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DBS Faces Five-Year Lag in Indonesia as Danamon Bid Ends

DBS Group Holdings Ltd. (DBS) Chief Executive Officer Piyush Gupta, pulling his $6.5 billion bid for PT Bank Danamon Indonesia, said his ambitions in Southeast Asia’s largest economy may be set back by about five years.

“I’m very bullish on Indonesia,” where DBS’s profit has tripled in the past three years, Gupta said at a press briefing in Singapore, a day after saying an agreement to acquire the nation’s sixth-largest lender from a Temasek Holdings Pte unit will lapse. “With the Danamon thing off the table, we will redouble our organic efforts in Indonesia.”

Gupta’s decision to abandon what would have been Southeast Asia’s biggest bank takeover helped ease investors’ concern that he may pay too much for a minority stake and led to a 2.6 percent jump in DBS shares while Danamon headed for the biggest decline in 4 1/2 years. DBS also posted 10 percent growth in second-quarter profit as it seeks to expand outside Singapore, which has the slimmest loan margins in the region.

“DBS missed out on a value-creation opportunity,” Kevin Kwek, an analyst at Sanford C. Bernstein & Co. in Singapore, said in a note to clients. The bank “will have to build up a presence in Indonesia the longer and harder way.”

Photographer: Munshi Ahmed/Bloomberg

The deal’s failure poses a setback for DBS Chief Executive Officer Piyush Gupta’s ambitions of expanding in faster-growing countries to reduce reliance on lending in Singapore, Southeast Asia’s least-profitable loan market. Close

The deal’s failure poses a setback for DBS Chief Executive Officer Piyush Gupta’s... Read More

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Photographer: Munshi Ahmed/Bloomberg

The deal’s failure poses a setback for DBS Chief Executive Officer Piyush Gupta’s ambitions of expanding in faster-growing countries to reduce reliance on lending in Singapore, Southeast Asia’s least-profitable loan market.

It may take Singapore-based DBS about five more years to expand its own operations in Indonesia to match Danamon’s $400 million in profit, Gupta told reporters today.

Ownership Rules

DBS, Southeast Asia’s largest bank, had offered on April 2, 2012, to buy 99 percent of Danamon -- including a 67 percent stake from Temasek’s Fullerton Financial Holdings -- for 66.4 trillion rupiah ($6.5 billion). The proposed acquisition was hobbled after Indonesia implemented new bank ownership rules a year ago that limited DBS to buying a 40 percent stake.

DBS said today that second-quarter net income climbed to S$887 million ($697 million), led by fees and commissions and trading income. That compared with the S$883 million average of seven analysts’ estimates compiled by Bloomberg.

Rival United Overseas Bank Ltd. (UOB) also reported higher profit for the quarter today. Southeast Asia’s third-largest lender by assets said net income jumped 10 percent to S$783 million as lending rose and fee and commission income gained. Earnings beat the S$700 million average of seven analysts’ estimates.

Regional Revenue

When DBS made the Danamon bid almost 16 months ago, it said that 2011 revenue from South and Southeast Asia would have increased to 27 percent from 7 percent with Danamon, while its reliance on Singapore would have declined to 49 percent from 62 percent.

Photographer: Dimas Ardian/Bloomberg

A woman walks past a PT Bank Danamon Indonesia automated teller machine (ATM) in Jakarta. Close

A woman walks past a PT Bank Danamon Indonesia automated teller machine (ATM) in Jakarta.

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Photographer: Dimas Ardian/Bloomberg

A woman walks past a PT Bank Danamon Indonesia automated teller machine (ATM) in Jakarta.

The lender had sought a controlling stake in Danamon as part of a strategy to expand in markets outside Singapore and Hong Kong, which jointly accounted for 83 percent of its profit in 2012. Average net interest margins for banks in its home market are 1.82 percent, according to data compiled by Bloomberg based on the latest company filings, lagging behind lenders in the rest of Southeast Asia. In Hong Kong, the measure is even lower at 1.66 percent, the data show.

In contrast, Indonesian lenders are the most profitable in the world’s 20 biggest economies, data compiled by Bloomberg show. Banks with a market value of at least $5 billion boast an average net interest margin of 6.6 percent, the data show.

Shrinking Margin

DBS’s net interest margin shrank to 1.62 percent last quarter from 1.72 percent a year earlier, today’s earnings report showed. That’s the 15th straight year-on-year decline.

“Indonesia was supposed to give them a leg up in terms of growth,” said Julian Chua, a Kuala Lumpur-based analyst at Nomura Advisory Services Sdn, who recommends investors buy DBS shares. “There may not be that many willing sellers of such a sizable bank.”

Photographer: Munshi Ahmed/Bloomberg

DBS will probably report tomorrow that second-quarter profit climbed to S$883 million, according to the average of seven analysts’ estimates compiled by Bloomberg, from S$810 million a year earlier. Close

DBS will probably report tomorrow that second-quarter profit climbed to S$883 million,... Read More

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Photographer: Munshi Ahmed/Bloomberg

DBS will probably report tomorrow that second-quarter profit climbed to S$883 million, according to the average of seven analysts’ estimates compiled by Bloomberg, from S$810 million a year earlier.

Shares of DBS rose 2.6 percent, the most in almost three months, to S$17.14 at 3:04 p.m. in Singapore trading. The stock has gained 16 percent this year.

DBS, which spent less than S$10 million pursuing the acquisition, will now focus on expanding organically in Indonesia instead of seeking other bank stakes, said Gupta, 53.

“I don’t really have a compulsion to do any acquisition,” he said. “We have the opportunity to do a lot more, particularly pushing a lot more technology into the country that we’ve not been able to do in the last couple of years.”

DBS Indonesia

DBS’s Indonesia unit, with 43 branches at the end of last year, had 41.8 trillion rupiah of assets, accounting for less than 1 percent of the total in the country’s banking system, according to Bank Indonesia data. Danamon had almost four times DBS’s assets, at 155.8 trillion rupiah, company filings show.

Profit at DBS Indonesia has grown at a compounded annual rate of 65 percent over the past three years and revenue has expanded 20 percent, Gupta said. Last month, DBS invested S$100 million of capital into the unit and moved staff to a new building, he said.

The group’s net fees and commissions from businesses including stock broking, investment banking and wealth management climbed 26 percent in the three months ended June from a year earlier to S$477 million, DBS said today. Net trading income more than doubled to S$336 million, and net interest income rose 4 percent to S$1.38 billion. Allowances for credit and other losses more than doubled to S$245 million.

Danamon Falls

Shares of Danamon fell 13 percent, on pace for the steepest drop since January 2009, to 4,500 rupiah in Jakarta today. The lender’s share price target was cut by 70 percent to 2,100 rupiah by HSBC Holdings Plc analysts led by Kar Weng Loo. DBS’s proposed offer price would have been a 35 percent premium over its closing price of 5,200 rupiah yesterday.

Indonesia had been using the proposed cash-and-stock transaction to negotiate for more access for its banks -- led by PT Bank Mandiri, PT Bank Rakyat Indonesia and PT Bank Negara Indonesia -- in Singapore. Bank Indonesia introduced new rules on July 13, 2012, limiting ownership in local banks by rivals to 40 percent.

DBS is reluctant to buy minority stakes because of the capital costs associated with the new international banking standards knows as Basel III, Gupta reiterated at the briefing today. Those rules requiring lenders to deduct the value of minority investments from Tier 1 capital make such deals “punitive,” he said.

“We are very open to foreign investment coming to Indonesia,” Peter Jacobs, director of communications at Bank Indonesia, said in a Bloomberg TV interview with Susan Li today. “But in certain areas, especially on the banking sector, I think we need to be very prudent because this area is very sensitive.”

Access Talks

The Monetary Authority of Singapore will continue to work with Bank Indonesia to “explore further access by our respective financial institutions into each other’s markets,” a spokesman for the regulator said in an e-mailed response to questions. The decision on whether to proceed with the Danamon purchase had to be made by DBS’s board, managers and shareholders, MAS said.

Danamon doesn’t expect “any impact” on its operations from the lapse of the purchase agreement, CEO Henry Ho said in an e-mailed statement yesterday.

DBS had proposed acquiring the 67.4 percent stake in Danamon held by Fullerton Financial by allowing it to swap its Danamon holdings into DBS shares. The exchange was to be at a price of 7,000 rupiah for each Danamon share and called for DBS to issue 439 million new shares to the Temasek unit at S$14.07 apiece, increasing the stake held in DBS by Singapore’s state-owned investment company to 40.4 percent from 29.5 percent.

Following that transaction, DBS would have made a tender offer for any remaining Danamon stock at 7,000 rupiah a share, taking its holding in the Indonesian bank to 99 percent.

Fullerton Financial “will continue to be invested in Danamon, (BDMN)” the Temasek unit said in a statement yesterday. “FFH remains committed to working with all stakeholders in Indonesia to grow and strengthen Danamon.”

To contact the reporter on this story: Sanat Vallikappen in Singapore at vallikappen@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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