What will DBS use the money for?

With the news of DBSÆs fresh capital-raising exercise, rumours have re-emerged of a possible tie-up with AustraliaÆs Westpac.

Given DBS’s extraordinary capital-cushion, observers feel confident a big acquisition is being planned, and Westpac – which trades on a price to book of 2.7 times and has a market cap of $13 billion – is regarded as the best possible contender.

Westpac derives 93% of its earnings from Australia, while DBS still makes almost all of its money in Singapore. However, the Singapore government, which owns 39.7% of DBS, has been pushing the bank to emulate HSBC and expand its footprint outside its home base.

With this logic in mind, DBS spoke to Westpac last September, and it was rumoured that both sides got close to an agreement. This would have seen Westpac CEO, David Morgan, taking the top job, but basing himself in Singapore.

There are many ways in which the deal makes sense. Both are well-managed banks in stable economies. And both Australia and Singapore have been seeking to build bridges towards each other – as exemplified by the link-ups between their stock exchanges. That is not to say the two banks would not face cultural differences, however.

DBS is a former state-controlled bank which has only recently been introduced to a new go-getting culture by former JP Morgan banker, John Olds. Westpac, meanwhile, has a chequered past. Edna Carew’s book Westpac: the bank that broke the bank offers an insight into the mistakes the bank made in the 1980s when it had to be rescued after a A$1.66 billion ($880 million) loss. Carew relates how in 1987 the bank set itself a target to grow assets by 100% by 1990. It has since become a much more prudent bank and has ratcheted its cost income ratio down to 54.5%.

What could stand in the way of a deal? Politics may be the main obstacle.

The Australian government has hinted that it will examine the ‘national interest’ carefully whenever a foreigner tries to buy or merge with one of the Nation’s big four banks. The Australian Treasurer must give his approval for any shareholder to buy more than 10% of an Australian bank. This amounts to a right of veto over any merger.

Nor is the current Howard administration thought to be keen on DBS’s entry. This is because it fears that one of the other big four banks will make a counteroffer and offer a higher takeover premium – thanks to the fact that it could realize more synergies than DBS by closing overlapping branches.

It follows that this would put the government in an ideological quandary. On the one hand it supports the idea of Australia’s four big banks staying independent of one another, but on the other its right wing ideology would find it hard to turn away a bidder that offered a higher premium to shareholders.

If these political concerns could be overcome, it is thought that the company would be listed in Singapore and Australia. And what would it cost based on Westpac's book value of $4.62 billion? If the acquisition by HSBC of Republic Bank of New York is used as a benchmark the price could be anything between $12.9 billion and $16.17 billion.

However, analysts contacted by FinanceAsia thought the chances of a deal being done were no better than 50-50. If that were the case, it begs the question: what exactly will DBS use the $500 million of subordinated debt for?