Singapore bank takeover bid draws flak in Indonesia

People use DBS ATMs at a subway station in Singapore April 2, 2012. — Reuters picPeople use DBS ATMs at a subway station in Singapore April 2, 2012. — Reuters pic

JAKARTA, April 3 — Lawmakers from two of Indonesia's most powerful political parties voiced opposition today to a bid by Singapore's DBS Group to take over local lender Bank Danamon, and said they wanted to bar heavy foreign ownership of local banks.

But they signaled they may not be able to stop the $7.2 billion (RM21.6 billion) deal that would be the largest ever foreign takeover in Southeast Asia's biggest economy, at least for now.

Local investors and bankers in Jakarta also told Reuters they would lobby against the bid by DBS, even though there seemed to be no regulatory obstacles. Several complained Indonesian banks were not given a level playing field overseas.

“We will regulate banks in a reciprocal manner, with a limitation on foreign ownership,” said Harry Azhar Azis of the Golkar party and the vice-chairman of the parliament's financial committee.

Golkar is the second largest party in parliament and a member of the ruling coalition. Last week, it was instrumental in scuppering a government push to lift fuel prices – long called for by economists and rating agencies – after widespread public protests.

Azis indicated the banking deal, in which DBS proposes to issue shares to buy Singapore state investor Temasek Holdings' 67 per cent stake in Danamon and to pay cash to buy out minority investors, could not be immediately blocked.

But with a presidential election approaching in 2014, politicians and policymakers could play to the domestic audience, where nationalism can be a vote-winner.

“We can't do much as long as the banking law is not completed and enacted,” Azis said.

“The parliament will focus on completing a draft of the banking law starting in the middle of this year, so by the end of the year we can present it to a plenary meeting and it could become law by mid-2013,” Azis said.

The plan for a banking law appears to have cross-party support in the parliament. Maruara Sirait, from the main opposition PDI-P party and also on the parliament's financial committee, said he was very concerned about foreign ownership in banking and would work to limit that in a new banking law.

Sirait said he will also query the central bank, the country's banking regulator, over the deal, particularly since both sides involve Temasek, a sovereign player that has sparked nationalist opposition before to its investments in Indonesia.

Rivals complain

Local bankers and investors also said they opposed the deal.

“This is not about another country's expansion to Indonesia,” said Pahala Mansury, the chief financial officer of Indonesia's largest lender, Bank Mandiri, which is struggling to expand overseas to become a regional player.

“We need to see equal treatment in other countries and in Indonesia. Frankly, we are still facing obstacles to develop in Singapore now,” said Mansury.

Mansury did not elaborate or specify if Mandiri had applied to expand in Singapore, where it has one branch with a limited licence.

Singapore has had an often-testy relationship with its giant neighbour Indonesia. Many from Indonesia's rich Chinese minority park funds in Singapore, a global financial centre dominated by ethnic Chinese. For its part the squeaky clean city-state complains about choking haze from Indonesian forest fires.

Other financial institutions in Jakarta, most of whom declined to be identified and wanted a shot to buy Danamon themselves, say they will start a campaign against the deal, in an effort to scupper it or pressure regulators to limit foreign ownership.

Analysts said Indonesia's banking sector was indeed more open to foreigners than those of its Southeast Asian neighbours.

Indonesia's banking sector opened up more than others in the region after being battered by the Asian financial crisis in 1998, when many lenders collapsed. Eight of Indonesia's top 11 banks by market value are now either controlled by foreign banks, business families, private equity firms or wealth funds.

Indonesia allows foreign entities to hold up to 99 per cent of local banks, compared to 30 per cent in Malaysia and Vietnam.

“Indonesia is returning to normal by shutting the door, whereas other Asian countries are returning to normal by opening up more, so Indonesia just looks worse,” said Edward Teather, senior ASEAN economist at UBS, on a visit to Jakarta.

Open for now

Indonesia's central bank mooted a rule last year that could have capped foreign ownership of local lenders at around 50 per cent. Sources told Reuters Bank Indonesia quietly dropped the move after an investor uproar and opposition from President Susilo Bambang Yudhoyono himself.

A security officer stands at the entrance of a branch of Bank Danamon in Jakarta, in this March 15, 2011 file picture. — Reuters picA security officer stands at the entrance of a branch of Bank Danamon in Jakarta, in this March 15, 2011 file picture. — Reuters picThe country's state deposit agency told Reuters earlier this year that the regulation had been scrapped because the government wanted to attract foreign buyers this year for Bank Mutiara, formerly Bank Century, since it needed to recoup the 6.7 trillion rupiah (RM2.2 billion) it spent in a controversial bailout of the lender in the recent credit crisis.

Several prospective bank M&A deals were frozen last year while the ownership cap was being discussed, and the DBS bid is the first to emerge since. Danamon's shares jumped up to 50 per cent today as investors bet on the plan succeeding.

Others could follow if it goes ahead, with shares in Bank Panin Indonesia jumping 6 per cent yesterday on bets that it could become a target.

“There will definitely be quite a number of M&A deals done in Indonesia,” said Zafrul Aziz, CEO of Malaysia's Maybank Investment Bank. “The Indonesian regulators have been very supportive ... they have a very open door policy.”

Existing rules should mean regulators at Bank Indonesia favour the DBS deal since it is essentially a deal with Temasek and foreign investors are only meant to own only a single bank in Indonesia.

Temasek is the majority owner of Danamon and is also the biggest shareholder of DBS, which already operates in Indonesia. So selling its Danamon stake to DBS would combine two Indonesian financial holdings into one bank.

“I think the deal will be encouraged from a regulatory perspective,” said Joel Hogarth, co-ordinator of O'Melveny and Myers Indonesian practice.

“The Singapore government has been under pressure for a while from Bank Indonesia as they have got interests in quite a number of banks and have been told they need to have a single presence.”

Nationalism may win out

A senior diplomat in the region said DBS seems to have done all the right things in terms of sounding out regulators, but could still run into problems since Singapore government ownership tended to stir nationalistic feelings that could be exploited by politicians.

While Temasek is largely a silent investor, a tie-up with DBS may mean putting its logo out in public at all of Danamon's 3,000 or so branches across the archipelago, potentially creating some public resentment over the Singapore takeover among an increasingly confident Indonesian middle class.

“The sense of economic nationalism in Indonesia over the past six months has risen to new heights, partly because of the commodity boom,” said Hal Hill, a professor on Southeast Asian economies at the Australian National University.

So a politically focused campaign could hold up approval of the deal beyond DBS's timeline of the second half of this year, and lead to future rules that could force DBS to sell off a chunk of its Danamon holding.

Such a scenario would worry other investors too, from existing shareholders to investors from China, South Korea, Australia, the Middle East and Europe that executives say are eyeing Indonesia's bank assets.

“Maybe they're a little tougher on foreigners, but they haven't said that explicitly. There is a little anti-foreigner feeling, in terms of bank ownership,' said an executive at a private equity firm, who declined to be identified.

“Even if DBS gets approved it's going to take a year to get approved ... So I think if you decide you want to own a bank in Indonesia, my view is you should do it as early as possible before the election, then you'll still have a chance.” — Reuters 


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