DBS Launches S$2.1 Billion Capital Raising Initiative
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Nine-month Profits Released in Conjunction With Capital Launch
SINGAPORE, Nov. 5 - DBS Group Holdings (DBS or the Bank) today raised S$2.1 billion of capital through a placement of approximately 221.8 million ordinary shares to investors. The placement is underwritten by Deutsche Bank, Singapore Branch (Deutsche Bank). DBS views this capital raising as conclusive and has no intention of issuing additional ordinary shares for its medium-term needs.
In addition to the S$2.1 billion capital raising program, DBS is also undertaking a balance sheet restructuring exercise that will free up S$450 million of capital by this year end as it sheds low-yielding loans and higher-cost deposits in Singapore and in Hong Kong.
The capital raising and balance sheet right sizing initiatives will strengthen DBS' capital during uncertain economic times. On a proforma basis, DBS' Tier I capital adequacy ratio (CAR) will increase from 9.1% at the end of September, 2001 to 11.9%, and its total CAR from 14.3% to 16.8%. These initiatives will enable the Bank to meet the core capital requirements when DBS acquires the remaining 28% of Dao Heng Bank under the put or call options with Dao Heng Bank minority investors in January 2003.
DBS will focus on integration and consolidation of recent acquisitions and has no plans to seek out acquisition opportunities for the near-term.
In conjunction with the above initiatives, DBS reported its nine-month results for the period ended September 30, 2001. For the period, operating profits were up 5.9% while net profits declined 20.3% compared to the nine-month period ended September 30, 2000. The decline in net profits was largely due to a prudent stance on provisioning for a potential weakening in asset quality and equity valuations brought on by an uncertain economic environment.
S$2.1 Billion Capital Raising Initiative
The S$2.1 billion capital-raising program is lead managed by Deutsche Bank and DBS Bank. The program consists of two parts. The first portion of S$1.15 billion has been purchased by two large U.S. institutional investors, and the second portion of S$950 million will be sold to investors globally, including a tranche offered to retail investors in Singapore through DBS Vickers, DMG Securities, and a syndicate of local brokers.
Brandes Investment Partners, L.P. ("Brandes") and certain of the investment management companies wholly-owned by Capital Group International, Inc. ("the CGII Management Companies") have committed to purchase, on behalf of accounts managed by them, S$1.15 billion of ordinary DBS shares through a special depository receipt (DR) program, in which holders of the DRs will exercise the voting rights on the shares only according to the recommendations of independent proxy voting advisors. This DR program, set up by DBS, enables Brandes, on the one hand, and the accounts managed by the CGII Management Companies (the "CGII Management Companies Accounts"), on the other, each to invest more than the 5% shareholding threshold for any single investor as prescribed under the Banking Act. Both investors have obtained approval from the Monetary Authority of Singapore ("MAS") to invest up to an additional 5% of new DBS shares in this program.
A total of up to approximately 121.8 million DBS ordinary shares will be issued to Brandes and the CGII Management Companies Accounts at a price of S$9.50 per share. This represents a discount of 7% to the volume weighted average price of S$10.21 at which the shares were transacted on November 2, 2001.
The second portion of the new shares, S$950 million, will be made available to investors through Deutsche Bank. Orders will be received under an accelerated book-build process, and all the shares are expected to be allocated by 7:00 a.m. Tuesday, November 6. Up to 100 million DBS ordinary shares will be bookbuilt from a price of S$9.50 per share. DBS will receive the benefit of the full amount of the bookbuilt price above S$9.50 per share.
The total number of DBS ordinary shares to be issued constitutes approximately 18% of the outstanding DBS ordinary shares, and is subject to the approval of the SGX for their listing and quotation. The issue will increase the net tangible asset backing per DBS ordinary share from S$4.57 as of September 30, 2001 to S$5.32. Based on consensus 2002 EPS forecast for DBS of S$0.94, the proforma EPS adjusted for these capital initiatives would be S$0.83.
In addition, DBS has granted to Deutsche Bank an option to subscribe for an additional S$200 million of DBS ordinary shares at a price, and on such other terms, to be agreed between DBS and Deutsche Bank. The exercise of such option is subject to DBS' consent and such option is to be exercised by 7.00 a.m. (Singapore time) on 6th November, 2001.
The issue of the shares is underwritten by Deutsche Bank. This underwriting ensures DBS of a successful completion of the capital raising program. For this purpose, the trading in DBS shares on the SGX will be suspended on Monday, November 5. Trading is expected to resume at 9am on Tuesday, November 6.
S$450 Million Balance Sheet Restructuring
DBS is implementing a balance sheet restructuring exercise which includes utilizing credit derivatives, and the selective shedding of low-yielding loans and high cost deposits. This exercise manages down DBS' risk-weighted assets and will release S$450 million of capital by this year-end.
DBS recognises that, in this leaner capital environment, focus will no longer be on market share but in finding creative ways to improve yield on assets, as it has done with this balance sheet restructuring.
Nine-month Results Released to Provide Clarity During Uncertain Times
In order to add clarity to its share issuance, DBS released its results for the first nine months of 2001. For that period, notwithstanding the challenging operating environment, operating profit grew by 5.9% to S$1,353 million, but that growth was offset by a S$254 million increase in provisions. Hence, net profit for that period declined by 20.3% to S$830 million compared to the same period a year earlier.
Net interest income for the period ending September 30, 2001 was flat compared to the prior year, but was supported by the S$91 million contribution from Dao Heng Bank. Interest margins declined to 1.78% compared to 2.06% the year prior, but were stable compared to the 1.78% level earned in the first half of 2001.
Fee and commission income grew by 8.5% to S$425 million as the Bank continues its progress in funds management and credit cards in Hong Kong and in Singapore. Other income was up 163% to S$542 million due to strong profit from treasury operations, and gains from the sale of shares in The Insurance Corporation of Singapore (approximately S$120 million) and Keppel Capital (approximately S$61 million).
Provisions Increase but Asset Quality Continues to Improve
The provision charge of S$292 million was taken to shield the Bank from potential loan delinquencies and weaker equity valuations, especially in the post-September 11 environment. Notwithstanding the Bank's usual precaution under the MAS NPL classification and provisioning standards, non-performing loans at September 30, 2001 decreased to 6.0% compared to 7.6% at the end of December 2000 and 6.2% at the end of June 2001. At the same time, provision coverage increased from 49% at September 2000, to 59% at the end of September 2001. DBS believes that it has taken a conservative stance to stay ahead of the curve in case of further deterioration in the economic environment and the resulting threat to asset quality.
Beyond being prudent with the provision charge, DBS has implemented several initiatives to ensure that it is well prepared for any potential weakening in asset quality. DBS has automated its credit delinquency monitoring systems. It launched a comprehensive review of all loans with weaker credit prospects in August. DBS has also started to implement trigger based reviews whereby the occurrence of certain external events will require immediate reviews of the borrowers more rapidly than the normally scheduled six month review.
Dao Heng Consolidation Ahead of Expectations
The harmonisation of Dao Heng Bank with DBS continues to proceed smoothly. The third quarter marks the first period that DBS is consolidating Dao Heng Bank earnings. For the first nine months of 2001, the consolidation of Dao Heng Bank raised operating profit growth to 5.9% from a decline of 3.3%. Dao Heng Bank also helped DBS' revenue growth increase to 16.3% from 6.1%. The continued strength of Dao Heng Bank's credit card business in Hong Kong, where it is the number three card issuer, has offset, for example, the weakness of DBS' fee business in stock broking and capital markets.
Since the merger announcement in April 2001, DBS has worked expeditiously to harmonize DBS Kwong On, Dao Heng Bank, and DBS' other Hong Kong operations. Synergies from operations have been both ahead of schedule and greater than expected. Although no synergies were planned for 2001, DBS has already realised 10% of the original annual synergy target that the Bank expects to achieve by 2003. Gains were achieved by rationalising 18 (or 11%) of the combined Hong Kong branches, reducing 10% of head-count through attrition and retrenchment, selling new treasury and wealth management products, and centralising back office operations.
Dao Heng Bank annual synergy savings have been revised upwards by 39% from HK$540 million to HK$750 million. Most of the synergy improvement relates to new revenue enhancement opportunities, as compared to cost savings.
Improved Efficiency in Expense Management
DBS is on schedule to reduce its expense growth rate to the targeted 17% (excluding acquisitions and restructuring charges) for this year down from 26% reported for the first half of 2001. The growth rate for the first nine months of this year has declined to 19%. The run rate for expenses in the third quarter was 10% below the run rate average of the first two quarters of the year. This trend underscores DBS' determination to manage its costs. DBS has implemented several expense management initiatives to create better cost efficiencies such as head-count reductions through attrition and retrenchment, salary reductions for senior management, and paring back on several projects.
Conclusion
DBS has shown improvement in key areas including the reduction of run rate expenses, stabilization of interest margins, and the reduction of NPLs. The Bank has taken steps over the last year and a half to improve its operations, especially credit and risk management, all to reduce the downside risks to investors. By building up its capital and provisions, DBS is better able to ensure that it is well positioned for any future economic uncertainties.
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