JAKARTA (TheInsiderStories) – Indonesia Financial Services Authority (FSA) may allow Japanese lender Bank of Tokyo-Mitsubishi UFJ (BTMU) to acquire more than 40 per cent shares in local lender PT Bank Danamon Indonesia Tbk (IDX: BDMN) with several conditions.

Previously, BTMU said it aimed to buy up to 100 per cent shares in the lender, which would value the deal at over US$6 billion. The Japanese major bank had been in contact with the Indonesian regulator since Indonesia’s authority has put a 40 per cent limit for foreign ownership in financial services company in a bid to better regulate such services amid growing credit potential.

Based on the Single Presence Policy (FSA Regulation Number 39, 2017), in princple, a single entity may not simultaneously hold a controlling interest in more than one bank. If an entity or a shareholder holds more than one bank, the shareholder is required to merge the two banks.

Prior to acquiring Danamon shares, BTMU already holds shares in PT Bank Nusantara Parahyangan (BNP). FSA Official Heru Kristiyana said that there is a possibility for BTMU to own more than 40 per cent shares in Bank Danamon if BTMU can merge its local business entity, PT Bank Nusantara Parahyangan (BNP) into Danamon after the acquisition.

The merger between BNP and Bank Danamon can be one of the solutions for BTMU to control the shares of Danamon without violating the Single Presence Policy (SPP).

Currently, BTMU, as a control holder in BNP, has finished the first phase of the acquisition, with an initial 19.9 per cent stake in Danamon or, based on a price of Rp8,323 per share (US$0.61) and at an investment amount of Rp15.875 trillion (US$ 1.17 billion).

“The merger can strengthen the banks financially,” he said Thursday (29/3).

After setting a limit to 40 per cent for the last three years, foreign investors are now allowed to control a more-than-40 per cent stake in Indonesian banks, provided that they buy two local banks and merge them into one. Indonesia’s financial authorities have given the green light to two foreign banks (China Construction Bank Corporation and the South Korea-based Shinhan Bank) that seek to tap Indonesia’s lucrative banking sector.

The Indonesian government regards such deals as a win-win situation. The foreign investor obtains management control in a lucrative sector, while the government sees consolidation, making the sector more stable, as smaller (and weaker) players are merged into a larger entity.

Although it makes the investment more expensive and complex for the foreign buyer, it is an attractive deal for those with long-term ambitions (the economic slowdown and Basel’s mandatory liquidity buffers for banks, imply that such deals are not attractive for short- term profit-seekers). On the other hand, Indonesia is known for its policy flip-flops. As such, there always looms the risk of seeing foreign ownership cut again in the future.

Although local banks’ loan growth figures have slowed in recent years amid the country’s economic slowdown, Indonesia’s banking sector remains among the world’s most profitable banking industries with an average net interest margin of 5 per cent (double that of Singapore and Malaysia).

Moreover, there is plenty of room for further growth considering that banking penetration in the largest economy of Southeast Asia is still low. There are currently 118 banks active in Indonesia. However, the top ten largest banks control about 60 per cent of the country’s total banking assets.

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com