DBS pulls the plug on Bank Danamon deal

SINGAPORE (Reuters) - Singapore's DBS Group Holdings Ltd DBSM.SI said it would not pursue a $7.2 billion takeover of Indonesia's PT Bank Danamon BDMN.JK, a deal that had been stuck in limbo after regulators threw a spanner in the process.

Indonesia’s central bank has put a 40 percent cap on foreign ownership of its banks, making it difficult for DBS, Southeast Asia’s biggest lender, to integrate Danamon with its existing business in Indonesia.

DBS, due to report quarterly results on Thursday, said late on Wednesday it would allow the takeover agreement to lapse after August 1.

In June, DBS had extended its agreement for two months with Fullerton Financial Holdings, a unit of Singapore state investor Temasek Holdings Pte Ltd TEM.UL, to buy 67.4 percent in Danamon after Indonesia's central bank approved the deal but capped the DBS stake at 40 percent.

The market had expected DBS to extend the agreement further, but some analysts said current market conditions in Indonesia might have forced DBS to take a harder look at the deal.

“Things have changed a lot in Indonesia over the past few months in terms of the liquidity environment tightening, along with the rupiah declining by about 11 percent since the announcement was made, so the economics of the deal have become much worse,” said Matthew Smith, an analyst at Macquarie Capital Securities in Singapore, who has a “neutral” rating on DBS.

“It reflects well on DBS management that they are taking the deal off the table for now. It doesn’t mean it’s off the table forever. If things get worse in Indonesian and the Indonesians say, ‘We need to let foreign capital in again’, they may revisit, but the pricing would be different,” Smith added.

DBS Group Chief Executive Piyush Gupta said the bank was positive on Indonesia’s long-term potential and it would still expand its Indonesian franchise, while remaining open to opportunities.

Gupta, an ex-Citibanker who took the helm in late 2009, has turned DBS from a laggard to an outperformer, helped by double-digit loan growth and strong fee income from capital markets and wealth management.

The Danamon deal had been seen as part of his push to diversify the earnings base away from Singapore and Hong Kong, which contribute 80 percent of profits.

DBS’s earnings momentum is under threat from China’s economic slowdown and the spillover effect on Hong Kong, its second-biggest market, as well as from recent Singapore government measures to tighten property-related financing.

The bank may be on the lookout for more large deals to boost growth.

“They will look for a pretty decent-sized bank, financial company or some financial operation in their regional footprint that is for sale,” said James Antos, an analyst at Mizuho Securities Asia in Hong Kong.

Reporting by Anshuman Daga and Saeed Azhar; Additional reporting by Rachel Armstrong and Rujun Shen; editing by Jane Baird