Published December 23, 2008

DBS grabs initiative with $4b cash call

Move not unexpected, but size and pricing come as surprise to some

By EMILYN YAP
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(SINGAPORE) Preparing for tougher times ahead, DBS Group yesterday launched a $4 billion rights issue priced at a steep discount to boost its balance sheet and pursue organic growth.

Already, the bank expects fourth-quarter net profit to drop from the previous quarter, and other one-time charges could hit the bottom line further.

While some analysts had expected several Asian banks to raise new capital as the financial crisis unfolds, the size and discount involved in DBS's rights issue seemed to have caught the market off guard.

Reacting to the news, DBS shares fell as much as 10.6 per cent to an intraday low of $8.81, before closing at $9.37 for a 4.9 per cent or 48-cent loss.

The rights issue comes 'at a time when investor preference globally has shifted in favour of banks with higher capital levels, especially core capital levels,' DBS said.

To raise around $4 billion in net proceeds, DBS is offering 760.48 million rights shares on the basis of one rights share for every two existing held. The rights shares are priced at $5.42 each, at a whopping 45 per cent discount to the counter's closing price of $9.85 last Friday.



Five banks - Citi, Goldman Sachs, JP Morgan, Morgan Stanley and UBS - are underwriting the rights issue in full. DBS's directors plan to take up their entitlements under the rights issue fully.

DBS's largest shareholder, Temasek Holdings, is also subscribing for up to 33.3 per cent of the rights issue through a sub-underwriting arrangement. This includes Temasek taking up its full rights entitlement of 27.6 per cent. Its aggregate shareholdings after the exercise will remain under 30 per cent.

The books closure date for the renounceable rights offering is Dec 31, 2008.

'It came (as quite a surprise), that they are raising so much money . . . and at such a huge discount,' said Phillip Securities analyst Brandon Ng.

Assuming that it raises $4 billion, DBS would have a pro forma consolidated core Tier 1 ratio of 9.9 per cent as of Sept 30, up from 7.8 per cent previously. According to DBS, this new ratio exceeds UOB's 9.3 per cent, but remains below OCBC's 10.6 per cent.

The new funds would also raise DBS's pro forma consolidated Tier 1 ratio from 9.7 per cent to 11.8 per cent. Again, this is more than UOB's 11.2 per cent but less than OCBC's 14.4 per cent.

'DBS's Tier 1 ratio is lower than the other two banks',' said CIMB analyst Kenneth Ng. 'It's safe to assume that $4 billion puts their Tier 1 just above UOB's, so they wouldn't be the last.'

DBS chief executive Richard Stanley emphasised in a teleconference yesterday afternoon: 'This rights issue is being initiated from a position of strength . . . It is not to support a kitchen-sinking or a clean-up of our balance sheet.'

The new funds will also be used for organic growth, but not mergers or acquisitions, he added. 'The current environment presents both opportunities and challenges.'

DBS said that it will continue to build its businesses in Singapore and Hong Kong. Among other strategies, 'we'll do this by increasing high-quality corporate lending . . . cross-selling a wide array of products including cash management and other fee-based products,' said Mr Stanley.

DBS will also continue to invest in China, Taiwan, India and Indonesia, he added.

The bank however, expects Q4 net profit to be moderately lower than the previous quarter's. This does not take into account one-time charges, which include $45 million from the recent staff restructuring and more impairment of its investment in TMB Bank.

The bank's rights issue comes on the back of fundraising exercises by other banks. Standard Chartered for instance, recently obtained £pounds;1.8 billion (S$3.9 billion) in a rights offer priced at a 49 per cent discount, reported Bloomberg.

Analysts from Morgan Stanley had said in a report last month that 39 banks in Asia may need to raise new share capital, cut dividends, or sell assets for cash in the next few months. DBS was among those that they thought were most likely to call for new capital, while OCBC and UOB were not on their list.

'The question we should be asking now is, for the other two banks (OCBC and UOB) which did preference share issues - will that be enough, and will we see further capital raising?' asked managing director of NetResearch Asia, Kevin Scully.

When asked by BT, a UOB spokesman said that its Tier 1 ratio as of Sept 30 is adequate, but 'we continue to review our capital position and needs'.

OCBC did not specify if further fundraising plans were in the works.