DBS Gets Nod to Buy 40% Stake in Danamon for $2.75 Billion

DBS Group Holdings Ltd. got approval from Indonesia’s central bank to acquire a $2.75 billion stake in PT Bank Danamon Indonesia, giving Southeast Asia’s largest lender less control than it had sought.

DBS, which in April 2012 proposed buying all of Danamon, will be allowed to purchase 40 percent, Bank Indonesia Governor Darmin Nasution said in Parliament yesterday. Last year’s agreement valued Danamon at 7,000 rupiah a share, or a 17 percent premium over yesterday’s close. Danamon fell 2.5 percent to 5,850 rupiah.

The decision may thwart DBS’s ambition of expanding in Indonesia, Southeast Asia’s most profitable lending market. Approval for the proposed $6.8 billion acquisition, which would have been the region’s biggest banking takeover, has been delayed as Indonesia seeks more access for its lenders in the island nation.

“I would have to question the rationale for going after a 40 percent stake,” said Matthew Smith, an analyst at Macquarie Capital Securities Singapore Pte, who rates DBS as “neutral.” “If they could just end up holding that, and never be able to consolidate, that’s got to be a risk.”

DBS hasn’t received written notification of the approval from Bank Indonesia and “hopes” its application will be approved as originally submitted, Karen Ngui, a Singapore-based spokeswoman at DBS, said in an e-mailed statement yesterday. She declined to elaborate on whether the bank will proceed with the purchase.

Shares Drop

Shares of Danamon dropped as much as 5 percent earlier today in Jakarta, before closing at a four-month low.

DBS shares fell 0.4 percent to S$17.28 at the close in Singapore. The stock has climbed 16 percent this year, compared with the 9.1 percent gain in the benchmark Straits Times Index.

Getting only a minority stake means that DBS won’t have management control over the Indonesian lender, Kevin Kwek, a Singapore-based analyst at Sanford C. Bernstein & Co., said in an e-mailed response to questions. The bank will also have to deal with the added complication of having to set aside capital to meet international Basel III guidelines regarding stakes in other lenders, he said.

“DBS will have to weigh the financial implications and uncertainties of a potentially lengthy path to eventual majority control against the situation of Danamon being one of the last few meaningful platforms to acquire in Indonesia,” Kwek, who rates DBS as “outperform,” wrote today.

‘Very Reluctant’

DBS is “very reluctant” to buy minority stakes, Chief Executive Officer Piyush Gupta had said on May 2, after the bank reported earnings for the three months to March 31. Basel III rules that require banks to deduct the value of minority investments from their Tier 1 capital makes such deals “quite punitive,” Chief Financial Officer Chng Sok Hui said that day.

Buying just a 40 percent stake in Danamon could reduce DBS’s Tier 1 ratio by 70 basis points, Krishna Guha, an analyst at Jefferies Group LLC, wrote in an April 23 research note. It may also take longer for the asset to add to DBS’s earnings than a full takeover, he wrote.

Seeking Reciprocity

The Indonesian central bank is seeking reciprocity for the three biggest state-owned Indonesian lenders’ operations in Singapore, Nasution said in Jakarta yesterday. Those lenders are PT Bank Mandiri, PT Bank Rakyat Indonesia and PT Bank Negara Indonesia, he said.

The Monetary Authority of Singapore and Bank Indonesia are exploring further access into each other’s markets, the Singapore regulator said in an e-mailed statement yesterday.

“In the case of Indonesian banks in Singapore, this will be by way of a broader provision of financial services, both in wholesale banking and to, for example, Indonesian students and work-permit holders in Singapore,” it said.

DBS targeted Danamon to help counter narrowing loan margins and waning credit demand in its home market. The Singapore bank had agreed to pay about 45.2 trillion rupiah to Temasek Holdings Pte, Singapore’s state-owned investment company, for its 67.4 percent stake, and make a tender offer of 21.2 trillion rupiah for the remaining shares from minority holders at 7,000 rupiah each.

Bigger Stake

“We note the announcement from Bank Indonesia and will evaluate duly,” said Jeffrey Fang, a Temasek spokesman. If DBS was allowed to buy all of Temasek’s stake in Danamon in a share swap, the state investment company’s holding in the Singapore bank would climb to 40.4 percent from 29.5 percent.

Temasek yesterday boosted its stake in Industrial & Commercial Bank of China Ltd. for the third time in a year as Goldman Sachs Group Inc. exited its investment in the lender.

In Indonesia, ownership rules from the central bank, set after DBS announced its bid last year, limit lenders’ initial purchases of stakes in the country’s lenders to 40 percent. Buyers meeting capital-strength criteria would be allowed to increase holdings over time, the regulator had said.

The central bank signaled on March 6 it may implement a five-year waiting period before acquirers can increase stakes above 40 percent. Foreign buyers must also commit to supporting Indonesia’s economy by lending to productive sectors, among other criteria, it said.

Indonesian lenders are the most profitable among the world’s 20 biggest economies, according to data compiled by Bloomberg. The average return on equity for the country’s five banks with a market value of more than $5 billion is 22.6 percent, the data show.

Best Margins

The lenders boasted an average net interest margin, a measure of lending profitability, of 7.3 percent, also the best among the 20 largest economies, according to the data.

The International Monetary Fund estimates Indonesia’s economy will expand 6.3 percent this year.

Sumitomo Mitsui Financial Group Inc. agreed on May 8 to buy 40 percent of Indonesia’s PT Bank Tabungan Pensiunan Nasional for about $1.5 billion in the Tokyo-based lender’s biggest purchase of a foreign financial firm.

Banks in Singapore have a net interest margin of 1.82 percent, the lowest in Southeast Asia, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal.