Reciprocity issue mars DBS greenlight to purchase Bank Danamon stake

Making it harder to gain controlling interest.

According to Maybank Kim Eng, while the recent green light given to DBS to acquire a 40% stake in Bank Danamon is a longterm positive, the full beneficial impact of the deal is being muddled by roadblocks to possibly gaining controlling interest in the Indonesian bank due to reciprocity issues that are being imposed on Singapore.

Here's more from Maybank Kim Eng:

Neutral on the announcement. That DBS has finally been given the green light to acquire a 40% stake in Bank Danamon is overall longterm positive for the group in expanding its reach within the region. However, management is likely to seek further clarity on the reciprocity issue before deciding on its next move, we believe. Separately, we see little near-term impact to the group’s financials from this deal. Our TP of SGD20 is maintained - FY13 P/BV of 1.4x. BUY.

Reciprocity required. Bank Indonesia’s (BI) Governor says that the central bank has approved DBS’ acquisition of an initial 40% stake in Bank Danamon, with the option to eventually increase this, subject to reciprocity in Singapore for its three state-owned banks – Bank Mandiri, Bank Rakyat and Bank Negara Indonesia.

Questions remain. DBS’ written reply is that it “hopes the application will be approved as originally submitted and will continue to be closely guided by BI”. Would DBS still proceed with an associate stake? We think it would, but a major consideration would be the timeframe it would take to raise its stake to a controlling interest, given that the deal is complicated by this reciprocity clause.

Cost of a 40% stake. Assuming no change to the originally proposed purchase price of IDR7,000/share (17% premium to current price of IDR6,000), we value the 40% stake at SGD3.44b. With the lapse in time, this translates to a lower 2.4x P/BV vs 2.6x when the acquisition was first mooted. This would leave Temasek with a balance of 27.4% which it could dispose off to DBS in the future.

Lower funding cost. The original proposal called for the issue of 439m new DBS shares at an issue price of SGD14.07/share to fund the acquisition of a 67.4% stake. At DBS’ current share price of SGD17.35, it would only need to issue 198m shares for a 40% stake, which would enlarge its share capital base by 8%.

Minimal impact to financials. We estimate a neutral impact (-1%) to group FY14 EPS from the deal, and a mild dilution in ROE from 11.3% to 10.9%. The group’s fully-phased in CET1 ratio of 11.3% (end-Dec 2013) would remain fairly intact if funding is via a new share issue.

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