Singapore loses much more than Indonesia in DBS decision — Vincent Lingga

AUG 4 — The sudden changes in the bank ownership rules made by Bank Indonesia only three months after Singapore’s DBS Bank announced in April 2012 its plan to acquire Bank Danamon, the sixth largest bank in the country, caused the deal to collapse on Wednesday.

DBS, Southeast Asia’s largest bank by assets, announced it had dropped its plan to acquire Singapore government investment company Temasek’s 67.40 per cent holding in Danamon because it was allowed to initially hold only 40 per cent of the bank, as required by the new rules.

Singapore lost a lot, especially in the run up to the ASEAN economic community in 2015. Indonesia, on the other hand, only lost a little in what seemed to be a short-sighted decision by DBS.

The corporate decision by DBS may not bode well for its rapport with Bank Indonesia. Neither did that move seem to bear the hallmark of Piyush Gupta, the usually visionary CEO of DBS. That decision also would not augur well for the seemingly “perpetual” testy relations between the two governments, taking into account the official stamp in both DBS and Temasek.

True, a minority stake is certainly less attractive as DBS will not be able to fully steer Bank Danamon in the direction it desires.

But the US$7.2 billion (the value of the original deal) question is why DBS did not feel comfortable with the initial deal, while waiting for an eventual controlling ownership — which is still allowed by Bank Indonesia under certain conditions tied to good corporate governance and financial health.

After all, even after the initial deal, the other major shareholder in Danamon will remain to be Temasek, which also controls DBS through its subsidiaries.

Despite the requirement for DBS to put up more core (Tier 1) capital, as required by the capital adequacy rules of the Basel-based Bank for International Settlement, a 40 per cent holding in Danamon, one of the most profitable and best-managed banks in Indonesia, is still quite strategic for boosting the pace of DBS’ operation, growth in the country.

Depending only on organic growth through its wholly-owned subsidiary Bank DBS Indonesia will take a very long time to expand across the vast archipelago.

The short-sighted decision to cancel the deal will cause DBS to lose the momentum to grow robustly in Indonesia, which is still the most lucrative banking market and most profitable lending market in the region.

Where else could DBS get an average lending margin of almost 7.5 per cent, four times larger than in Singapore and where else DBS could find a market in the region with such a huge potential, other than Indonesia, the US$1 trillion economy with a population of more than 240 million.

There is indeed uncertainty about the chance of eventually gaining controlling ownership of Bank Danamon because it depends on Bank Indonesia’s discretionary power — the assessment of DBS corporate governance rating and financial health.

But why should DBS, well known for its excellent corporate governance and strong financial health, worry at all about those requirements. It will never be able to become a leading bank in Asia without having a strong footing in Indonesia, India and Hong Kong.

For DBS, the acquisition will give it access to Danamon’s more than 3,000-branch network that serves over six million customers, larger than the population of Singapore.

The Monetary Authority of Singapore (MAS) also seemed too rigid in responding to Bank Indonesia’s demand that DBS’ acquisition of Danamon is tied to wider access for Indonesian banks to enter the Singaporean market.

Since Singapore needs Indonesia much more than the other way around, we cannot understand why MAS did not make the terms easier for Indonesian banks to enter Singapore. They would not pose any significant challenge to Singapore’s banks nor the other giant international banks in the city-state.

MAS may be worried a compromise for Indonesia with regards to the terms for foreign bank entry could set a precedent for other countries to demand similar treatment.

But the three local banks, DBS, UOB and OCBC have so strongly been entrenched in Singapore that it would be rather impossible for foreign banks to make a significant dent on the corporate and retail banking market.

To put it briefly, both Indonesia and Singapore would benefit greatly from a DBS-Danamon merger.

First of all, a DBS-Danamon merger will bring in a more significant competitor to Indonesia’s four largest banks — state-owned Bank Mandiri, BNI, and BRI and Bank Central Asia — thereby, making
the banking market even more competitive and consequently more efficient.

Most important is that the DBS-Danamon deal would have benefitted Indonesia’s banking industry through the transfer of skills, expertise in risk management and other best practices of good governance, as well as wider access to new sources of long-term foreign exchange financing for infrastructure development. — The Jakarta Post

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malay Mail Online.