DBS plans $2.76 bn rights offering

DBS Group Holdings Ltd, Southeast Asia's biggest bank, will seek S$4 billion ($2.76 billion) in a rights offering and forecast its smallest quarterly profit in three years.

DBS will issue one new share for every two held by existing investors including Temasek Holdings Pte at a 45 per cent discount to its December 19 closing price, the company said on Monday. The sale will help restore capital ratios that were lower than at rival Singaporean lenders, DBS said.

Chief Executive Officer Richard Stanley is turning to shareholders for cash after a slowdown in Singapore's economy and rising provisions for losses on credit investments caused DBS's steepest earnings decline in two years. DBS on Monday said fourth- quarter profit may fall from the previous three months and predicted credit costs will increase in 2009.

“There will be pressure on the share price when they issue, especially in these times and at such a big discount,” said Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer & Co, which manages $350 billion.

“I won't be calling a big buy on this sector, I'd rather wait for the fourth-quarter performance.”

Temasek, one of Singapore's two state-owned investment firms and owner of just under 28 per cent of DBS, will underwrite up to one-third of the rights offer. The arrangement includes a commitment from the firm to take up its pro-rata share of the sale, a Temasek spokeswoman said.

Even if Temasek ends up buying a third of the offer, its holding would remain below the 30 per cent that would trigger a mandatory takeover bid, Stanley said.

The bank is selling shares at S$5.42 apiece, 74 per cent below where they began the year.

The stock slipped 4.9 per cent to S$9.37 at the 5 pm local time close.

DBS is operating in “an environment that is witnessing revenue deceleration,” JPMorgan Chase & Co analysts Harsh Wardhan Modi and Sunil Garg said in a note on Monday. Citing contracting margins, lower fee income and weaker asset quality, the analysts cut per-share earnings forecasts by 11 per cent to S$1.21 for this year and by 43 per cent for 2009.

The bank said it decided to sell stock because investors are increasingly focused on capital ratios. The sale will raise DBS's core Tier 1 capital ratio to 9.9 per cent from 7.8 per cent. Tier 1 capital, which includes equity as well as preferred and hybrid securities, will rise to 11.8 per cent from 9.7 per cent, DBS said.

With the sale, DBS would surpass United Overseas Bank Ltd, Singapore's second-biggest by assets, in both capital measures, Chief Financial Officer Chng Sok Hui said in a conference call. DBS would still trail Oversea-Chinese Banking Corp, she said.

“The capital raising should increase confidence” in DBS, said James Chua, a Singapore-based analyst at Phillip Capital Management, which oversees about $450 million. DBS's Tier 1 capital “was definitely an issue, and that was why it traded at a discount versus its peers.”

While staff costs will increase this quarter as it pays out bonuses, job cuts announced in November will result in cost savings in the following period, the bank said. DBS also said total charges may fall this quarter from the previous three months as it won't make any “material” provisions for credit- linked investments.

DBS joins financial firms that have raised about $920 billion worldwide to survive the global recession brought about by frozen credit markets. Standard & Poor's said on December 19 it expects banks to face more uncertainty in funding markets and a higher level of stress than in a “typical business-cycle trough.”

Banks around the world are raising cash to combat the credit crunch. Standard Chartered Plc, the UK bank that makes most of its profit in Asia, said December 18 it raised ?1.8 billion ($2.8 billion) in a rights offer priced at a 49 per cent discount.

In Asia, lenders including Mizuho Financial Group Inc and National Australia Bank Ltd have raised a combined $52 billion as the US recession dragged down growth in the region, according to data compiled by Bloomberg.

DBS priced the offering at less than half the firm's book value of S$13.26 as of September 30. That makes it “attractive to investors,” said Pauline Lee, an analyst at Kim Eng Securities in Singapore.

The bank said on November 7 it will cut 900 jobs, or 6 per cent of its workforce, in the bank's first mass layoffs since 2001. DBS's net income fell 38 per cent to S$379 million for the quarter ended on September 30, the most among Singapore's three banks.

Citigroup Inc, Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley and UBS AG are arranging the sale, DBS said.