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outheast Asia’s largest bank, Singapore’s DBS Group Holdings Ltd, has prepared S$9.1 billion (US$7.2 billion) to buy a 99 percent stake in Bank Danamon (BDMN), to create Indonesia’s fifth-largest lender by assets and marking the biggest Southeast Asian banking takeover.

DBS announced Monday it would acquire a 67.37 percent stake in Danamon, owned by its parent company Temasek Holdings Pte., in a share swap mechanism exchanging 439 million new shares of DBS worth
Rp 45.2 trillion.

Temasek, an investment fund controlled by the Singaporean government, owned Danamon through Asia Financial (Indonesia) Pte. Ltd., a unit of its subsidiary, Fullerton Financial Holdings Pte. Ltd.

The Singaporean lender has also set aside Rp 21.2 trillion to acquire the remaining listed shares from Danamon’s minority shareholders in a tender offer to be carried out soon, with a cash offer funded partly by issuing bonds, DBS CEO Piyush Gupta said.

The offer price for both majority and minority shareholders was at Rp 7,000 per Danamon share, representing a premium of 56.3 percent over its one-month average share price of Rp 4,480. That amounts to 2.6 times Danamon’s book value, which analysts considered in line with the Indonesian banking industry.

“It’s what I call a fairly priced deal. It is not cheap, but we think there is value that we could create. So, within a reasonable period of time, over the medium term, we think we can make the deal accredited,” Gupta told a news conference.

“Indonesia is a high-growth country with good return prospects and, therefore, you have to expect to pay a full price to be able to bring out the franchise in this market.”

Danamon is currently Indonesia’s sixth-largest lender by assets with total assets of Rp 127 trillion, set to overtake PT Bank CIMB Niaga (BNGA) for fifth position. CIMB Niaga and PT Bank OCBC NISP (NISP) are controlled by Malaysian and Singaporean lenders through a similar takeover from domestic banks.

Banks in Indonesia are some of the most profitable in the region with average net interest margins (NIM) nearing 6 percent. That has attracted investors to the country’s banking industry, but regulator Bank Indonesia’s (BI) plan to cap ownership in Indonesia’s banks has seen some foreign investors backing off.

Gupta said DBS would comply with whatever regulations both central banks in Singapore and Indonesia impose, adding that the deal has complied with the existing rules.

Indonesia, Southeast Asia’s largest economy, has been growing beyond the global average at more than 6 percent over the past two years, boosting demand for credit with average loan growth steadily above 20 percent in the same period.

The Danamon takeover, expected to be concluded before the end of 2012, will boost the DBS revenue contribution from Southeast Asia to 27 percent from the previous 7 percent, while reducing reliance on Singapore to 49 percent from 62 percent, according to Gupta.

Gupta said DBS would maintain Danamon’s expertise in micro financing, which accounts for two-thirds of Danamon’s loan book, but would add a significant scope in the corporate segment, which is DBS’ forte.

Danamon, which has 3,000 branch networks and 6 million customers, has been known in Indonesia for its PT Adira Dinamika Multi Finance (ADMF) auto financing subsidiary and Simpan Pinjam micro financing unit — both of which account for about two-thirds of Danamon’s loan portfolio.

“That part of strategy [micro financing] will not change. We want to grow those businesses — that’s important. What we can do, however, is grow our SMEs [small and medium enterprises] and corporate segments and to provide balance,” Gupta said.

With very tight competition in micro lending, Danamon will need to excel in corporate banking and that could be done by tapping into the DBS market, said Harry Su, head of research at Bahana Securities. The takeover will also benefit DBS because it needs inorganic growth through acquisitions to offset its less rapid organic growth, he added.

“So, the net-net is quite positive,” Harry told The Jakarta Post.

DBS booked a 15 percent increase in net profit to S$3.04 billion with lending rising by 28 percent to a record S$4.83 billion. Danamon, on the other hand, saw profits jumping 16 percent to Rp 3.33 trillion, while loans grew 23 percent to Rp 101.7 trillion.

Fitch Ratings immediately put Danamon on a ratings watch following the planned takeover to be upgraded to BBB investment grade from BB+ at present if the transaction is completed and if DBS shows “extraordinary support” for Danamon.

“Fitch [expects] that Danamon’s risk profile will improve on likely support from the new controlling shareholder,” the international ratings agency said in a statement.