Indonesia will find it difficult to block DBS Group's $7.2 billion bid to take over Bank Danamon based on current rules, and any rejection could dent investor sentiment, the Singapore lender's chief said on April 11.
DBS Chief Executive Piyush Gupta said he was "fairly confident" of approval in six months of what would be the biggest take-over of an Indonesian firm, despite rumblings of nationalism from some local bankers and politicians looking towards elections in 2014.
"A transaction of this nature falling through - despite being legally valid and within regulations - could be a huge impediment for future sentiment and future (investment) flows," Gupta told Reuters in an interview.
Clouding the waters, Indonesia's central bank said an accord with Singapore on reciprocal bank access would be a factor in approving the DBS/Danamon deal - a step its deputy governor said would take a "long time".
Gupta, speaking shortly before that announcement, said there was a "positive predisposition towards this transaction" among Indonesian authorities, but he acknowledged reciprocity was one of several headwinds and an issue beyond his control.
DBS, Southeast Asia's largest bank, plans to buy the 67.4 percent stake in Danamon held by Singapore state investor Temasek Holdings and has offered a 52 percent premium to minority shareholders.
Gupta, an Indian with Singapore citizenship, is credited with improving customer service, expanding private and premium banking, increasing market share in loans and getting a foothold in yuan-denominated offshore bond issues and deposits since he joined DBS from Citigroup in late 2009.
But he faces his biggest test yet in Indonesia, where regulations can shift and politics can come into play.
Some backlash was to be expected, Gupta said. But after meeting more than 100 prominent Indonesians in recent weeks, he said he felt people were seeing the benefits of the deal.
"I didn't miscalculate at all," he said, emphasising his own experience in Indonesia and that of members of his management team. "We went into it with eyes open."
Gupta said DBS, itself part-owned by Temasek, felt the need to offer what it did because of interest in Indonesia's sixth-largest bank from Japanese and Chinese rivals he did not name.
"Temasek is not cashing out. It is swapping its Indonesia exposure from direct to indirect exposure," Gupta, 52, said at DBS headquarters in Singapore's business district, against a backdrop of dark wooden walls and oriental artwork.
"The market doesn't think it is a sweetheart deal for us. Otherwise our stock won't be 5 percent down. When my stock is down 5 percent, Temasek is down a billion dollars."
Gupta's pay of more than S$8 million ($6.4 million) last year, when DBS had record net profit of more than S$3 billion, made him the best-rewarded bank boss in Singapore.
But DBS shares have risen just 1.6 percent since he took over in late 2009, underperforming local rivals Oversea-Chinese Banking Corp and United Overseas Bank Ltd as well as the benchmark index's gains of 12 percent.
Analysts see the Indonesian deal as positive for DBS in the longer term with the expansion into Southeast Asia's largest economy, but they expect changes in Danamon's focus and say it might take some time to pay off for both banks.
Gupta said the deal will slow down DBS's plan to achieve 12 percent return on equity at the group level.
"It is 4-5 percent dilutive in year one, it is a couple of percent dilutive in the second year and then accretive in the third year," he said.
DBS faces costs and challenges in integrating Danamon's 3,000 branches and outlets, but Gupta said he did not envision any cuts to its workforce of nearly 70,000 people.
"It's a growth acquisition," said Gupta, who has spent a large part of his career in India and Southeast Asia in consumer and corporate banking. "We just take them and add them on."
The Singapore bank also will not touch the names of Danamon units that handle microfinancing at 1,500 outlets and consumer finance at another 1,000.
"I'm not wedded to a branding approach," he said. "For us to be successful in the scale we want to be, we must be seen to be a local player, we must be Indonesian-ised."
Hanging over the regional aspirations of DBS is the spectre of its foray into Hong Kong a decade ago. It overpaid for Dao Heng Bank to begin with and then went through a lengthy and costly integration that included two writedowns.
Earlier DBS said it plans to inject 2.3 billion yuan ($364 million) into its fast-growing China unit, investing in network expansion, staff hires and upgrading infrastructure and technology platforms. The wholly-owned China subsidiary was set up five years ago.
Gupta, noting DBS is a different bank than it was 10 years ago, said he began feeling confident in the third quarter of last year that it was time to do a deal. About six weeks ago, he said, DBS went to Temasek with the idea of the Danamon take-over.
Indonesia holds "immense" promise for DBS, he said, because of its large, growing economy and rapidly rising middle class. "It is one of the least penetrated banking markets in the world," Gupta said. "This can be a really significant game-changing opportunity for DBS.