DBS

DMG & PARTNERS RESEARCH on 19 July 2012

INDONESIA'S central bank will set the single ownership limit in local banks at a maximum of 40 per cent, but will approve higher levels of ownership if owners are listed banks with strong financial health, including Tier 1 capital above 6 per cent.

Bank Indonesia's shedding of more light is a positive step towards the completion of DBS' acquisition of Bank Danamon.

Our DBS TP of $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 April 2012, DBS announced its plan to buy over the 67.4 per cent 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 Indonesian rupiah 7,000 cash per share.

In our view, DBS is clearly within Bank Indonesia's definition of "strong financial health".

DBS' Tier 1 capital adequacy ratio of 12.7 per cent is double Bank Indonesia's requirement of 6 per cent.

Our financial model for DBS assumes a successful acquisition of Bank Danamon by Nov 1, 2012. With this assumption, we derived a DBS TP of $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' net interest margin.

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