DBS' failed deal could hurt Bank Danamon's M&A efforts

The string of impacts isn't over yet.

According to Fitch Ratings, the lapse of the agreement for Singapore's DBS to buy a majority stake in Indonesia's Bank Danamon highlights challenges in the regulatory environment, which may deter foreign interest in Indonesian banks.

Fitch said that DBS was only able to obtain regulatory approval for a 40% stake, lower than its intended 67%. This could limit potential buyers of Indonesian banks to investors with less commitment to the country and who may be looking essentially for capital gains.

Here's more from Fitch Ratings:

Bank Indonesia's decision to approve a lower-than-intended shareholding sets a precedent of only a limited chance of gaining majority control of an Indonesian bank. Rules on bank ownership introduced in 2012 limit holdings in local banks of up to 40%, although there is regulatory discretion to lift this cap. Bank Indonesia was reported to be willing to consider increasing the ownership limit, depending on reciprocity from the Monetary Authority of Singapore such that major Indonesian banks can expand in Singapore. We believe the collapse of the deal is likely to discourage some long-term foreign buyers looking to establish and build a local franchise.

The ownership restriction would have impeded DBS's ability to steer Danamon's strategic direction and risk appetite. The Singaporean group's corporate governance procedures place an emphasis on a high degree of management control regarding its major operations, including the existing overseas markets and prospective investments as it seeks to build a sustainable pan-Asian franchise. Owning only a minority stake in Danamon would have rendered DBS less likely to achieve the same degree of integration in Indonesia as with its core subsidiaries elsewhere in the region.

The sheer size of the transaction's value would also have resulted in a less-optimal use of capital for DBS. A stake of anywhere between 10%-50% needs to be deducted from common equity, subject to certain thresholds, under the Basel III capital rules.