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Indonesian bank solves MUFG's Southeast Asian puzzle

Japanese megalender sees region's most populous country as strategic hub

This Bank Danamon branch in Jakarta serves as one of 1,859 locations in Indonesia.   © Reuters

TOKYO -- Mitsubishi UFJ Financial Group's sequential takeover of Bank Danamon, Indonesia's fifth-largest commercial bank, illustrates how the Japanese multinational plans to transform its Southeast Asian outposts into a regional empire.

MUFG embarked on previous purchases in Thailand, the Philippines and Vietnam, but President Nobuyuki Hirano publicly identified Indonesia as the next investment target. The country's 260 million people make it the most populous in Southeast Asia, and the economic growth rate remains steadily high around 5%.

It took five years of negotiations with Indonesian banks and financial authorities for MUFG to reach this point. "We're laying down the final piece," a senior executive told reporters in a teleconference late Tuesday.

The rule of three

Bank Danamon, formed in 1956, oversees a network of 1,859 domestic locations. The Jakarta-based bank is strong in auto loans and corporate financing. After deciding to pursue a buyout Nov. 8 and performing due diligence, MUFG signed a final deal Tuesday.

The agreement initially was expected to possibly take place next year, but "the pace has been going exceedingly smoothly," a senior MUFG executive said.

The financial group will acquire Bank Danamon in three stages, starting with the purchase of a 19.9% equity stake by Sunday from an investment company controlled by Temasek Holdings, a Singaporean government wealth fund.

By around mid-2018, MUFG will lift its ownership to 40%, the maximum Indonesia generally allows for a single foreign investor in a domestic bank. The financial group will ask regulators to grant an exception, opening the door to a share above 73.8% and thereby making it a consolidated subsidiary. The final price tag could climb to around 700 billion yen ($6.17 billion), the largest foreign acquisition by a Japanese bank.

Wedded to the strategy

MUFG's Southeast Asian strategy fixates on obtaining majority ownership in targets and turning them into consolidated units. In that vein, the group sold off its entire stake of about 5% in Malaysian financial group CIMB for 68 billion yen in September.

That sale may seem counterintuitive, but the Japanese group would rather "join hands with those we can marry than continue relationships with those we cannot marry," a senior executive said.

MUFG's predecessor, Bank of Tokyo, established a permanent office in Jakarta in 1957 and transformed that location into a full branch in 1968. The branch in Indonesia's capital mainly provides financing to Japanese companies operating there.

But capturing the fruits of economic growth hinges on lending to smaller companies and middle-class individuals.

"Our two options were to build a company from scratch or buy a local bank," a senior executive said. The group chose option B, joining hands with Bank Danamon with the intent of marriage.

Rising from the ashes

MUFG also christened the Bank Danamon buyout with the project name "Renaissance." The financial group positioned Indonesia as the base for its Southeast Asia strategy, and had moved toward purchasing the bank a few years ago. But MUFG relented on that effort when certain conditions were not met.

Singapore's DBS Group Holdings tried to acquire Bank Danamon in 2012, but ended up scrapping its plans as well. MUFG managed to resurrect the buyout by smoothing the grounds with regulators and other parties.

The Japanese group already earns over 40% of its profits overseas. The Indonesian lender will provide a springboard for boosting that metric above 50%.

The banking group has been in discussions with Indonesian financial regulators "for a long, long time," Takayoshi Futae, Asia & Oceania CEO for MUFG unit Bank of Tokyo-Mitsubishi UFJ, told reporters in Indonesia. "I am cautiously optimistic about our approval beyond the 40% investment."

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