This article first appeared in The Edge Malaysia Weekly on December 23, 2019 - December 29, 2019

INDONESIA’s banking sector is seeing some M&A activity again after a lull.

Two weeks ago, a foreign bank — Bangkok Bank Plc — announced plans to buy an 89.1% stake in mid-sized lender PT Bank Permata for US$2.7 billion, in what will be the first major overseas acquisition for a Thai bank.

The deal is prominent as it involves the acquisition of one of the most sizeable stakes in a long time by a foreign bank.

This raises the question as to whether Malaysian banks may be keen to sniff out M&A options in Indonesia again.

Recall that over the last decade, several banks, including RHB Bank Bhd, Affin Bank Bhd and Bank Islam Malaysia Bhd, were intent on acquiring Indonesian banks. But they gave up along the way mainly because Indonesia, which had been a hotbed for M&A activity then, began imposing foreign shareholding limits on its banks. Malaysian banks were only keen on controlling stakes.

Indonesia remains a highly attractive banking market as its net interest margins, an indicator of profitability, are among the highest in the world at about 5%, while banking penetration is low. It has good potential, particularly for Islamic banks, given that it is the world’s most populous Muslim nation.

Analysts whom The Edge spoke to reckon that while Indonesia offers good prospects, Malaysian lenders do not seem to be prioritising bank M&A at the moment. This is due to, among other things, growing external headwinds — including trade and geopolitical tensions — that pose risks not just to economies but also banks.

There seems to be largely a wait-and-see attitude when it comes to bank M&A now, they say.

“If at all, I would think it might be RHB Bank that would be keen. It had been the most interested in the past. Affin and AMMB [Holdings Bhd] are too caught up in their own issues at the moment,” a local banking analyst says.

He points out that AMMB, which has a domestic focus, is about to embark on a legal battle with former premier Datuk Seri Najib Razak. On Dec 9, Najib filed a lawsut against AMMB and a former relationship manager over the management of his accounts in relation to funds diverted from controversial firm SRC International Sdn Bhd. The bank vowed to vigorously oppose the action.

As for Affin Bank, it is not seen to be in the best position to take on an M&A anytime soon as it needs to sort out some asset quality issues first. Bank Islam, meanwhile, is embarking on a restructuring exercise that will only be completed later next year.

So far, only two Malaysian banks have commercial banks in Indonesia. Malayan Banking Bhd acquired PT Bank Internasional Indonesia, now known as PT Bank Maybank Indonesia, in 2008, while CIMB Group Holdings bought into PT Bank CIMB Niaga.

According to analysts, it is hard to say if Malaysian banks would be better off pursuing a digital-only banking agenda in Indonesia instead of making expensive acquisitions of bricks-and-mortar banks.

“If you go the digital or virtual banking route, then it is likely that most of the Malaysian banks would be interested. But one can’t tell yet if they’d be better off as it really depends on what advantages a digital bank would have over a conventional bank. Would they have free rein to do everything that a conventional bank does?” an analysts asks.

Indonesia has one of the world’s largest young populations. Over half of its 260 million people is under the age of 40, a segment of tech-savvy users that would make it a good market for digital banks.

In July this year, AMMB group CEO Datuk Sulaiman Mohd Tahir told The Edge that AMMB was considering venturing into the regional markets via digital banking. He was particularly keen on Singapore and Indonesia because of the strong business volumes between Malaysia and the two countries.

In Indonesia, DBS Group launched its digital bank, digibank, in 2017, while PT Bank Tabungan Pensiunan Nasional launched digital bank Jenius in 2016.

There are currently 115 commercial banks in Indonesia, down slightly from 118 in 2015. Regulators consider this too many — the country has the most number of banks in the Asean region — and want the industry to consolidate further.

To speed things up, the banking regulator allowed foreign investors to have more than a 40% stake in local banks as long as the deal involved buying two lenders and merging them.

For example, in March 2017, Mitsubishi UFJ Financial Group (MUFG) completed its purchase of a majority stake in PT Bank Danamon Indonesia. MUFG later this year merged Bank Danamon with another lender that was already under its control, Bank Nusantara Parahyangan.

In August, Bloomberg reported that Indonesia plans to amend the single-presence policy.

Japanese and Korean banks have been the most keen suitors of Indonesian banks in recent times as they look for faster-growing markets than their own. It was reported that Japan’s Sumitomo Mitsui Financial Group and Singapore’s DBS and OCBC had been vying to buy Bank Permata.

Meanwhile, it remains to be seen if the Bank Permata deal, done at 1.77 times its book value, will go through as it is subject to certain conditions, including regulatory approvals in Indonesia and Thailand. The deal is expected to close by end-2020.

Bangkok Bank is buying the 12th largest Indonesian bank by assets from Standard Chartered Plc and local conglomerate PT Astra International, which each own 44.56%. Bank Permata operates about 330 branches across 62 cities. After the purchase, Bangkok Bank has to make a mandatory offer for the remaining stake that it does not own.

“Indonesia in particular is a key focus for us as it is one of the fastest-growing major economies in Asia with highly attractive macroeconomic fundamentals, favourable demographics and increasing Asean regional integration,” Bangkok Bank said in a statement.

CGS-CIMB Research says the purchase price seems high. “Although Bangkok Bank highlighted that the purchase … at 1.77 times price-to-book value is lower than preceding M&As among Indonesia banks, we note that these transactions were for larger banks with higher profitability, and during a period of strong economic outlook. In our view, Bangkok Bank’s transaction multiple … seems on the higher end,” it says in a Dec 12 report on the Thai bank.

In 2014, RHB Bank aborted a plan to buy a 40% stake in PT Bank Mestika Dharma after failing to secure approval from the Indonesian regulator for the deal. It had initially wanted to buy an 80% stake, but reduced the quantum after Indonesia introduced a cap on foreign shareholding in 2012.

The Affin banking group axed plans to buy a controlling stake in PT Bank Ina Perdana in 2011 on worries about the foreign shareholding limit.

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