Indonesia lets DBS buy 40% stake in Bank Danamon

Indonesia’s central bank approved a long-delayed bid by Singapore’s DBS Group to buy up to 40% of PT Bank Danamon, governor Darmin Nasution said on Tuesday.

The approval follows the central bank’s earlier ruling that bidders can first take only a 40% stake in a local bank. They must then undergo three financial-soundness tests, one every six months, before moving to majority ownership.

That would mean it would be at least 18 months before DBS could take control of Indonesia’s sixth largest lender.

DBS wants to buy the Danamon stake from Singapore’s state investor Temasek, which is the biggest shareholder in DBS with owns just over 29%.

“If they want more ... we want to see a realisation from MAS (the Monetary Authority of Singapore) regarding our need for reciprocity,” the outgoing governor told parliament members and reporters.

But the approval for an only 40% stake in Danamon may complicate the DBS plan. It has said it would be reluctant to take a minority stake.

The deal hit a wall last year when the Indonesian regulator capped ownership in local banks shortly after DBS announced the bid. There have also being growing calls in parliament for Singapore to open up to Indonesian banks if the DBS deal is allowed to go through.

If DBS agrees to buy a 40% stake it will have to take a hit of 100 to 150 basis points on its core capital under Basel III, said a Singapore-based banking analyst, who asked not to be named . The new global capital rules for banks makes it punitive for lenders to own minority stakes in rival banks.

In its original bid, DBS would buy most of that stake in the form of new DBS shares issued to Temasek, which in turn would become an even bigger owner of DBS, and cash.

Temasek already owns about 29% of DBS and its stake would rise to about 40% were DBS to take the full 67% Temasek holds in Danamon.

Temasek has obtained a regulatory waiver from MAS from having to make a general offer for the remaining DBS shares.

If the full takeover were allowed, it would make Singapore-based DBS the fifth-biggest lender in Indonesia, one of southeast Asia’s hottest markets, where bank penetration is low and annual loan growth runs at 20%.

It would also be the biggest banking deal on record in Southeast Asia.

Danamon has lower returns on equity than some peers and a heavy exposure to auto financing, an area vulnerable to recently announced steps by policymakers to curb excessive lending in the region’s largest economy.

The deal’s implied price-to-book ratio of 2.6 times is below the 4.5 times paid by Sumitomo Mitsui Financial Group for Indonesia’s Bank Tabungan Pensiunan Nasional this month.