Temasek Holdings

Singapore’s DBS has one more shot at Danamon

PUBLISHED : Monday, 03 June, 2013, 10:05am
UPDATED : Thursday, 29 August, 2013, 4:13am


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DBS Group, Southeast Asia’s biggest bank, on Monday gave itself one more chance to buy a controlling stake in Indonesia’s PT Bank Danamon after Jakarta threw a spanner in the works of the proposed US$7.2 billion takeover.

DBS said it had extended its agreement with Temasek Holdings to buy the Singapore state investor’s controlling 67.4 per cent stake in Danamon for two more months, after Indonesia’s central bank approved the deal but capped DBS’ share at 40 per cent.

Analysts said DBS and Temasek are now in a bind as Southeast Asia’s biggest banking deal hangs in the balance.

“Increasingly, this is becoming an inefficient deal for DBS from an operational and capital perspective. And at some stage, it also becomes a question of credibility for DBS,” a person familiar with the process said.

“It’s a messy situation and the debate within DBS is whether to live with the short-term pain or walk away,” the person added. The person declined to be identified because he is not authorised to speak to the media.

DBS shares dropped 2 per cent in early trade, more than the 0.9 per cent drop in the Straits Times Index. Banking shares in general were hit by central bank data showing loan growth is slowing. United Overseas Bank’s shares dropped as much as 2 per cent.

Without a controlling stake the Singapore lender will have difficulty integrating Danamon with its existing business in Indonesia.

A 40 per cent stake also means it will have to deduct between 100 and 150 basis points from its regulatory core capital under Basel III, which is seen as punitive for banks owning minority stakes.

Temasek, meanwhile, wants to swap its 67.4 per cent stake in Indonesia’s sixth-biggest bank for more shares in DBS, giving it indirect exposure to the rapidly growing Indonesian banking sector through DBS.

A Temasek-led vehicle bought a 51 per cent stake in Bank Danamon in 2005 for an undisclosed price and subsequently increased its stake to 67.4 per cent over the next few years.

Bank Indonesia, as part of its approval, conditioned the purchase of a DBS controlling stake in Danamon on Singapore allowing Indonesian lenders greater access to the Southeast Asian banking hub’s US$33 billion financial services industry.

Singapore has promised to open up its financial services sector to Indonesian banks, in the areas of wholesale banking and limited retail banking for Indonesian students and workers.

But Indonesia wants more in the form of reciprocity for local banks in Singapore, which analysts said implied full banking licences. These allow foreign banks to open several branches in the city-state and accept retail deposits.

“It does not cost DBS anything to wait and see a little bit given that the regulators are talking, which is a positive,” said Kevin Kwek, a banking analyst at Sanford C. Bernstein & Co.

“Whether they will come to an agreement that would be in DBS’ favour is a question mark.”

DBS said in a statement on Monday the “long-stop date”, or last date for the agreement, had been extended until August 1, after which the share purchase agreement would lapse unless both parties mutually agreed to a further extension.

Kwek said one alternative for DBS is to re-negotiate the deal at a lower price if it was only able to buy 40 per cent.

It could pay below two times book now and then introduce a call option at a higher price to Temasek for the remaining 27 per cent if things change, he said.

DBS’s original deal for Danamon valued Indonesia’s sixth-biggest bank at 2.6-times price-to-book, below the 4.5-times multiple that Sumitomo Mitsui Financial Group agreed to pay last month to buy a US$1.5 billion stake in Indonesia’s BTPN.

Indonesia’s financial regulator, which will have oversight of the banking sector from next year, supports a maximum 40 per cent ownership limit rule for banks that is a key element of a new law legislators hope to enact next year.