Photo credit: Bank Danamon

JAKARTA (TheInsiderStories) – Japanese lender Bank of Tokyo-Mitsubishi UFJ (BTMU) will acquire a 40 per cent in publicly-listed PT Bank Danamon Indonesia Tbk (IDX: BDMN) in two phases, starting early next year, according to the Indonesia Financial Services Authority (FSA).

In the first phase, BTMU will acquire 20 per cent of Bank Danamon’s stake and plans to perform careful due diligence to detect any compliance concerns that could force it to suspend the talks.

“We expect the acquisition to start gradually next year,” said Heru Kristiyana, Deputy of FSA, Wednesday (6/12).

Danamon lends primarily to the retail and corporate sectors and is a major private player in microfinance. Singapore’s DBS Group Holdings (DBSM.SI) had sought to buy a controlling stake in Danamon in 2013, but dropped the bid after Indonesia changed laws to restrict single ownership in banks to 40 per cent.

However, it now appears that Indonesia can relax these curbs on special grounds, specifically if the investing bank is financially strong.

Temasek, one of the world’s biggest investors, currently owns about 68 per cent of Danamon. With the planned acquisition, BTMU will receive benefits from Danamon, according to Moody’s Investor Services.

Danamon is Indonesia’s fifth-largest bank by market capitalization, and ranks eighth by total assets. Net profit grew 14 per cent to Rp2.79 trillion for the fiscal year that ended in Dec. 2016. The institution holds a solid presence in both retail and corporate banking, boasting a domestic network of more than 1,800 locations group-wide.

The proposed investment in Indonesia is part of a broader effort to expand overseas, where business now accounts for about 40 per cent of BTMU’s loan book, as a result of Japan’s ultra-low interest rates suppressing profitability.

BTMU has a 77 per cent stake in Bank of Ayudhya (Baa1 stable, ba1), a 20 per cent interest in Vietnam JSC Bank for Industry and Trade (B2 stable, b2), and a 20 per cent stake in the Philippines’ Security Bank Corporation (Baa2 stable, baa3).

Currently, Temasek Holdings (Private) Limited (Aaa stable) has a 67 per cent stake in Danamon, and Danamon’s rating incorporates affiliate support from Temasek. However, we view Temasek’s stake in the bank as more of a financial investment than a strategic one, incorporating only a moderate level of support from Temasek in Danamon’s rating, leading to a one-notch uplift for the bank’s baseline credit assessment.

Inasmuch as the BTMU investment is more strategic, it may be more willing to provide Danamon extraordinary support in case of need, which would positively affect any assessment of affiliate support for the bank.

The Mitsubishi UFJ Financial Group unit’s board decided last week to begin negotiations in earnest with Singaporean state wealth fund Temasek Holdings, as well as with local authorities. BTMU seeks to turn Bank Danamon into an equity-method affiliate as early as mid-2018, entitling BTMU to a cut of the Indonesian lender’s earnings. The initial investment is seen at around US$1.76 billion.

Written by Elisa Valenta, email: