A  positive  step  towards  DBS'  acquisition  of  Danamon. Indonesia's  central bank will set the single ownership limit in  local banks at a maximum of 40%, but will  approve  higher  levels  of  ownership  if  owners  are  listed  banks  with  strong financial health, including Tier 1 capital above 6%. Bank Indonesia's shedding of more  light  is  a  positive  step  towards  the  completion  of  DBS  acquisition  of  Bank Danamon.    Our  DBS  TP  of  S$14.60  assumes  the  successful  purchase  of  Bank Danamon by DBS.  Whilst there is huge potential for long term growth, we see no catalyst  driving  DBS  share  price  in  the  short  term,  and  therefore  maintain NEUTRAL.

Recall  that  in  early  Apr  2012,  DBS  announced  its  plan  to  buy  over  the  67.4% stake  in  Bank  Danamon  that  Temasek  owns,  with  payment  in  the  form  of  new DBS  shares.  DBS  also  made  a  mandatory  tender  offer  for  the  remaining Danamon shares at IDR7,000 cash per share.

DBS'  Tier  1  CAR  of  12.7%  is  double  BI's  requirement.  In  our  view,  DBS  is clearly within Bank Indonesia's definition of 'strong financial health'.  DBS' Tier 1 CAR of 12.7% is double BI's requirement of 6%. 

Our financial model for DBS assumes a successful acquisition of Bank Danamon by 1 Nov 2012. With this assumption, we derived a DBS TP of S$14.60, pegged to 1.15x 2012 book. This is a discount to the historical average of 1.32x P/B given the global  economic uncertainties and the negative impact of the soft SIBOR on DBS' NIM.

However,  if  the  acquisition  cannot  proceed  (which  is  an  unlikely  event),  our  TP will  be  a  lower  S$14.30,  which  is  pegged  to  1.15x  of  a  lower  2012  book  (DBS' book will rise with the acquisition as goodwill increases).   

Source: OSK