30 days.
“As was seen with the recent bailout of Yes Bank (through capital infusion by consortium of banks), the process of approvals/ legal support could be accelerated and RBI may also provide liquidity support to tide-over deposit outflows,” Jefferies analysts Prakhar Sharma, Parameswaran Subramanian and Bhaskar Basu write in a note dated Nov 17.
However, Jefferies is concerned that DBS's "dividend trajectory", amid the struggle to recover from Covid-19-triggered credit risks, might be affected.
Given DBS's recent gain of around 24%, reaching a level of 1.25 times trailing book value, the brokerage has lowered its call on DBS to "hold".
As at 10.23 am, DBS was up 8 cents or 0.3% at $24.73 with 2.9 million shares changed hands.