Indonesia draws high interest from foreign banks

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Indonesia draws high interest from foreign banks

Choi Chang-sik, head of Hana Financial Group’s Indonesian banking unit, said a takeover in Southeast Asia’s most populous country would be worth paying top dollar.

Korea’s third-largest lender could become one of Indonesia’s 20 biggest banks through a purchase, he estimated. “If we pay a big price to acquire a good bank, I think it pays off,” Choi said in Jakarta last month, adding that sentiment reflects his own opinion.

Right now, though, there’s one big hurdle. Indonesian ownership rules stipulate that foreign lenders are limited to minority stakes in a market where loans are the most profitable among the 20 biggest economies.

That’s why foreign lenders like Hana are closely watching an Indonesia central bank ruling on DBS Group Holdings’ proposed $6.8 billion takeover of PT Bank Danamon Indonesia. If the central bank restricts Singapore-based DBS to a minority stake, other overseas banks may cool on acquisitions, said Mark Young of Fitch Ratings.

At stake is an estimated $10 billion in deals targeting Indonesia, according to three investment bankers who asked for anonymity. Mitsubishi UFJ Financial Group, Japan’s largest bank by market value, and China Construction Bank, the country’s second biggest, are among lenders that have studied acquisitions.

While Indonesia’s central bank limited initial purchases to 40 percent, it left the door open for buyers who meet criteria for capital strength to increase their investments over time. The new regulations came after DBS’s April 2012 announcement of the Danamon takeover, the biggest-ever bank deal in Indonesia.

And the central bank may approve the DBS deal in full to avoid hurting Indonesia’s banking industry, according to Jonathan Foster of Singapore-based Religare Capital Markets.

“There’s no shortage of people who want to come in, and there’s potentially no shortage of targets,” said Clifford Rees of PricewaterhouseCoopers in Indonesia. Rees said he gets calls every week from potential buyers in Japan, China, Korea and Europe seeking deals in the nation of 254 million people.

On March 6, the central bank issued a circular signaling a five-year waiting period before banks can raise their stakes in rivals above 40 percent, assuming they meet corporate-governance standards; foreign acquirers must also commit to supporting Indonesia’s economy by lending to productive sectors, among other criteria, it said.

The average return on equity in is 22.6 percent for the Indonesia’s five banks with a market value of more than $5 billion, the latest available data show. Those lenders boasted an average net interest margin of 7.3 percent, the best among the 20 largest economies, the data show.

Potential acquirers are also drawn to an economy estimated by the International Monetary Fund to expand 6.3 percent this year, the fastest pace in Southeast Asia, and a swelling middle class and lower penetration of bank loans than in neighboring countries like Malaysia. Indonesia’s attractiveness means some foreign lenders are unfazed by the new ownership limit. Sumitomo Mitsui Financial Group, Japan’s second-largest publicly traded bank, is nearing a deal to buy a stake in Bank Tabungan Pensiunan Nasional being sold by TPG Capital, people familiar with the matter said last week.

Japanese banks, whose loan margins are the thinnest in Asia, may be more willing than lenders from other countries to settle for minority stakes in Indonesia, said Henri Guedeney of Chicago-based management consulting firm A.T. Kearney. “Some of the Japanese and Korean players are not necessarily looking at full-fledged ownership, but a strategic stake to capture the growth or establish joint-ventures,” Guedeney said. “It’s all part of learning the market.”

Until 2012, Indonesia was among few developing countries in Asia that allowed majority acquisitions of local banks, with a 99 percent ceiling. China, India, Thailand and Vietnam restrict overseas lenders to minority stakes. Bloomberg

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