How will Indonesia's new ownership cap rules affect DBS' bid for Bank Danamon?

Analysts believe DBS' acquisition of Bank Danamon is likely to go ahead despite the new regulations - but on what grounds?

Asian Development Bank: Edimon Ginting, Senior Country Economist, Indonesia Resident Mission
The new BI Regulation no. 14/2012 limits single ownership of domestic financial institutions to 40%. But there is certain exception for well-run publicly-listed banks that meet capital and other financial requirements. These banks have to receive approval from Bank Indonesia and are committed to to stay over a certain period in Indonesia to contribute to the country's economic development. In addition, these banks will need to sell off at least 20% of its shares to the public within five years of the acquisition.

So technically, the new regulation provides room for DBS' bid for Bank Danamon to go ahead, as long as DBS can meet all the requirements and obtain Bank Indonesia's approval.

As stated by Bank Indonesia, the new regulation is motivated by the need to strengthen and consolidate domestic banking system. In addition, the new regulation applies equally to domestic private banks and foreign-own banks. Internationally, different country has different regulation on single ownership limit. But Indonesia's experience before the 1997 Asian crisis demonstrated that bank's corporate governance was often negatively correlated with the size and domination of single ownership.

Maybank Kim Eng: Desmond Ch'ng, Director, Equity Markets (Research)
The DBS acquisition of Bank Danamon is likely to proceed, but the manner in which it is executed is still unclear at this juncture. The uncertainty is whether DBS would be exempted from the ruling that an acquirer can only increase its stake above 40% if the acquiree bank has maintained a GCG level of 1 or 2 in three consecutive appraisal periods within five years. This implies that DBS will have to build up its stake gradually. Even so, the initial acquisition of a 40% would still provide DBS with control over Bank Danamon, which we believe is a positive move over the longer term.

IG Markets: Justin Harper
This could be good news for DBS and opens the back door up to a deal being struck to take over Danamon. While the 40 per cent cap on foreign ownership could put off future overseas banks from entering the market it may not affect DBS’s planned takeover of Danamon. This is because there is the caveat that a strong bank will be exempt from this cap. While DBS definitely qualifies as a strong bank there is still a question mark over just how much of Danamon will it be allowed to buy?

Indonesia has turned very defensive of its banking sector and the rules are still unclear. Even if DBS is successful, it may face hurdles further down the line as the central bank announces more limitations on foreign banking activities.