DBS proposed acquisition of Temasek’s 67.4% stake in Bank Danamon

Target price: S$11.50

Overall neutral on the deal. The acquisition of Bank Danamon would catapult DBS into Indonesia, with control over the country’s sixth-largest bank. Moreover, it would serve to diversify the geographical spread of the group’s earnings. For these reasons, we are positive over the longer term, but the deal, by our estimates, is neutral in the near term. We see little reason to revise our Sell call on the stock and our TP of SGD11.50 (2012 P/BV of 0.9x) is maintained.

Decent valuations. DBS’ proposed acquisition of Temasek’s 67.4% stake in Bank Danamon for 2.6x P/BV is decently priced, in our view. If its general offer is fully accepted, DBS will eventually hold a

99% stake in the bank which will have to pared down to 80% over 2 years. Of the entire acquisition cost of up to SGD9.1b, SGD6.2b is to be financed via the issue of new shares, and the balance via cash/debt.

Neutral on near-term fundamentals. We expect the deal to dilute 2013 EPS by a marginal 4%, It is generally neutral on DBS’ book value and slightly dilutive on DBS’ 2013 ROE, which should dip to 9.7% from 10.2%. RWCR is expected to decline to 14.8% to 15.8%. Management expects the acquisition to turn accretive from 2015 onwards.

Longer term synergies include DBS’ ability to enhance Bank Danamon’s funding structure, corporate banking position and treasury/money market operations. Present weaknesses that DBS would have to address, in our view, include Danamon’s weak deposit gathering franchise and high exposure to auto and micro financing.

Temasek will not be voting. A simple majority approval is required from other minorities at the EGM, and Bank Indonesia (BI) approval will be required - it is unclear whether BI’s plan for a foreign shareholding cap has been shelved indefinitely. Temasek will eventually hold a 40% stake in DBS but has been exempt from making a GO for the bank.

A 14% stake in Alliance Financial Group (AFG) too. DBS has proposed to acquire a 49% stake in Vertical Theme, which owns a 29% stake in AFG. This gives DBS an eventual foothold in Malaysia and we see the possibility of this stake eventually increasing to 29%. Impact to financials is nevertheless negligible at this stage, by our estimates.

DBS to acquire Bank Danamon for 2.6x P/BV. DBS will acquire all shares in Asia Financial (Indonesia) Pte Ltd (AFI) for IDR45.2t (SGD6.2b). AFI holds 6.46b shares in Bank Danamon, or a 67.37% stake. The acquisition values Bank Danamon at IDR7,000/share or a 52% premium to its closing share price of IDR4,600/share. The deal translates to a historical P/BV of 2.6x, which is decent, in our view.

A mandatory tender offer (MTO) for the remaining 31.6% stake. This will entail the acquisition of a further 31.63% stake for IDR21.2t (SGD2.9b). This takes the entire acquisition cost up to SGD9.1b for a 99% stake, which is the maximum that DBS can hold.

Will however have to pare down stake to 80% in 2 years. DBS will be required to pare down its stake to no more than 80% within 2 years after the acquisition, unless Bapepam grants a waiver or an extension. To note that this is a condition that is attached to Maybank’s 97% stake in Bank Internasional Indonesia (BII) as well. Todate, paring down the stake has been difficult, for a prerequisite is that any disposal of shares should not result in a loss to the acquirer. Maybank has thus far been granted extensions.

Funded internally and through new shares. The AFI portion of SGD6.2b will be funded through the issue of 439m new DBS shares at an issue price of SGD14.07/share. The MTO portion of the deal will be funded through a combination of internal cash resources and future senior debt issuances.

About Bank Danamon

Indonesia’s 6th largest bank in terms of asset size. The bank has over 3,000 branches and outlets in Indonesia and a customer base of about 6 million. The bank ranks number 2 in auto lending as well as microfinance.

Financials of Bank Danamon, as per our regional forecasts, are set out below, with the financial ratios calculated at a closing share price of Rp4,600. Bank Danamon presently trades at a prospective 2012 PER of 11.3x, with a dividend yield of 3.4%.

Combined entity will be the 5th largest bank in Indonesia. Currently, DBS has a 99% stake in PT Bank DBS Indonesia, which has 40 branches in 11 cities. In 2011, Singapore accounted for 62% of group earnings, while HK and Greater China made up 24%. South and Southeast Asia, meanwhile, contributed 10%. Bank DBS Indonesia made a net profit of just about S$53m in 2011 (2% of group earnings). The combined entity will be the 5th largest bank in Indonesia.

The impact to financials

Dilutive in short term, accretive in the future. Management expects the acquisition to be EPS and ROE accretive from 2015. Integration is expected to commence in 2013, with synergies fully realized by 2015.

Slight 4% dilution to 2013 earnings. By our computations, the deal will result in a slight 4% dilution to 2013 EPS.

Neutral on book value, slight dilution in ROE. The deal is generally neutral on DBS’ book value. The deal is slightly dilutive on DBS’ 2013 ROE, which we expect to dip to 9.7% from 10.2%.

Manageable impact on CAR. The acquisition is expected to result in a slight dip in Tier 1 CAR to 12.1% from 12.9% end-Dec 2011, while RWCR is expected to decline to 14.8% to 15.8%.

Temasek’s stake in DBS increases to 40.4%. With the issue of shares, Temasek’s shareholding in DBS increases from 29.5% to 40.4%. Temasek has obtained a waiver form SIC from making an MGO for the remaining shares.

Where the synergies are

Neutral in short term. Overall, we are Neutral on the acquisition in the short term, as we see little impact to DBS’ financials from the deal. Over the longer term, we see various synergies and these include:

a) The balancing of DBS’ geographical earnings, with increased contributions from high growth markets such as Indonesia. It also reduces the group’s overall earnings exposure risk to the two highly developed yet opened economies of Singapore and Hong Kong. On a proforma basis, contributions from high growth markets would increase from 11% of 2011 revenue to 30% with Bank Danamon.

b) The ability for DBS to bolster Danamon’s funding franchise and lower the latter’s funding cost, leveraging on DBS’s strong capital position and strong credit ratings..

c) Leverage on DBS’ corporate client capabilities and treasury markets operations – Bank Danamon is largely a retail bank currently.

Weaknesses at Bank Danamon. There are two primary weaknesses at Bank Danamon presently, in our view, which DBS will have to deal with over time. These include:

- Its low deposit-gathering capabilities. As competition in deposit raising has intensified in the midst of low benchmark rates and a cap that the Central Bank put on IDR time deposit rates, Danamon might find it hard to push its cost of funds down. Bank Danamon’s CASA ratio is lower at 41% versus its peers’ 60%, while its loan/deposit ratio is higher at 98% versus 79% for the industry.

- Its high exposure to auto/motorcycle financing through 95% - owned Adira Finance, which accounts for about 35% of group income. Recent caps of loan-to-value (LTV) ratios, particularly on auto/motorcycle financing could have an impact on Bank Danamon’s loan growth. Moreover, Adira’s shift towards a higher portion of car financing could negatively impact NIM as this type of loan generates lower yields compared to motorcycle financing.

Looking to acquire 14% stake in AFG

To acquire a 14% stake from Temasek. DBS has also received approval from BNM to commence negotiations with regard to the acquisition of a 49% stake in Vertical Theme, which is presently held by Duxton Investments Pte Ltd, a wholly-owned subsidiary of Fullerton Financial Holdings. Vertical Theme holds a 29% stake in Alliance Financial Group (AFG), Malaysia.

A 29% stake over the long run? A 14% stake on its own does not make much of a difference to DBS, but it at least gets the group a foot through the Malaysian door. Speculation has been that the other 51% stake in Vertical Theme, which is held by Langkah Bahagia is also up for sale. Assuming DBS acquires this stake as well, this would take the group’s shareholding in AFG up to 29%.

Little impact to financials. Assuming an eventual 29% stake in AFG and an acquisition P/BV multiple of 1.8x for AFG, a 29% stake would cost DBS about RM1.9b or about S$800m. Against a 2013 consensus net profit forecast of RM522m (SGD215m) for AFG, we expect little impact from this acquisition just yet.

Fair value S$15.40


ACQUIRING DANAMON
• Acquiring Danamon from Temasek
• Aims to be accretive by 2015
• Strategic for LT, but selling likely in ST



CIMB   Target S$15.10

The share-and-cash structure works too as it keeps EPS dilution and capital strain palatable. Post-briefing, we are convinced of longer-term synergies but note that there is slight ROE compression, short-term; this is not severe enough to make us change our Outperform rating or target price.