DBS Indonesia deal may dodge new bank ownership rules

SINGAPORE/JAKARTA Tue Jun 26, 2012 3:43am EDT

People walk near the automatic teller machines (ATM) of Danamon Bank in Jakarta June 1, 2012. REUTERS/Enny Nuraheni

People walk near the automatic teller machines (ATM) of Danamon Bank in Jakarta June 1, 2012.

Credit: Reuters/Enny Nuraheni

SINGAPORE/JAKARTA (Reuters) - The gloom surrounding DBS Group's (DBSM.SI) $7.2 billion bid for Indonesia's Bank Danamon is giving way to renewed optimism, with signals from the central bank in Jakarta on Tuesday suggesting the Singapore lender's takeover may just scrape through.

Southeast Asia's biggest banking takeover bid was thrown into limbo in April, when Bank Indonesia (BI) announced it would not approve the deal to buy its sixth-biggest lender until it had published new regulations to cap ownership stakes in banks.

The central bank says it wants to prevent its lenders falling captive to single interests and ensure they have a diverse shareholder base holding management to account.

The new rules, first flagged more than a year ago, are due to be published by the end of June. Contrary to initial fears, industry watchers say they may still allow some foreign banks to buy control of Indonesian lenders.

"There are hints dropped every couple of days that it might be allowed through," said Derek Ovington, a Singapore-based banking analyst at CLSA.

In the latest sign, Deputy Governor Muliaman D. Hadad said on Tuesday majority foreign ownership might be approved by the central bank, depending on the bank's financial strength.

"Stake ownership in general will be 20, 30, 40 percent," he told reporters. "If more than 40 percent, it will be decided case-by-case and must get BI approval."

That followed other hints in recent days from Bank Indonesia officials that they may allow the current 99 percent single ownership threshold to remain in exceptional cases, where the single shareholder is a well-governed financial institution, raising hopes for DBS's Bank Danamon (BDMN.JK) bid.

Previously, Bank Indonesia had suggested that it would allow individuals or families to only hold up to 30 percent of local lenders, while financial institutions' holdings would be capped at 40 percent.

Indonesia's economy has been drawing strong investor interest in recent years for its booming domestic demand and resources, but policymakers have rattled sentiment with a series of proposals on foreign asset ownership.

Recent proposals limiting foreign ownership in mining companies to 49 percent has fuelled concerns Indonesia is becoming increasingly hostile to foreign investment.

TESTING THE MARKET

Indonesia is one of the rare emerging markets in Asia where foreigners can currently hold controlling stakes in domestic banks. Many countries including, China, India, Thailand and Malaysia have capped foreign ownerships at below 51 percent.

Indeed, eight of the G20 economy's top 11 banks by market value - including Bank Danamon itself - are controlled by foreign banks, business families, private equity firms or wealth funds. The central bank has said the new rules will apply to new investments, and would not force existing shareholders to instantly sell-down their stakes to below the new thresholds.

Lawyers and analysts say the central bank has been testing market appetite for its proposed changes through comments to the media and then modifying its plans according to the reaction.

"What's been happening is that Bank Indonesia has been communicating to the market informally through the press without actually stating the formal position," said CLSA's Ovington.

Expectations that the deal may go through after all have boosted Bank Danamon's share price by 12 percent in June, after it dropped about 5 percent last month. It is still trading around 15 percent below the 7,000 rupiah per share offered by DBS to minority shareholders.

"I think it will get done but BI will ask for tons of requirements, including capital control stuff as well as how long DBS can own Danamon's shares," said Jemmy Paul, equity fund manager at Indonesia's Sucorinvest Asset Management who helps manage 2.1 trillion rupiah.

Under a long-mooted deal that was announced in April, Singapore state investor Temasek will sell its 67.4 stake in Danamon in exchange for DBS shares, boosting the sovereign investor's stake in DBS to 40 percent from about 29 percent now.

DBS shares, which fell nearly 4 percent after the deal was announced, are down about another 2 percent since that slide.

RECIPROCAL DEAL?

One hurdle DBS could face is an Indonesian demand to allow reciprocal treatment in Singapore for the country's biggest lenders such as Bank Mandiri (BMRI.JK), which has a restricted license to operate in the city-state.

Mandiri and other Indonesian lenders are keen to expand to better serve the large Indonesian community in Singapore in areas such as remittances. But Indonesian banks have found it hard to penetrate Singapore's banking market, which is dominated by DBS and its local rivals United Overseas Bank (UOBH.SI) and Oversea-Chinese Banking Corp (OCBC.SI).

"Indonesians get off the plane, as they often do in Singapore, and there's no Bank Mandiri ATM when they land," said a source with direct knowledge of the DBS-Danamon deal. "Indonesia banks' ability to open branches and things like that in other markets and get market access is sharply limited, if at all."

DBS chief executive Piyush Gupta, who wants to expand the bank outside its main markets of Singapore and Hong Kong, had expected that the deal would go through under current rules.

DBS and its deal team, which comprised Credit Suisse (CSGN.VX) and Morgan Stanley (MS.N), were also hoping an approval would come before next year, when risks are high that the deal would become mired in political debate ahead of the 2014 presidential election.

But the Indonesian central bank surprised the Singapore lender by saying that it would review the deal under new rules, a source told Reuters.

A DBS spokeswoman said the bank was unable to comment on the subject and was awaiting formal announcements from Bank Indonesia.

Lawyers say on paper Bank Indonesia's approach now looks to have captured the balance between a push for better corporate governance and allowing well-run foreign banks a route into their banking market.

"The key test, however, will be how Bank Indonesia implements the exemption regime and whether this is done in a transparent and consistent manner," said Jake Robson, a partner at Norton Rose law firm in Singapore.

"Some of the small banks owned by domestic groups or families may find it hard to comply with the governance requirements and may be forced to sell-out, but there's unlikely to be a huge M&A wave as a result of this new regulation."

(Additional reporting by Rieka Rahadiana and Adriana Nina Kusuma in JAKARTA and Rachel Armstrong in SINGPAORE; Editing by Denny Thomas and Alex Richardson)

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