Report: Indonesia seen within days to give green light to biggest foreign bank takeover

SINGAPORE/JAKARTA: Indonesia is expected within days to give a green
light to its biggest foreign bank takeover, but sources say the deal
conditions are likely to send a very different signal: foreign
ownership and bank consolidation are now in the slow lane.
Indonesia's bank regulator is due this month to decide on Singapore bank DBS Group's $7.2 billion bid for local lender PT Bank Danamon, and sources close to the deal expect it will force DBS to complete the transaction in two steps over 18 months.
That
would be in accordance with the central bank's "two-stage" guidance for
bank takeovers that were issued around the same time as the DBS-Danamon
deal was announced last year.
However, some foreign bidders have
been hoping that the guidelines would not be enforced strictly and that
exceptions would be made for deals like DBS-Danamon, which is billed as
one that would help modernise and strengthen the sector.
Those hopes look set to be dashed, according to the sources and mergers-and-acquisitions lawyers following the case closely.
"The
main issue for those foreign investors with strong track records
looking to acquire controlling stakes in Indonesian banks is that the
two-stage acquisition process seems to be illogical and unnecessary,"
Jake Robson, a Singapore-based partner at law firm Norton Rose.
"If
this two-stage acquisition process is not waived by BI (Bank Indonesia)
this will certainly be seen negatively by foreign investors and could,
as a result in the short term, have the opposite effect to the stated
objectives of the new regulations, including consolidation of the
industry...."
Indonesia acknowledges that its over-crowded and
stodgy banking industry needs consolidation and an infusion of
expertise that experienced international lenders can bring. In return,
foreign banks see a market with huge potential.
Only about 40
percent of Indonesia's 240 million people have bank accounts and most
personal borrowing is done outside the banking sector. Yet the nation
has more than 120 commercial lenders, most of them minnows unable to
compete with the top 10 banks which control 80 percent of total bank
assets.
For foreign banks, the takeover guidelines and Indonesia's desire to strengthen its banking system are incompatible.
"For
the acquirer, there is an uncertainty of eventual majority control....
Hence before securing control, the incentive to transform (the local
lender) would be somewhat diluted," said Christopher Wong, senior
investment manager at Aberdeen Asset Management Asia, which owns DBS
shares.
Under the guidelines, bidders cannot take control of a
lender in one go. They can first take a 40 percent stake but must then
undergo three financial-soundness tests, one every six months, before
moving to majority ownership.
The guidelines are meant to apply
to all takeovers - whether by a foreign or local bidder - but advisers
expect it to be policed more strictly in the case of foreign banks,
which already control six of the top 15 local banks, according to
central bank data.
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Indonesia's comparative credit-to-GDP ratio:
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GO-SLOW SIGN
"This
ruling on ownership cap is basically directed at foreign banks. I've
been told by the central bankers but they can't say that publicly in
order to avoid problems with other countries," said the chief executive
of one Indonesian bank, speaking on condition of anonymity.
"Local
banks, especially the major banks, will be the ones who benefit from
this regulation as they can buy the smaller banks easily and cheaply."
He
said Indonesia was also likely to increase capital requirements for
banks, pushing smaller banks into the arms of larger ones.
Bank
Indonesia, however, said the takeover guidelines applied evenly to both
local and foreign banks, though it acknowledged that there was some
confusion surrounding them.
"There is some confusion. This
regulation is valid for everyone, not only foreigners," said Halim
Alamsjah, a deputy central bank governor whose remit includes banking.
It
is unclear whether DBS, which is buying the Danamon stake from
Singapore's state investment arm Temasek, would go ahead with the
takeover if forced to abide by the new guidelines.
At the Singapore bank's earnings briefing last week, DBS Chief Executive Piyush Gupta said he would await Bank Indonesia's announcement before deciding the fate of the deal.
"I have no update on Danamon. Our application is still with BI and we are awaiting BI's review and decision-making."
However, when asked about the merits of taking minority stakes in another developing market, Vietnam, Gupta replied:
"We
are very reluctant to do minority positions. For us minority positions
tend to be private-equity type of transactions and we rather do control
transactions where we can really influence. We like being operating
managers."
Under Indonesia's two-step guidelines, there is no
guarantees an acquirer - especially a foreign one - will be allowed to
take the second step to control.
However, some foreign bidders appear ready to take the risk that they won't get past first base.
Japan's Sumitomo Mitsui Banking Corp is in advanced talks to buy a $1.3 billion stake in Bank Tabungan Pensiunan Nasional Tbk Pt (BTPN) , an Indonesian lender backed by TPG Capital, people familiar with the matter say.
And several foreign banks have been sitting on minority stakes for some time, Australia & New Zealand Banking Group's 39 percent stake in Bank Panin and Standard Chartered's 38 percent stake in Bank Permata .
'ALL THE BIG BOYS ARE HERE'
Most
if not all of them, though, would be eager to move to control. In the
case of DBS, which has a small wholly owned local unit, PT Bank DBS Indonesia, it would also like to combine Danamon and DBS Indonesia to create the country's fifth-largest lender.
At
least three banking deals worth $3.2 billion are being held back due to
the regulatory uncertainty, including U.S. private equity firm TPG
Capital's planned sale to Japan's Sumitomo Mitsui of a 58.5 percent
stake in BTPN and Rabobank's exit from Indonesia, bankers said.
"All the big boys are here," said Cliff Rees, a partner at PricewaterhouseCoopers in Jakarta.
However,
he added, Indonesia needed to continue to encourage foreign capital. If
it forced DBS and other foreign acquirers into a slow two-step, it
would fail to achieve its stated target of more than halving the number
of banks over the next decade.
"Their vision was to have 40-50 banks. That is not going to happen over the next 10 years." - Reuters