Unclear M&A rules may hit interest in Indonesian banks

pub_date:Uncertainty, risk of failure likely to erode value of some lenders: analystsINDONESIA'S opaque foreign ownership rules that may leave takeover bids for domestic banks in limbo for years have curbed an important source of capital.存倉 This is at a time when the country's lenders are struggling to ramp up lending to its rapidly emerging consumer class.Under new rules unveiled just months after DBS Group launched its US$7.3 billion bid for Bank Danamon, foreign banks may initially own no more than 40 per cent of any of Indonesia's 120 domestic lenders. Expanding that stake to the maximum share of 99 per cent would take at least 18 months as investors submit to three six-monthly corporate governance reviews.But what represents good corporate governance remains unclear. What's more, as the 14-month ordeal of DBS Group's ill-fated tilt at Bank Danamon suggests, the investment approval process risks stretching on for much longer than planned.The uncertainty and the risk of failure may erode the value of some Indonesian banks, analysts say."The appetite for the right target will remain strong," said Clifford Rees, the head of financial services at consultancy PricewaterhouseCoopers in Jakarta."Once the new banking share-holding regulations become more clear M&A (mergers and acquisitions) will begin again. However, pricing of transactions will probably become more realistic."Getting permission to go to a majority stake could be very subjective."For now, at least, any recent overseas appetite in Indonesia's banks appears to be concentrated in South Korea and Japan, where years of near-zero interest rates have shrunk the profit banks make from lending.Two Japanese lenders - Sumitomo Mitsui and Mitsubishi UFG - said in May that they were considering bidding for 40 per cent shares in Indonesian banks.Mizuho Group, another Japanese bank, was said last month to be pondering taking over a 39 per cent stake in Bank Panin, which is currently owned by the ANZ Group. The cost was rumoured to be US$570 million.Among the 85 financial institutions listed on Japan's Topix index, the average net interest margin - the difference between the cost of borrowing money and the interest it earns by lending it to customers - was 1.33 per cent, accor迷你倉ing to data compiled by Bloomberg. That margin will compress further. Data from the country's central bank showed interest from new loans shrunk to an all-time low of 0.86 per cent earlier this year.That's compared with interest margins of nearly 6 per cent in Indonesia where loans as a percentage of GDP were about 32 per cent. In China, outstanding loans represent 150 per cent of the economy; in Malaysia it's 130 per cent and in the Philippines it's 60 per cent.Joseph Abraham, ANZ's president director in Indonesia and the chairman of Jakarta-based Foreign Banks Association, said his company would likely retain their local presence. The company aims to expand into a regional lender taking deposits, extending project finance and private banking services. Indonesia is at the centre of that strategy, he added."Indonesia is a key linchpin in the regional economy," Mr Abraham explained, adding that ANZ, this year, marks its 40th anniversary in the country. "We've been through all the ups and downs. We don't see any change in our approach."But tougher regulations that require banks to treat as their own the liabilities held by lenders in which they only have a minority stake may act as a brake on investment, analysts say.Under capital adequacy rules set down by the Basel III agreement, banks have to set aside twice the amount of their retained earnings and common stock to cover loans held by their minority-stake affiliates than they previously had to."The change in the bank ownership laws isn't positive for the sector," said Wee Siang Ng, a senior analyst with ratings agency Moody's in Singapore. In January, the analyst published a report rating the outlook for Indonesia's banking sector as "stable"."The initial lower limit of 40 per cent will deter some parties but it will depend on the banks. Japanese banks have strong balance sheets and will be more willing to absorb the dilutive effects of the initial limit of 40 per cent."Even so, for banks with a longer view the 40 per cent stake may well represent a good start, noted Fauzi Ichsan, senior economist and head of government relations with Standard Chartered in Jakarta."This is one of the most under-banked markets in the world," Mr Ichsan added. "Forty per cent is still a lot."自存倉