(Aug 15): “Do you have Jakarta’s blessing?” That’s the first question Oversea-Chinese Banking Corp CEO Samuel Tsien will be asked by investors about his plan to buy Indonesia’s PT Bank Permata.
OCBC is weighing a bid for Standard Chartered’s Indonesian bank, Bloomberg News has reported, citing people with knowledge of the matter. Deliberations are still at an early stage and may not result in a deal. And even if they do, there’s the government to consider.
OCBC is one of Singapore’s three homegrown banks and Indonesia has been touchy in the past about ceding control of its lenders to the neighboring city-state. Just ask DBS Group Holdings. The larger rival to OCBC had to walk away from a US$6.5 billion ($9 billion) acquisition of PT Bank Danamon Indonesia in 2013 after Jakarta kicked up a fuss about lack of reciprocity for Indonesian banks getting licensed in Singapore. The central bank curbed the DBS plan for full ownership to a minority stake.
Will Jakarta be more comfortable six years later? The afterglow of the China commodity boom still-prevalent back then is long gone, and Susilo Bambang Yudhoyono’s sclerotic late presidency has been replaced by a possibly re-energised Joko Widodo beginning his second term. Tsien’s overture for 90% of Permata will show how much has really changed.
Like Danamon, Permata is a mid-tier Indonesian bank. Standard Chartered has a near 45% stake, though most of the value in the franchise comes from equal partner PT Astra International. Southeast Asia’s largest independent automotive group controls half of Indonesia’s car market thanks to partnerships with Toyota Motor Corp and Daihatsu Motor Co. No wonder auto financing is Permata’s core competence.
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The bank’s 4.2% return on tangible common equity last year may be unappetising for StanChart CEO Bill Winters, who has promised to deliver 10% to his own investors by 2021, a goal the UK-based specialist lender to emerging markets hasn’t hit in several years. StanChart, which has a separate wholly owned operation in Indonesia, said in February that it no longer considers Permata to be a core investment.
But things may look very different from Tsien’s perspective. OCBC faces the prospect of a trade war-induced slowdown in its home market. Singapore recently slashed its GDP growth estimate for 2019 to between zero and 1%. The bleak outlook is a “bad omen for bank lending,” according to Bloomberg Intelligence.
Mind you, Indonesia won’t be a perfect sanctuary: the rupiah could wobble as global risk aversion takes hold and capital rushes into dollar assets. Still, Bank Indonesia has done a good job of anchoring inflation expectations. Aided by higher fiscal spending, domestic demand should hold up even as the global economy sputters.
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It was poor luck for the news to break on the day the US yield curve inverted, signaling a high possibility of an imminent recession. Sure enough, the fall in OCBC’s share price Thursday seems to suggest that the bank’s dividend-loving investors would rather that Tsien returned more cash than go on a shopping spree in these uncertain times.
They should at least be grateful that OCBC is not doubling down on its 20% ownership of China’s Bank of Ningbo Co. Besides, strategic considerations may be more important than tactical ones. Mitsubishi UFJ Financial Group now owns 94% of Danamon.
That highlights a problem for the Singaporeans: Their Japanese rivals are looking to offer multinational clients access to the local-currency balance sheets of their Southeast Asian affiliates, in addition to cheap yen financing arranged by headquarters in Tokyo. Both OCBC and DBS want a share of this corporate banking pie.
OCBC already has a presence in Indonesia, where it owns 85% of Bank OCBC NISP. Given Indonesia’s juicy net interest margins, owning another lender there can’t hurt, provided two conditions are met. One, Astra’s departure from Permata shouldn’t mean the end of car-financing. Two, Indonesia shouldn’t make this a repeat of the 2013 nationalistic drama.
A distracting, long-drawn transaction that eventually gets scuttled would be the worst possible outcome for OCBC shareholders. They’ll be watching for Jakarta’s answer.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. All the views expressed are the author's own
