3 reasons why analysts are excited about DBS' latest acquisition

This is worth a whopping $279m.

According to Phillip Securities, DBS Group Holdings announced on 17 Mar 14 that it has agreed to acquire the Asian private banking business of Societe Generale in Singapore and Hong Kong, as well as selected parts of trust business, for USD $200m (S$279m). 

This will represent approximately 1.75% of AUM where total AUM will increase 15% to S$125b and increases high networth AUM by 23%.

Here's more from Phillip Securities:

This is expected to be completed in 4Q14, funded internally with minimal impact on its capital position, earnings or NAV. Management expects the acquisition to provide significant revenue synergies and is in line with one of DBS’s strategic priorities to be a leading wealth manager in Asia and increase the scale of its WM business.

We are positive on the acquisition of SocGen’s private banking business for a few reasons.

1) The purchase of SocGen’s AUM is reasonably priced. DBS is acquiring S$16b of AUM for S$279m which is 0.0175X. OCBC, in 2009, acquired ING’s AUM of S$15.8b for S$1.46b which is 0.093X.

SocGen is comparably smaller than ING and OCBC tripled its AUM while DBS is growing its AUM by 15%, which justifies a smaller price tag. The scalable business model of SocGen should be easily integrated into DBS’s platform and not difficult to achieve cost and revenue synergies.

2) The acquisition will give DBS access to new clients and experienced human capital. This further strengthens DBS’s position as a key WM player in Asia.

The increase in high networth AUM by 23% and additional product and distribution channels are a plus. According to a survey by McKinsey & Co, Asian HNW are still mostly first generation, making their fortune through their own business. To capture HNW and ultra-HNW, it is crucial not only to offer private banking services but also a ‘one-stop’ shop approach for their business needs, hence a preference for strong banking platforms instead of smaller private bank setups.

We believe DBS already has this in their strategic roadmap and this is further confirmation of that.

3) Management expects acquisition to be EPS accretive 1 year after completion.

Wealth income was S$924m in FY13 with S$109b of AuM (1%). An increase of S$16b in AUM will lift earnings by a marginal S$27M in FY15 assuming a 80% cost-income ratio which is the estimate for Asian private banks by McKinsey & Co.

This is estimated to positively impact our FY15E EPS only 0.5%, a non-material impact. Hence, we leave our estimates unchanged for now.