Gupta's dreams for DBS in Indonesia mired with risks

Indonesia is again on the front pages of the newspapers, now it is the largest bank acquisition since years. DBS Singapore will take full control of Danamon Bank.

Although from regulatory point of view it should be approved. The government prefers that shareholders in local banks remain in Indonesian hands. Therefore Bank Indonesia wants to implement new regulation before processing the application from DBS to acquire Danamon.

Although Mr Gupta should be applauded for such a strategic plan, it will come with a few headaches:

Regulator
First, Bank Indonesia still has to decide on the regulation for foreign ownership of banks in Indonesia. The expectation is that, forced by the above announcement, Bank Indonesia will issue some new regulation in May 2012.

Bank Indonesia was also kindly reminded by BNI, Bank Mandiri and other Indonesian state banks that upon approval of this acquisition, Indonesia should expect a reciprocal for Indonesian banks in Singapore.

The Monetary Authority of Singapore (MAS) has set very strict rules for foreign banks in Singapore and Indonesian banks are keen to service the many Indonesians who have their capital stored in Singapore. It is a public secret that Singapore banking industry is flourishing because of the offshore money from wealthy Indonesians. Currently only BNI has a full banking license in Singapore.

This trade off may not be that easy, DBS buys the Danamon shares from Temasek and Temasek receives new shares in DBS. Temasek share portion in DBS will grow from 29.5% to 40.4%. However Temasek can’t demand MAS to lower its rules for Indonesian banks. Furthermore if MAS would make any gesture towards Indonesian Banks, Malaysia and other countries will protest.

Only last February Bank Indonesia waived a suggested proposal on foreign shareholder cap which would limit foreigners to a minority share in local banks. ANZ was successful in increasing its share in the joint venture ANZ-Panin to 99%, but holds a 38, 9% stake in Panin Bank. Although ANZ has the wish to enlarge their stake in Panin Bank, the regulator unclear directions and the high asking price of the family Gunawan who owns 42% of Panin bank has stopped them so far. DBS has not waited for the regulator.

Integration
DBS expects to receive approval from MAS and Bank Indonesia before year end. This means that 2012 will be BAU for both banks while in the background integration teams will work hard to prepare the integration which will be pulled off in 2013, if everything goes via plan.

The integration will require a lot of work, for each branch Bank Indonesia needs to give permission, IT has to work out which system will be preferred, and for a while both systems need to operative simultaneously while cross selling of products should be promoted. Other banks will target relationship managers (RM) from both Danamon and DBS to join them as integration work will demand additional work for the RM.

There is no doubt for the reasons that DBS has for securing their majority in Danamon bank. The Indonesian economy is booming and Danamon has over 6 million customers which is higher than the total population of Singapore.

DBS puts Bank Indonesia under pressure to speed up their regulation on foreign ownership on local banks. That is good and might be the way to get things done in Indonesia and the new combination will secure DBS foothold in the booming Indonesian economy. But for sure it will give Mr Gupta some sleepiness’ nights.

Robert Andriessen, Andriessen Consulting

Email Robert at [email protected]