Main story: Japan’s Sumitomo enters the fray with Indonesia banking M&A set to kick off

Sumitomo Mitsui Financial is the eventual winner of a race for a stake in niche lender Bank Tabungan Pensiun Nasional, with banking M&A set to kick off

Macro roundup: Growth near slowest in three years, but economy resilient

Japan’s Sumitomo enters the fray as Indonesia banking M&A set to kick off

Japan’s Sumitomo Mitsui Financial Group Inc. (SMFG) said it has reached an agreement to acquire up to 40% of Indonesia’s PT Bank Tabungan Pensiunan Nasional (IDX:BTPN) in a deal worth an initial IDR9.2 trillion ($946 million) that could rise to over $1.5 billion.

The deal highlights the attractiveness of Indonesia's banking sector, with mergers and acquisitions expected to pick up, but challenges and risks remain.

Tokyo-based Sumitomo Mitsui is buying 24.26% of BTPN from TPG Capital Management LP at IDR6,500 a share, it says in a statement.

The shares are being sold at a 12% premium based on Friday’s close of IDR5,800. Sumitomo Mitsui also plans to buy another 15.74% in BTPN, pending approval from Indonesia’s authorities.

M&A has been prolific in Indonesia’s banking sector since ownership regulations were relaxed following the 1998 Asian financial crisis. Another bout of bank deals may ensues in the short to medium term on the backdrop of a rapidly increasing middle class, low banking penetration, a regulator which is keen to consolidate more than 120 commercial banks and as the Association of Southeast Asian Nations liberalizes investment rules.

Singapore’s DBS Group Holdings Ltd. (SGX:D05) is in the process of seeking regulatory approval to buy a majority stake in PT Bank Danamon (BDMN), Indonesia’s sixth-biggest bank, in a deal worth up to $7.3 billion that could be the largest ever acquisition in Indonesia and pave the way for more inbound banking M&A.

In one of the most high profile deals of recent years, Malayan Banking Bhd. (KL:MAY) paid $2.7 billion for PT Bank Internasional Indonesia (IDX:BNII) in 2008.

Leaders of Asean—an area which boasts about 600 million people across 10 countries and combined gross domestic product larger than that of India— are aiming to create closer economic integration by 2015, including in the financial sector.

Last month, Asean finance ministers and central bankers meeting in Brunei were presented with a study that recommended more liberalization of the banking sector in the region.

Major Indonesian banks such as PT Bank Mandiri (IDX:BMRI), PT Bank Rakyat (IDX:BBRI), and PT Bank Negara Indonesia (IDX:BBNI) all have said that they are seeking opportunities to expand in other countries in Southeast Asia.

According to a 2012 report by International Finance Corp., Indonesia’s banking penetration stood at just 32% of gross domestic product, the lowest in Asia, and local banks earn a lucrative return on assets of 2.9%, far outpacing returns in Malaysia, the Philippines, Singapore and China.  

Danamon CEO: BTPN deal will strengthen an attractive Indonesia bank sector

The Sumitomo-BTPN deal will further strengthen a local banking sector that is already attractive, according to the CEO of Bank Danamon, itself the target of a high-profile ongoing acquisition. “Anything that can bring in stronger players into the market [will] strengthen the local banking industry,” Bank Danamon President Director Henry Ho tells TIS.

“On that note, I think it’s a positive development for the country. It means Indonesia is still very sexy, very attractive for foreign investors. It's good for everybody. Competition is healthy. It's good for you and me as consumers. Banks will become more competitive and offer better service. Hopefully they will offer better pricing. I think overall it should be very positive for the country.” He declined to comment on whether the DBS-Danamon deal had received regulatory approval.

Insider Stories reported exclusively last month that Bank Indonesia has given the green light to an initial 40% purchase of Danamon by DBS which it can then build up to a majority holding if it passes Bank Indonesia’s standards for corporate governance and fiscal management.

Indonesia last year issued a rule limiting investors from buying more than 40% of a local bank as part of its banking sector reform program.

DBS is in the process of seeking regulatory approval to exceed the ownership cap and buy up to 67.4% of Danamon, which can be granted by Bank Indonesia with certain stipulations, including that the buyer be fiscally healthy and demonstrate good corporate governance.

The outcome of the deal could serve as a benchmark for other foreign owners seeking majority stakes in Indonesian banks. With DBS’s strengths in wholesale banking, capital markets and trade finance, “it will give us a bigger platform for Danamon to reach out to these markets,” Ho said, while DBS is seeking to expand its franchise in Indonesia via the deal.

Indonesia most profitable loan market among big economies

Mitsubishi UFJ Financial Group had also previously expressed interest in buying TPG’s $1.7 billion stake in BTPN as Japanese banks move outside a saturated domestic market to seek more profitable investments in places like Indonesia, where a rapidly expanding middle class is set to double in size to 140 million people over the next seven years.

Indonesia is the most profitable market for loans among the world’s 20 biggest economies, according to data compiled by Bloomberg News.

Indonesian lenders with a market value of more than $5 billion achieve 7.3% average net interest margin, according to Bloomberg. In Japan, by contrast, the average among lenders on the Topix Banks Index is 1.33%, the slimmest in Asia. TPG owns around 58% of BTPN, which has an estimated market value of nearly $2.9 billion, according to Bloomberg.

It initially bought 72% of BTPN in 2008 but this was partly diluted following a rights issue in 2010. Established in 1958 and now managing over 1,000 offices and a workforce of 19,000 employees, BTPN’s net profit increased 41% to IDR1.98 trillion ($206 million) last year, while its earnings have risen fivefold since 2008.

Set up in 1992, TPG manages 17 offices in 10 countries across the globe and has $54.5 billion of capital under management.  

Indonesian banks present M&A opportunities, but challenges too

There are several potential challenges to foreigners entering the Indonesian banking sector, particularly if they are unable to take a controlling stake.

Fitch Ratings notes that Basel III regulations mean an acquirer bank in a market where restrictions apply, such as Indonesia potentially has to partially deduct 10%-50% holdings in financial institutions from regulatory capital, which makes minority holdings “potentially a very inefficient use of capital” under the new regulations.

The Sumitomo-BTPN deal may be an expensive way of acquiring an Indonesian banking license, although the cost is relatively small for the Japanese giant, and there is a risk of overpaying without achieving synergies, it says.

Still, “Indonesia remains an attractive banking system because of its low credit penetration, strong and resilient economic growth, and expanding middle class.

Most major Indonesian banks are well capitalized and have sound loss-absorption capacities,” Fitch says.

Analysts, executives and regulators also agree that Indonesia needs to boost its human resources quickly if it wants to expand its banking industry and make financial services more widely available in rural areas and outer islands of the archipelago.

Technology also needs to be ramped up, but there will be limit to what technological capital can do compared to human capital.

Joseph Abraham, CEO of ANZ Indonesia and head of Indonesia’s Foreign Banks Association, said last week that "uncertainty [from new regulations] always weighs negatively.

Having said that, Indonesia is an attractive place. So the trade offs between the two will be highly dependent on the strategies of each individual."  

Roundup: First-quarter growth near slowest in 3 years, but economy resilient

The economy grew 6.02% in the first quarter of the year from the same period a year earlier, its slowest pace in two and half year and comparing with 6.11% in the fourth quarter of last year, highlighting the impact of inflation on the domestic consumption that is the economy’s major driver as well as the impact of weak commodity prices on exports.

The economics team at local lender PT Bank Danamon (IDX:BDMN) forecast full-year growth to come in at 6.17%, slightly below 6.23% growth last year and below the government’s target of 6.8%.

However, market watchers don’t expect the weakness to persist, even if the government in the next few months implements a widely expected increase in the price of subsidized gasoline and diesel to IDR6,000 from IDR4,500 a liter currently in order to avoid ballooning state budget deficit.

“If the government raised the subsidized fuel price, consumption would slow down further but [this] may only last for about two quarters,” according to the Bank Danamon analysts.

“Furthermore, it should be [tempered] by rising spending in preparation for the general election,” due in 2014.

“Pressure on domestic consumption should also be limited by the better absorption of the labor market, as reflected in the open unemployment rate that have declined below 6%,” standing at 5.92% currently.

Analysts at Capital Economics agree. The London-based research provider described first-quarter growth as “solid” despite the slower pickup, and noted the economy has now expanded between 6% and 7% for 10 consecutive quarters, while first-quarter household spending rose 5.2% and investment gained 5.9%.

“The stability is mainly due to the fact that Indonesia is a domestically-driven economy. Exports are equivalent to just 25% of GDP, which is much lower than others in the region,” it said.

While weak exports and lower commodity prices will act as a drag on the economy this year and next, “as a domestically-driven economy, Indonesia is relatively well-placed to withstand the impact of subdued global demand and should continue to outperform most of the rest of Asia,” likely growing by 6% this year.