Fate of $10 Billion Bank Deals Turns on Indonesia's DBS Call
Choi Chang-Sik, the head of Hana Financial Group's Indonesian banking unit, says a takeover in Southeast Asia's most populous country would be worth paying top dollar for.
South Korea's third-largest lender could become one of Indonesia's 20 biggest banks through a purchase, he estimated, up from 69th now. "If we pay a big price to acquire a good bank, I think it pays off," Choi said in an April 12 interview in Jakarta, adding that the sentiment reflects his personal opinion.
Right now, though, there's one big hurdle to Choi's thinking. Indonesian ownership rules introduced last year stipulate that foreign lenders may be limited to minority investments in a market where loans are the most profitable among the 20 biggest economies.
That's why foreign lenders like Hana are closely watching an Indonesia central bank ruling on DBS Group Holdings's proposed $6.8 billion takeover of Bank Danamon Indonesia. Should the central bank restrict Singapore-based DBS to buying a 40 percent stake rather than the full takeover it is seeking, other overseas banks may cool on acquisitions in Indonesia, said Mark Young, the head of Fitch Ratings' financial institutions group in the Asia-Pacific region.
"It would make banks sit back and think more carefully about it," said Young.
A decision could come within days, Bank Indonesia Governor Darmin Nasution told reporters in Jakarta on Monday.
Door left open
At stake is an estimated $10 billion of deals targeting Indonesia, according to three investment bankers who asked for anonymity because they're not authorized to discuss the matter publicly. Mitsubishi UFJ Financial Group, Japan's largest bank by market value, and China Construction Bank, the country's second biggest, are among lenders that have studied acquisitions there.
Bankers will be studying the DBS ruling because while Indonesia's central bank limited initial purchases to 40 percent, it left the door open for buyers who meet criteria for capital strength to increase their investments over time. The new regulations came after DBS's April 2012 announcement of the Danamon takeover, the biggest-ever bank deal in Indonesia.
'No shortage'
The central bank may approve the DBS deal in full to avoid hurting Indonesia's banking industry by choking off foreign investment, according to Jonathan Foster, Singapore-based director of special situations at Religare Capital Markets.
"There's no shortage of people who want to come in, and there's potentially no shortage of targets," said Clifford Rees, PricewaterhouseCoopers' head of financial services in Indonesia. Rees said he gets calls every week from potential buyers based in Japan, China, South Korea and Europe seeking deals in the nation of 254 million people.
On March 6, the central bank issued a circular signaling a five-year waiting period before banks can raise their stakes in rivals above 40 percent, assuming they meet corporate-governance standards; foreign acquirers must also commit to supporting Indonesia's economy by lending to productive sectors, among other criteria, it said.
Indonesian lenders are the second-most profitable among the 20 biggest economies in the world, according to data compiled by Bloomberg. The average return on equity is 22.6 percent for the country's five banks with a market value of more than $5 billion, the latest available data show. Those lenders boasted an average net interest margin of 7.3 percent, the best among the 20 largest economies, the data show.
Sumitomo Mitsui
Potential acquirers are also drawn to an economy estimated by the International Monetary Fund to expand 6.3 percent this year, the fastest pace in Southeast Asia. A swelling middle class and a lower penetration of bank loans than in neighboring countries like Malaysia adds to the attraction. At about 30 percent, Indonesia has the lowest loan to gross domestic product ratio among major Asian markets, according to a World Bank presentation in February last year.
Indonesia's attractiveness means some foreign lenders are unfazed by the new ownership limit. Sumitomo Mitsui Financial Group, Japan's second-largest publicly traded bank, is nearing a deal to buy a stake in Bank Tabungan Pensiunan Nasional being sold by TPG Capital, people familiar with the matter said last week.
Financial crisis
Japanese banks, whose loan margins are the thinnest in Asia, may be more willing than lenders from other countries to settle for minority stakes in Indonesia, said Henri Guedeney, partner at Chicago-based management consulting firm A.T. Kearney.
"Some of the Japanese and Korean players are not necessarily looking at full-fledged ownership, but a strategic stake to capture the growth or establish joint ventures," Guedeney said. "It's all part of learning the market."
Until 2012, Indonesia was among few developing countries in Asia that allowed majority acquisitions of local banks, with a 99 percent ceiling. China, India, Thailand and Vietnam restrict overseas lenders to minority stakes.
Indonesia's open investment climate was the legacy of the Asian financial crisis when the nation's economy shrank 13 percent in 1998, and more than 80 banks failed or were nationalized or recapitalized. Temasek Holdings Pte., Singapore's state investment company, Fort Worth, Texas-based TPG and Farallon Capital Management LLC of San Francisco were among foreign buyers who profited by purchasing local banks that then multiplied in value.
"In 1998, we simply just sold these banks at a low price," Raden Pardede, who was vice president director of the agency responsible for selling government-held assets, said in an interview. "The window of opportunity is not always open."
Capital ratio
Under the new rules, a foreign acquirer must have at least a 6 percent Tier 1 capital ratio to qualify for a majority bank purchase. DBS, Southeast Asia's largest lender, ended 2012 with a ratio of 14 percent, according to data compiled by Bloomberg.
"As a strong financial institution coming from a strong economy with strong regulators behind it, DBS makes a good candidate in terms of an acquisition," said Fitch's Young. A decision limiting DBS to 40 percent "would clearly mean that it may be difficult to acquire majority ownership of an important bank in Indonesia."
'Punitive' deals
DBS is "very reluctant" to buy minority stakes, Chief Executive Officer Piyush Gupta said on May 2, after the bank reported earnings for the three months to March 31. Basel III rules that require banks to deduct minority investments of 10 percent or more from their capital make such deals "quite punitive," DBS finance chief Chng Sok Hui said. By contrast, majority acquisitions don't trigger capital deductions.
Buying just a 40 percent stake in Danamon could reduce DBS's Tier 1 ratio by 70 basis points, and the deal may take longer to add to earnings than an all-out acquisition, Krishna Guha, an analyst at Jefferies Group LLC, wrote in an April 23 research note.
Small Indonesian lenders, meanwhile, are likely to seek partners as the country introduces stricter capital regulations, according to Rees of PwC. New rules that take effect this year bar banks with less than 1 trillion rupiah in capital from offering electronic banking or conducting foreign-exchange transactions.
"There are banks out there readying themselves for sale," Rees said, adding that there are 10 deals or so of about $100 million each in the works. "All they have to do is wait until the moment is right."
Bloomberg
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