The deal sees DBS taking its capital adequacy ratio to a low point. Indeed, the deal has been structured so that part of the payment to the Guoco group has been deferred till the end of 2002. This was done to ensure that the capital adequacy ratio did not fall below 9%.
“It means DBS is out of the M&A game for a while,” comments one analyst. “The bank will have to cease looking at acquisitions and start consolidating.” The top Singapore bank will launch a $1.1 billion subordinated debt issue in the next two months to boost its capital base.
According to JPMorgan’s bank expert, James Von Moltke, the Dao Heng deal gives DBS a leg in two financial centres and forms the first part of a Greater China strategy. However, for DBS to eventually buy a bank of Dao Heng’s quality in Taiwan, it will have to fork out at least $3 billion, meaning such an acquisition is not likely to be on the immediate horizon.
Meanwhile, for the Singaporean government, DBS’s expansion into Hong Kong will not be without consequence. The fact that a Singapore bank has been able to buy in Hong Kong will put it under pressure to allow foreign buyers similar freedom in Singapore’s own banking market. It would look especially hypocritical if it vetoed a Hong Kong bank’s efforts to buy in Singapore.
As for DBS, the merger of Dao Heng with DBS Kwong On creates one of the biggest banking entities in Hong Kong with 100 branches. Furthermore, it will enlarge DBS Group assets by 32% and the bank's customer deposit base by 31%.
DBS was advised on the deal by Goldman Sachs. The selling Guoco Group was advised by Morgan Stanley and JPMorgan. Merrill Lynch was the independent financial adviser to the board of Dao Heng bank.
