DBS’s long-running saga to purchase a 67% controlling stake in Bank Danamon came to an end this month after it was only able to obtain regulatory approval to buy 40% from Bank Indonesia, the country’s central bank.
In July 2012, just a few months after DBS first bid for the stake, Bank Indonesia introduced a rule that slashed the stake that foreigners could buy in local banks from 99% to 40%. The cap can be lifted at the regulator’s discretion, but in the case of DBS and Danamon it hasn't been. DBS has now given up.
The reason why DBS didn't get the all-clear was obvious. If it had got its intended 67% stake, the Singaporean bank combined with its Indonesian subsidiary would have become Indonesia's third or fourth largest bank, making it a big threat to domestic banks.
Protecting the business interests of domestic banks and maintaining the banking sector’s national identity was the main reason behind Indonesia’s new foreign ownership rules in the first place.
DBS did not want to settle for anything less than a majority stake. As well as the management difficulties of not having control, Basel III penalises banks with minority stakes in other financial institutions. That's a hard thing to swallow even for Singapore’s well capitalised lenders.
The DBS fallout could act as a possible deterrent to foreign investors, although it is worth noting that Indonesia’s regulations are still relatively relaxed when compared to its neighbours in southeast Asia such as Malaysia, which has a 30% ceiling on foreign ownership. In addition, Indonesia's GDP growth of 5.8% will almost certainly keep foreign banks hooked — that figure is a lot juicier than most other Asean nations can boast.
Add to that the fact that Indonesia’s banking sector has relatively low credit penetration compared to other fast-growing markets such as India and China, an expanding middle class and high net interest margins, and Indonesia can still prove to be an attractive market for banks looking for expansion.
Mizuho, which is eyeing a $570m stake in Panin Bank, would probably have no qualms being a minority shareholder. It is only looking for investment returns, rather than anything more strategic.
Missing out
But while the rules have helped Indonesian domestic banks fend off a potentially strong competitor in DBS, the Indonesian banking sector does not necessarily stand to gain from the failure of the deal. Foreign ownership would certainly bring with it worries over competition, but could also provide a healthy injection of risk management and transparency from which Indonesia’s developing banking sector could learn.
Most importantly, such deals would also provide much needed capital for Indonesia’s domestic banks — which have been experiencing something of a mini credit crunch.
Bank Indonesia raised the country’s interest rate for two consecutive months in June and July to 6.5% in a bid to curb the nation’s inflation troubles, which currently stands at a four year high of 8.6%. As a result, many domestic banks have been finding it tougher to get access to funding. That's not great when capital is already flowing out of the country as investors prepare for a withdrawal of the US quantitative easing that has helped to drive flows into emerging markets.
Indonesia needs to tread a fine line between developing and guarding its banking system. In protecting against the dangers it perceives from abroad, it must not isolate its banks from the benefits foreign suitors can offer. If it does, it might find it has worse headaches ahead.