DBS India eyeing retail banking boost after merger with Lakshmi Vilas Bank

24, Nov. 2020

A branch of DBS Bank India at Gurugram city in the northern Indian state of Haryana. The bank is expected to grow its retail arm significantly after the merger with Lakshmi Vilas Bank which has more than 560 branches across India. (NNA)
A branch of DBS Bank India at Gurugram city in the northern Indian state of Haryana. The bank is expected to grow its retail arm significantly after the merger with Lakshmi Vilas Bank which has more than 560 branches across India. (NNA)

By Atul Ranjan

NEW DELHI, NNA- The imminent takeover of India's troubled Lakshmi Vilas Bank Ltd. by DBS Bank India Ltd. (DBIL) will help the latter grow its consumer banking arm in India, to serve individuals and businesses especially in the south, according to industry analysts.

Many experts believe that the planned merger will be a win-win for both the sides. Embattled Lakshmi Vilas Bank (LVB) will receive a lifeline, while DBIL will get access to its more than 200 billion rupees of funds in the form of deposits, a wide loyal customer base and established network of over 560 branches.

Observers also pointed out that DBIL is a wholly-owned subsidiary of DBS Bank Ltd. of Singapore, a country which has longstanding diaspora ties with the southern Indian states. So this should place it in good stead for further growth in India.

On Nov. 17, India’s central bank, the Reserve Bank of India (RBI), announced a plan to amalgamate the LVB into DBIL, which will invest 25 billion rupees ($345 million) in LVB’s capital to support credit growth of the merged entity to run its operation smoothly.

Global credit rating agency Fitch Ratings Inc. said this could add as many as 563 DBIL branches to its existing network of 27 outlets, helping it gain significant foothold in the Indian banking sector. The total number is far greater than that of the branches of all other foreign banks in India put together.

“LVB's network is focused in south India, with three-quarters of its branches located in three states - Tamil Nadu, Andhra Pradesh and Karnataka. We regard LVB's branches as one of its most coveted residual assets for a foreign buyer and believe the ready-made platform that will enable deeper market penetration is the key draw for DBS,” said Fitch Ratings.

LVB’s latest annual report (FY 2019-20) shows that the five southern Indian states of Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, and Kerala alone account for over 85 percent of the bank's over 560 branches in the country. In addition, the Indian bank is already operating a network of over 970 ATMs (automated teller machines).

In a statement, DBIL said, “The proposed amalgamation will allow DBIL to scale its customer base and network, particularly in South India, which has longstanding and close business ties with Singapore.”

The bank added that the merger will provide stability and better prospects to LVB’s depositors, other customers and its employees who have been worried about the latter's future.

Tamal Bandyopadhay, a well-known Indian financial journalist and the author of ‘Pandemonium: The Great Indian Banking Tragedy’, said the merger will offer a good opportunity for DBS to expand retail or consumer banking quickly, something it has been wanting to do in India.

“Post merger, DBS will have an opportunity to leverage its physical branch network to garner a larger slice of the retail pie in India’s banking sector,” Bandyopadhay told NNA, adding that DBIL will have speedy access to LVB's deposits and loyal customer base.

“One of the reasons why many banks, especially foreign ones, have failed to penetrate the retail banking segment despite the ever-increasing use of digital banking, is because of the lack of physical branches in a big country like India,” said Bandyopadhay, who has served as an advisor to the successful Bandhan Bank Ltd. in India.

He said after DBS group converted its local unit into a wholly-owned subsidiary last year, DBIL is now regarded to be on a par with other Indian banks and this will help in its expansion drive. Other foreign banks have faced challenges in growing their business as they are not incorporated in India, said Bandyopadhay.

On the strong potential of the southern Indian market, Bandyopadhay said it is definitely more lucrative than central or eastern India. But what is important for DBIL is getting a large branch network that is essential for a big expansion into consumer banking.

"DBS has big retail dreams. Which is why the merger makes sense,” he said.

Fitch Ratings believe that LVB's balance sheets amount to less than 1 percent of DBS's risk-weighted assets (RWA) and equity. This means the takeover would not immediately affect the group's asset quality, profitability or capitalisation and, consequently, its credit ratings.

Agreeing, another credit rating agency, Moody's Investors Service Inc., said any effect on DBS's capital will be “immaterial” at least in the short term.

Moody's said India is one of DBS’s priority markets, and the acquisition of LVB fits into its expansion strategy.

“We estimate that the merger will increase DBS’s net loans in India to around 1.5 percent of group loans, from 0.9 percent as of June 30, 2020,” said Moody's.

It added that DBS’s net loan exposure in India will remain small and won’t “alter the group’s credit profile.”

Analysts Anand Dama and Neelam Bhatia of Emkay Global Financial Services Ltd., said, “In our view, the merger of LVB with DBS Bank, which is trying to expand its base in India, will be a long-term positive for the latter.”

DBS has been present in India since 1994. In March 2019, it converted its local operations to a wholly-owned subsidiary to expand the franchise and gain a stronger presence in the country. DBIL is present in 24 cities across 13 states.

With DBS betting big on its hybrid physical-digital or “phygital” model to penetrate the Indian market, the acquisition of LVB will help DBS complement traditional physical banking with its digital strategy, said rating agencies such as Fitch and Moody’s.

“India and Indonesia are DBS’s core foreign markets where it is actively growing its digital banking services, and had more than 3 million digital bank customers in these two markets at the end of 2019. LVB will add retail and SME (small and medium-sized enterprises) customers to DBS Bank,” said Moody’s.

In March last year, the bank had announced its plan to set up over 100 physical touchpoints in 25 Indian cities by the end of 2020 as part of its expansion.

“DBS will accelerate its growth plans, expand its operations and build greater scale in India through a ‘phygital’ model to further serve large corporates, small and medium enterprises and individual customers,” the company had said in a statement.

In 2016, the bank launched digibank, a mobile-only banking solution in India, and also piloting data-driven lending solutions for small and medium enterprises.

DBIL’s parent company DBS Group Holdings Ltd. primarily operates in Singapore and Hong Kong. It is a leading financial services group in Asia with a regional network across 18 markets. With total assets of SGD638.1 billion as of Sep 30 2020, it provides diversified services across consumer banking, wealth management, institutional banking, and treasury.

It is 30 percent indirectly owned by the Singapore government through Temasek Holdings Pte Ltd. as of Nov. 18, 2020.

Meanwhile, LVB shareholders and employees have expressed concerns about the proposed merger, which will be finalized “very soon”, industry observers told NNA.

“The merger may happen within a month. In fact, I won’t be surprised if it happens in the next few days,” a highly-placed source told NNA.