SINGAPORE Indonesia will find it difficult to block DBS Group's (DBSM.SI) $7.2 billion bid to take over Bank Danamon (BDMN.JK) based on current rules, and any rejection could dent investor sentiment, the Singapore lender's chief said on Wednesday.
DBS Chief Executive Piyush Gupta said he was "fairly confident" of approval in six months of what would be the biggest takeover of an Indonesian firm, despite rumblings of nationalism from some local bankers and politicians looking towards elections in 2014.
"A transaction of this nature falling through - despite being legally valid and within regulations - could be a huge impediment for future sentiment and future (investment) flows," Gupta told Reuters in an interview.
DBS, Southeast Asia's largest bank, plans to buy the 67.4 percent stake in Danamon held by Singapore state investor Temasek Holdings TEM.UL and has offered a 52 percent premium to minority shareholders.
Clouding the waters, Indonesia's central bank said an accord with Singapore on reciprocal bank access would be a factor in approving the DBS/Danamon deal - a step its deputy governor said would take a "long time".
Gupta, speaking shortly before that announcement, said there was a "positive predisposition towards this transaction" among Indonesian authorities, but he acknowledged reciprocity was one of several headwinds and an issue beyond his control.
More than 100 banks have licenses to operate in Singapore, a global financial centre, but Citigroup (C.N) is the only foreign player that does not face limits on the number of branches and teller machines (ATMs) it can set up to tap the retail market.
Bank Mandiri (BMRI.JK) and other Indonesian lenders have a small presence in Singapore, but are keen to expand to better serve the large Indonesian community in the city-state in areas such as remittances.
Gupta said DBS can make a general offer to buy 99 percent of Danamon, based on current Indonesian regulations.
"We all know that is not the only thing that matters but that is important," he said. "Indonesians are very pragmatic and I've lived and worked there. They don't like arrogance, they don't like these things. You've got to approach it in an Indonesian way which they like."
GRAPHIC on DBS/Danamon deal r.reuters.com/tep47s
"WITH EYES OPEN"
Gupta, an Indian with Singapore citizenship, is credited with improving customer service, expanding private and premium banking, increasing market share in loans and getting a foothold in yuan-denominated offshore bond issues and deposits since he joined DBS from Citigroup in late 2009.
But he faces his biggest test yet in Indonesia, where regulations can shift and politics can come into play.
Indonesia, Southeast Asia's largest economy, has regained its investment grade after 14 years from two rating agencies and was a darling of emerging market investors until this year when confusion over policy began chasing away foreign money.
Gupta said some backlash from the deal was to be expected. But after meeting more than 100 prominent Indonesians in recent weeks, he said he felt people were seeing the benefits.
"I didn't miscalculate at all," he said. "We went into it with eyes open."
Gupta said DBS, itself part-owned by Temasek, felt the need to offer what it did because of interest in Indonesia's sixth-largest bank from Japanese and Chinese rivals he did not name.
"Temasek is not cashing out. It's swapping its Indonesia exposure from direct to indirect exposure," Gupta, 52, said at DBS headquarters in Singapore's business district, against a backdrop of dark wooden walls and oriental artwork.
"The market doesn't think it's a sweetheart deal for us. Otherwise our stock won't be 5 percent down. When my stock is down 5 percent, Temasek is down a billion dollars."
"IT'S A GROWTH ACQUISITION"
Gupta's pay of more than S$8 million ($6.4 million) last year, when DBS had record net profit of more than S$3 billion, made him the best-rewarded bank boss in Singapore.
But DBS shares have risen just 1.6 percent since he took over in late 2009, underperforming local rivals Oversea-Chinese Banking Corp (OCBC.SI) and United Overseas Bank Ltd (UOBH.SI) as well as the benchmark index's .FTSTI gains of 12 percent.
DBS slipped about 0.5 percent on Wednesday in a market .FTSTI that was down nearer 1 percent.
Analysts see the Indonesian deal as positive for DBS in the longer term but they expect changes in Danamon's focus and say it might take some time to pay off for both banks.
Gupta said the deal will slow down DBS's plan to achieve 12 percent return on equity at the group level.
"It's 4-5 percent dilutive in year one, a couple of percent dilutive in the second year and then accretive in the third year," he said.
DBS faces costs and challenges in integrating Danamon's 3,000 branches and outlets, but Gupta said he did not envision any cuts to its workforce of nearly 70,000 people.
"It's a growth acquisition," said Gupta, who has spent a large part of his career in India and Southeast Asia in consumer and corporate banking. "We just take them and add them on."
The Singapore bank also will not touch the names of Danamon units that handle microfinancing at 1,500 outlets and consumer finance at another 1,000.
"I'm not wedded to a branding approach," he said. "For us to be successful in the scale we want to be, we must be seen to be a local player, we must be Indonesian-ized."
Hanging over the regional aspirations of DBS is the specter of its foray into Hong Kong a decade ago. It overpaid for Dao Heng Bank to begin with and then went through a lengthy and costly integration that included two writedowns.
Earlier on Wednesday, DBS said it plans to inject 2.3 billion yuan ($364 million) into its fast-growing China unit, investing in network expansion, staff hires and upgrading infrastructure and technology platforms. The wholly owned China subsidiary was set up five years ago.
Gupta, noting DBS is a different bank than it was 10 years ago, said he began feeling confident in the third quarter of last year that it was time to do a deal. About six weeks ago, he said, DBS went to Temasek with the idea of the Danamon takeover.
Indonesia holds "immense" promise for DBS, he said, because of its large, growing economy and rapidly rising middle class.
"It is one of the least penetrated banking markets in the world," Gupta said. "This can be a really significant game-changing opportunity for DBS."
(Editing by Ian Geoghegan)