Published December 23, 2008

DBS move may well spark industry fund-raising

By CONRAD TAN
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DBS's plan to raise some $4 billion in new capital through a rights issue should have been welcomed by the market.

It was not. DBS's share price plunged nearly 11 per cent as soon as trading resumed after the announcement, before recovering slightly to end the day 4.9 per cent lower at $9.37.

One possible reason was that the steep discount at which the shares were being offered - 45 per cent below DBS's closing price last Friday - might have given an impression that the bank is anxious for cash to plug a hole in its balance sheet.

DBS chief executive Richard Stanley dismissed that notion in a conference call yesterday. The bank was raising capital 'from a position of strength', he said, emphasising that the money was not meant to fund any 'extraordinary provisions' or an impending acquisition.

Precautionary measure

Kenneth Ng, an analyst at CIMB, agreed. 'It's more of a precautionary measure,' he told BT.

At 9.7 per cent, DBS's Tier-1 capital ratio - the size of its buffer against losses - before the rights issue was comfortably above the minimum 6 per cent required of banks here, he and other analysts pointed out.

But where some see strength, others found cause for concern. Kevin Scully, who heads independent equity research firm NetResearch Asia, thinks that DBS is moving to shore up its balance sheet ahead of impending charges for bad loans or other exposures.

'The extent of the fund-raising, given that theoretically their Tier-1 ratio is quite high already, probably means that they hadn't provided enough in the last quarter,' he said.

In his view, that explains why DBS's share price has fallen to less than its book value per share - what the bank's assets, less its liabilities, are worth on its books - while shares of its peers, OCBC Bank and UOB, have been trading at roughly book value.

'The market perceived that its asset quality was poorer,' said Mr Scully. 'This fund-raising probably confirms that because the asset quality is poorer, the potential for provisions is higher. The large discount and the quantum is probably required given that the equity market sentiment is very bad.'

The sheer size of the rights issue will also dilute the stakes of shareholders who choose not to take up the offer, or can't afford to.

'The dilution is pretty massive - about 33 per cent,' said Pauline Lee, an analyst at Kim Eng Securities. The book value per share is likely to fall as a result of the enlarged share capital, she added. That could put further pressure on its share price in the short term.

But DBS has got it right in at least one respect. Unlike UK bank Barclays, which turned to foreign institutional investors for funds without first offering existing shareholders a chance to buy new paper, DBS has given all its shareholders a fair bite.

And at a 45 per cent discount, 'it's really a very good deal for the existing shareholders', said Ms Lee.

Compared with other recent rights offers, the discount seems less alarming too. Standard Chartered Bank's recent rights offer, which raised £pounds;1.8 billion (S$3.9 billion), was priced at a 49 per cent discount.

Spotlight on OCBC, UOB

The spotlight will now shift to OCBC and UOB. Neither have given any indication that they will raise new capital soon. Their Tier-1 and overall capital ratios at the end of September were higher than DBS's.

But as Morgan Stanley analysts Matthew Wilson and Anil Agarwal suggested last month, the unfolding financial crisis is likely to result in tighter regulation and greater capital adequacy requirements for banks everywhere.

Also, the existing Tier-1 ratios include funds raised from preference share issues earlier this year. As Mr Stanley admitted yesterday, investors now prefer banks with higher levels of common equity in their capital cushions.

Even as DBS strives to convince sceptics that it wasn't that its balance sheet needed repairing, its peers may well take its lead in raising fresh capital to head off future requirements.