DBS Group Holdings Ltd. may stay on the hunt for more acquisitions to fuel growth as its small, though high-value, home market of Singapore poses limits on its ambitions of becoming a leading Asian bank, analysts say.

DBS, Southeast Asia's biggest bank by assets, has recently made substantial investments in the large and upcoming markets of Asia, including China and India. It announced on April 20 that it will acquire a 13% stake in Shenzhen Rural Commercial Bank, making it the largest shareholder of the Chinese lender. In November 2020, DBS acquired ailing Indian lender Lakshmi Vilas Bank Ltd.

"We are always open to looking at assets that could be implemented to our franchise, and certainly in countries where we do have a franchise, we will take a look at those assets," DBS CEO Piyush Gupta said on a call with analysts and reporters on April 30 after the lender announced its highest-ever quarterly net profit. He was responding to a query on whether DBS would bid for assets that Citigroup Inc. has put up for sale as it scales down retail operations in Asia.

Snagging chunks of businesses from his former employer would help Gupta expand DBS' footprint in Asia and build its defenses against neobank challengers in his home market, which still accounts for more than two-thirds of the bank's earnings. In 2020, DBS derived 31.4% of its net income before taxes from outside Singapore, up from 29.8% in the year prior, S&P Global Market Intelligence data shows.

Most local companies, including national flag carrier Singapore Airlines Ltd., telecommunications operator Singtel, and even rival banks Oversea-Chinese Banking Corporation Ltd., and United Overseas Bank Ltd. have had to look abroad as the island nation's population of just 5.7 million puts natural limits on growth. This is in spite of the fact that Singapore has one of the highest per capita incomes in the world. However, DBS may face competition from other regional players, including Japanese banks, that are also seeking inorganic growth in Asia-Pacific.

DBS earlier acquired the retail and wealth management business of Australia and New Zealand Banking Group Ltd. in Singapore, Hong Kong, China, Taiwan and Indonesia. However, its bid to buy PT Bank Danamon Indonesia Tbk was thwarted by regulatory hurdles eight years ago and the Indonesian lender was ultimately acquired by Mitsubishi UFJ Financial Group Inc. in a series of transactions.

Strategic focus

Home-grown rival OCBC acquired Hong Kong-incorporated Wing Hang Bank in 2014, adding about 70 branches to its Greater China network. Meanwhile, UOB has strategically focused on Southeast Asia, having 93% of its total branches in the region, or 83% excluding Singapore, according to S&P Global Market Intelligence data. The three major Singapore banks already account for about 60% of the market in domestic customer loans and deposits, according to S&P Global Ratings.

DBS may continue to pursue acquisitions "when looking to expand its presence in some of its operating geographies, especially those that are likely to see growth in the short term," said Tay Wee Kuang, research analyst at Phillip Securities. "Citi's recent announcement of its exit from various markets that overlaps with DBS' operating geographies may also see DBS being an interested party when considering some of the assets that are put up for sale," he said.

DBS reported that its net profit in the first quarter of 2021 rose to S$2.01 billion, a 72% year-over-year growth that was helped by a write-back of S$190 million in allowances made in 2020 to cushion the impact of COVID-19. Improving asset quality and earnings may allow the lender to become more aggressive in seeking acquisitions as it moves past the worst of the pandemic, Tay said.

The bank is reportedly in talks to acquire Citi's consumer banking business in India after the U.S. company announced that it would exit from consumer business in 13 markets, most of them in Asia, according to an April 25 report in The Hindu Business Line.

"We think that DBS will likely focus on China and India for inorganic expansion for the commercial banking segment. We do not rule out acquisitions of wealth management franchises up for sale in the wider region," said Andrea Choong, equity research analyst at CGS-CIMB.

Scouting opportunities

During the pandemic, DBS decided that inorganic expansion is one of the opportunities the bank could tap into in order to "reposition" the bank, Gupta said.

DBS was drawn to Shenzhen Rural Commercial Bank due to its high return on equity and efficient capital treatment, Gupta said. "The bulk of the business, like any other bank business, has got a very good retail base, very good solid [small and medium-sized enterprises] base, and slightly upmarket wealth base," Gupta said.

Gupta added that leveraging Shenzhen Rural Commercial Bank's local network could also deepen DBS's strategy in the Greater Bay Area, a megapolis consisting of nine cities spanning Hong Kong, Macao, and nine other cities in China's Guangdong province.

The stake purchase mirrors efforts by other foreign banks to enter the Chinese market given regulatory hurdles, such as licensing, foreign share ownership limits and capital control on foreign currency, Choong said.

As the Singapore lender will have representation on the Chinese bank's board, it "will give DBS the opportunity to scale up their expertise in maneuvering the Chinese market before entering it in a larger way," she said. "Apart from [profit and loss], Shenzhen Rural Commercial Bank's contribution at this stage is the opportunity to scope the Shenzhen or Chinese market."

Similarly, the acquisition of Lakshmi Vilas Bank in India provides it with a "larger footprint in terms of branches in Southern India where Singapore real estate firms have built presence," said Krishna Guha, equity analyst at Jefferies. "It will help DBS to target SME lending."

The integration, which added 2% to the bank's expenses in the first quarter of 2021, is "going quite well," Gupta said, as the bank has managed to stabilize the Indian business. The asset quality remains in line with expectations and DBS has managed to recover some of the legacy non-performing assets.

As of May 3, US$1 was equivalent to S$1.33.