Indonesia’s Danamon Faces Funding Pressure as DBS Deal Fails

The failed $6.5 billion acquisition bid for PT Bank Danamon Indonesia leaves the lender vulnerable to rising funding costs that may limit profitability and growth at a time when the nation’s economy is slowing.

The bid by Singapore’s DBS Group Holdings Ltd., which lapsed Aug. 1 as it faced regulatory opposition to majority control, would have brought cheaper credit for Danamon, according to Nomura Holdings Inc. and Danareksa Sekuritas. Danamon shares fell for a second day yesterday after tumbling the most in more than four years on Aug. 1 in the wake of the breakdown.

“The collapse of the deal won’t destroy Danamon but it will severely cap its growth potential,” Wilianto Ie, head of research at Nomura in Indonesia, said by telephone July 31. “This will make the stock unattractive.” Nomura today downgraded Indonesian banks to underweight.

Indonesia’s economic growth slowed to 5.81 percent last quarter, statistics bureau figures showed today, adding to risks for the nation as investments ease, inflation accelerates and the currency slumps. The central bank has raised interest rates at the past two meetings to temper prices and reduce capital outflows -- actions that may hurt domestic spending and compound the slowdown in Southeast Asia’s biggest economy.

Funding Pressures

Danamon “is relatively more susceptible to funding cost pressures during a rising-rate environment,” HSBC Holdings Plc analysts including Kar Weng Loo wrote in an Aug. 1 report. “The outlook currently looks tough with rising inflation and interest rates” and the bank doesn’t have the same deposit strength as its larger peers, HSBC said.

Danamon gets more than half its total funds in the form of time deposits on which it pays a 5.4 percent interest rate. By contrast, PT Bank Central Asia, the country’s biggest bank by market value, gets less than than a fifth of its funds from this source and pays 3.7 percent interest on it, according to the banks’ second quarter earnings statements.

Shares of Danamon closed 5.6 percent lower to 4,200 rupiah in Jakarta yesterday. The stock plunged 14 percent Aug. 1, the biggest decline since January 2009, to the lowest since March 2012 -- the month before DBS made its bid to buy a majority stake from Singapore’s Temasek Holdings Pte.

Danamon is trading at 1.38 times its book value, the lowest since March 2009, compared with 2.4 times for the Jakarta Finance Index. HSBC’s Loo, who downgraded the stock to underweight and cut its target price by 70 percent to 2,100 rupiah, said it should trade below its book value.

The Indonesian bank sees no impact to its operations from the lapsed deal and will focus on a plan to strengthen its lending in the mass market, small and midsized enterprise and retail segments, Danamon President Director Henry Ho said in an e-mailed statement on July 31.

Watch Removed

Fitch Ratings removed a “rating watch positive” on Danamon following the collapse of the acquisition. It had placed the Jakarta-based bank on the watch in April 2012 to reflect the benefit to Danamon from DBS’s stronger credit.

Indonesia’s sixth-biggest bank by assets, which depends on automobile financing for more than a third of its profit, also faces risks stemming from slowing demand for cars and motorcycles. Car sales are expected to be unchanged this year, according to Indonesia’s automotive industries association. Sales growth has slowed after Bank Indonesia lifted downpayment requirements last year to avoid potential lending bubbles.

“Danamon is still struggling with the impact from the higher downpayment rule on the automotive financing, which has been magnified by the government’s decision to hike subsidized fuel prices,” said Andy Ferdinand, an analyst at Batavia Prosperindo Sekuritas in Jakarta. “It could take some time for Danamon to go through the difficult situation.”

Auto Sales

Indonesia’s domestic auto sales rose 12 percent in the first half of 2013 from a year earlier, about half the pace of 2012, according to PT Astra International, based on data from the automotive industries association.

Profit from Danamon’s PT Adira Dinamika Multi Finance automotive financing unit accounted for 41 percent of the bank’s 979.7 billion rupiah ($95 million) in second-quarter net income, according to calculations by Syaiful Adrian, an analyst at PT Ciptadana Securities in Jakarta.

Bank Mandiri, Indonesia’s biggest lender by assets, has 17.7 percent exposure to consumer loans, including personal finance, credit cards and home loans, according to data compiled by Bloomberg.

“Danamon has to fight the bigger competitors the hard way,” said Chandra Pasaribu, head of research at Danareksa Sekuritas. “It seems there is no easy way for them right now.”

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