DBS exits non-core investment in HDFC Bank

The Singapore bank raises $265 million from the sale of shares in the Indian lender as it continues to strengthen and streamline its balance sheet.

While Asian banks are arguably in a lot better shape than their US and European counterparts, they too are looking at different ways to raise fresh capital to ensure their capital ratios remain strong enough to get through the current recession. As part of this process, the banks are also trying to offload some of their non-core holdings as a way to streamline their investment portfolios and release a bit of extra cash.

Late last week, Singapore's DBS Group sold its entire 2.7% stake in India's HDFC Bank, raising Rs12.9 billion ($265 million) from a placement that was said to have attracted more than 75 investors. The sale, which was arranged by Deutsche Bank and completed after the market closed on Thursday, came just before DBS released its first-quarter earnings, which highlighted its strong revenue growth and cost discipline.

The results included significantly higher general allowances of S$182 million ($125 million) against its non-ABS CLO portfolio as well as its general loan portfolio to further bolster the balance sheet against economic uncertainties. Profit before allowances reached a record S$1.02 billion. Revenues rose 13% from the fourth quarter and 6% from the first quarter to 2009 to S$1.66 billion -- also a record -- while net interest income was steady despite lower interest rates. Cost discipline measures resulted in a 7% drop in expenses to S$638 million, while the net profit of S$456 million was up 19% from the fourth quarter, but down 24% year-on-year.

Gains from the sale of investment securities amounted to S$106 million, which was similar to the previous quarter but lower than a year ago. At the end of the first quarter, the bank's tier-1 capital adequacy ratio was 12.5%, while its total capital adequacy ratio stood at 16.7%, well above regulatory requirements.

"DBS is one of the best-capitalised banks in Asia and our capital ratios and underlying earnings remain strong. Given continuing uncertainties over how protracted the downturn will be, we remain vigilant in managing our balance sheet and ensuring that the franchise is in a solid position to capture future growth opportunities," chairman Koh Boon Hwee said in a press release outlining the quarterly results.

DBS offered 11.62 million shares at a price between Rs1,083 and Rs1,147 apiece, which equalled a discount of 2.5% to 8% versus Thursday's Mumbai close of Rs1,176.75. After about 2.5 hours of bookbuilding, the price was fixed just below the midpoint at Rs1.110 for a 5.7% discount.

The order book comprised a mixture of existing shareholders and new investors, and included a number of global India-dedicated funds, according to a source. However, the largest orders came from Indian accounts. There was no information on the size of the demand.

HDFC Bank's share price has had a good run since it hit a low of Rs798.85 on March 9, adding 47%. However, its earnings for the fourth quarter of fiscal 2009 (to March 21,2009), which were release at the end of April, were mixed with weaker-than-expected loan growth being offset on the positive side by largely flat net interest margins (despite declining interest rates) and accelerating growth in fee income. Analysts at securities house Indiabulls took this as a sign that the bank was weathering the downturn well and maintained their "buy" rating on the stock.

However, not all analysts agree on the bank's prospects during the economic downtrend. While Bloomberg counts 23 analysts with a "buy" on the company, there are as many who have either a "sell" or a "hold" on it. Analysts at Anand Rathi Financial Services said in a research note following the earnings release that they prefer banks with a better return-on-equity, such as Axis or Yes Bank, which are expected to return 19%-20% in the current fiscal year, compared with a forecast 14.5% for HDFC.

However, most people agree that long-term this is one of India's top quality banks. and the opportunity to pick up shares in bulk was therefore welcome. The trade accounted for about seven trading days, based on the average daily trading volume in the past three months.

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