Friday, August 12, 2011

Indonesia bars bank M&A, pending new ownership rules

JAKARTA: Indonesia's central bank temporarily barred takeovers in the banking sector, citing upcoming ownership rules, sowing more uncertainty about the regulatory environment in Southeast Asia's biggest economy.

Indonesia's expected imposition of bank ownership limits, including those on foreign investors, have already scuttled some cross-border deals. If the limits are imposed retroactively, as some expect, then several offshore investors and banks will have to cut their stakes in local lenders.

"We temporarily will not permit foreign banks to acquire domestic banks until the bank ownership regulation is issued," said Bank Indonesia spokesman Difi A. Johansyah.

The central bank is still drafting the policy and has not decided when it will be issued, he added. The bank has said earlier there was a possibility it could be issued this year, with a lengthy transition period likely.

In the meantime, even local banks won't be given permission for deals, officials said. Most deals in the Indonesian banking sector are initiated by foreigners.

The banking industry in Indonesia has been thrown into confusion ever since central bank governor Darmin Nasution said last month new limits on bank ownership were being studied. There is expectation in the industry that foreign ownership will be limited to 50 percent in banks.

If the rules are applied retroactively, foreign investors such as Singapore state investor Temasek and private equity firm TPG Capital will be forced to cut their majority stakes in Bank Danamon and BTPN , respectively.

Already, pending deals have suffered. Malaysian lender Affin Holdings said last week it has called off a plan to take up a stake in Bank Ina Perdana as the country's central bank may cap foreign ownership of domestic lenders.

"As an investor, obviously I prefer it to be open because I could get an M&A premium at some point if the bank I am in could be taken over by a foreigner," said Anand Pathmakanthan, a banking analyst at Nomura in Singapore.

"But logically they (Indonesian regulators) are not doing anything out of step with the rest of the world. Everyone protects their banks. So why should Indonesia be any different?"

Indonesia is currently the only emerging market in Asia with almost no ownership limits on banks. It is one of Asia's most fragmented banking markets, with about 2,000 lenders, including commercial and rural credit banks. Foreign lenders control about 27 percent of the country's outstanding loans.

The move comes at a time the industry is seeing strong growth.

Indonesian bank lending grew by 23.6 percent in July from a year ago, with the sector's capital adequacy ratio as a whole far above 8 percent and gross non-performing loans of below 5 percent, latest central bank data shows.

Leading Indonesian banks, Bank Mandiri and Bank Central Asia , posted strong second-quarter net profit growth, reflecting buoyant domestic demand for loans in the world's fourth-most populous country.


Indonesia currently allows foreign lenders to hold up to 99 percent of local banks. The banking sector was opened up to spur growth after the 1997 financial crisis led to the closure of many domestic lenders. Any single entity trying to own 25 percent or more needs prior approval.

Bank Indonesia deputy governor Halim Alamsyah, in charge of bank supervision, told Reuters in an interview early this year that three local banks were the target of foreign buyers.

It is unclear if the new policy would exempt state banks, including Mandiri and Bank Rakyat Indonesia , and be applied retroactively.

"That would complicate things a lot more," said Nomura's Pathmakanthan. "It is much easier to just say from here onwards this is what we feel, this should be the regulation. Retrospectively, yes that is different. There would be a lot of uncertainties about pricing and time frames, etc," he added.

Indonesia's central bank is also assessing bank risk controls in the wake of alleged embezzlement at Citi Indonesia and local Bank Mega .

Governor Nasution previously said he did not want banks to be controlled by one shareholder to raise internal controls, at a hearing last year in parliament that criticised the government's bailout of Bank Century, now called Bank Mutiara , during the financial crisis.

"Bank Indonesia wants banks to be more prudent by reducing risk factors," said Teguh Hartanto, an analyst at Bahana Securities in Jakarta.

Bank shares were unaffected on Friday by the announcement. Danamon was up 5 percent. BTPN and Mandiri were down, but in line with the broader market. ' Reuters


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