As DBS Group readies for a longer-than-expected wait for regulatory approval for its proposed takeover of PT Bank Danamon Indonesia, senior officials at the Singapore lender said foreign capital was sorely needed to spur consolidation and expand lending to the country's rapidly emerging middle class.
"Banking penetration rates are incredibly low here," a DBS official said here on Wednesday, speaking on condition of anonymity because the proposed takeover is ongoing.
"This is about strengthening the Indonesian banking sector."
A year after first offering to buy Indonesia's sixth- largest bank for US$6.77 billion, Singapore's biggest lender extended its deadline for regulatory approval by two months this week.
Indonesia's central bank is still assessing the deal, while ramping up political pressure for more access to neighbouring markets, including Singapore's, for its own banks.
DBS is the world's 58th largest bank in terms of the value of its retained earnings and common stock, which totalled US$21 billion in 2012, a survey published by The Banker showed.
Bank Mandiri, Indonesia's largest bank, with US$5 billion of core capital, is ranked number 181.
The takeover would see Singapore's Temasek Holdings sell its 67 per cent stake in Danamon to DBS, who will then buy the remaining shares it does not already own on the open market for 7,000 rupiah (S$0.89) each.
Danamon has more than 3,000 branches across Indonesia with about 6 million customers.
The combination with DBS's deep pockets has made some domestic vested interests nervous, who in turn are demanding reciprocity, or increased access to neighbouring markets.
"This talk about reciprocity is really about wanting to block the merger," said Fauzi Ichsan, managing director as well as senior economist and head of government relations at Standard Chartered Bank in Jakarta.
"Legally, logically, strategically, the deal should go through."
Bank Indonesia has said it aims to shrink the number of banks to 80 from roughly 120 in the coming years.
In 2008, Malaysian sovereign wealth fund Khazanah Nasional merged its Lippo Bank and Bank Niaga to form CIMB-Niaga, making it the sixth-largest lender then.
At stake is access to the country's newly emerging middle class.
Some 6 million people out of a population of more than 240 million leave the ranks of the poor every year as growth rates of more than 6 per cent a year trigger a rise in minimum wages.
In Jakarta alone, newly elected governor Joko Widodo has agreed to lift the monthly minimum wage to 2.2 million rupiah by mid- year from 1.53 million rupiah in 2012.
The number of households with disposable income of more than US$10,000 a year is expected to more than double to 31.1 million by 2020 from 13.7 million in 2011, figures from Euromonitor International show.
That surge in extra income is expected to drive demand for loans for everything from food stalls to motor scooters - items that are central to their owners' livelihood, helping ensure low default rates and high profit margins, DBS says.
The value of Indonesia's bank loans is equivalent to about a third of the country's gross domestic product, according to Business Monitor International.
In contrast, Singapore's loan-to-GDP ratio is 138 per cent.
Loan margins in Indonesia hover at just under 6 per cent, while in Singapore they are less than 2 per cent.
"This is one of the world's most underbanked and most profitable markets," StanChart's Mr Ichsan says.
Even so, there is little sign the government will ease its campaign to open up neighbouring markets for the country's banks.
Agus Martowardojo, who will soon become the Bank Indonesia governor, has publicly complained about the trouble the country's banks have in securing licences and other rights abroad even as foreign rivals have scope to offer a wide range of services.
New regulations introduced late last year seek to cap foreign ownership of local lenders to less than half from the 99 per cent allowed previously, force local branches to become incorporated Indonesian bodies under Indonesian law, and compel banks to set aside at least 20 per cent of their loan book for small and medium-sized businesses.
The new regulations mirror similar interventions in other sectors including oil and gas and mining as local interests seek a bigger slice of profits, said Bill Sullivan, a mergers-and-acquisitions lawyer specialising in the resource sector at Christian Teo Purwono & Partners in Jakarta.
"This is an economy- wide phenomenon," he said. "There is a risk that nationalism wins out over rationalism."
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