Singapore holds key in DBS deal

PHOTO: Singapore holds key in DBS deal

The Indonesian central bank has given its approval for DBS Group Holdings Ltd. to acquire a 40 per cent stake in Bank Danamon, less than the 99 per cent proposed by the Singapore financial group in April last year.

Bank Indonesia (BI) governor Darmin Nasution said in Jakarta on Tuesday that DBS Group could acquire a larger stake in Danamon only if the Monetary Authority of Singapore (MAS) was willing offer "leniency" for Indonesia's three state banks to expand there.

"Here, the reciprocity principle will apply, meaning that MAS should also permit three of our state-run banks to expand there," Darmin told a parliamentary hearing on Tuesday.

The three Indonesian lenders that frequently faced difficulties in efforts to expand in Singapore were Bank Mandiri, Bank Negara Indonesia (BNI) and Bank Rakyat Indonesia (BRI), according to Darmin.

For the deal to be completed, there also must be transparent process in the information exchange of banking supervision in Singapore and Indonesia - a process known as cross-border banking supervision, he added.

Darmin's statements highlighted the political complexity of DBS's initial plan to acquire a 99 per cent stake in Bank Danamon for US$6.8 billion (S$8.5 billion).

First seen as an ordinary banking turnover, the acquisition plan turned political. Lawmakers and local bankers, for instance, expressed concerns over the overwhelming dominance of foreign lenders in Indonesia's banking industry, which is known as being open to foreigners despite its status as among the world's most profitable and fast-growing markets.

The Banking Law in Indonesia allows foreigners to own a maximum 99 per cent stake in local banks. Just two weeks after DBS's acquisition plan was made public, BI issued an ownership cap of 40 per cent for local banks, with BI possessing discretionary power to issue exemptions for certain banks that possessed sound capital and healthy governance.

However, Darmin mentioned nothing about whether DBS Bank - Southeast Asia's largest lender by assets - met BI's capital standards, instead saying that the final decision on the deal would depend on whether MAS would agree to be lenient to Indonesian banks.

But the outgoing BI governor admitted the difficulty in its bid to win greater access for Indonesian banks, as there is still an absence of strong laws protecting Indonesia from the influx of foreign lenders.

"There's an extremely valuable lesson to be learned in this case: Don't talk about reciprocity when we have nothing to support it," Darmin said. "There must be a clear reason for why we can say 'no' - if there isn't then the [other party in the negotiation process] can just laugh at our demands."

Nevertheless, Darmin's decision to not make the final call on DBS Group's acquisition plan means that he will pass the final decision to former finance minister Agus Martowardojo, who is slated to take charge as BI's new governor starting on May 23.

Agus is former president director of Bank Mandiri, which is known for shouting the loudest for reciprocity demands and urging BI to not approve the deal before MAS grants greater access for the state-run lender.

He described reciprocity as "important" when asked for his stance on the DBS-Danamon deal during his fit-and-proper test for BI's top post.

Meanwhile, analysts believe that Indonesia, despite the absence of a legal framework for reciprocity demands, has a strong bargaining position with Singapore due its lucrative banking sector, with MAS believed to eventually meet BI's demands to smooth out the DBS Group's acquisition plan.

In a statement sent to The Jakarta Post on Tuesday, MAS said that it and BI were "exploring further access into each other's markets".

"In the case of Indonesian banks in Singapore, this will be by way of a broader provision of financial services, both in wholesale banking and to, for example, Indonesian students and work permit holders in Singapore," the central bank said.

Separately, DBS spokeswoman Karen Ngui said that her company hoped "the application will be approved as originally submitted".