DBS-Danamon Deal Falls Flat, But Banking Sector On Solid Footing
BMI View: Singaporean lender DBS suffered another setback to its aggressive expansion plans in Indonesia following the lapse of its share purchase agreement with Bank Danamon. The lapse was also a setback to banking sector relations between the Monetary Authority of Singapore (MAS) and Bank Indonesia (BI), who seemingly failed to come to terms over a banking reciprocity agreement that would have allowed DBS to seek a greater ownership stake in Danamon. In terms of Singapore's overall banking sector outlook, we note that while rising household debt levels do pose a non-negligible risk to the economy, affordability metrics as well as a solid medium term economic outlook suggest that a crisis is not in the cards.
Singaporean lender DBS suffered another setback to its aggressive expansion plans in Indonesia recently, having been forced to allow its share purchase agreement for Indonesia's Bank Danamon to lapse on August 1 st. Prior to the decision to allow the agreement to lapse, the deal had been placed in serious jeopardy following regulator Bank Indonesia (BI)'s announcement that it would not allow the Singaporean bank to assume a majority stake in Danamon, stymieing DBS's plans to assume a controlling interest over the lender's operations.
Rift Between MAS, BI?
Indeed, not only is the failure of the Danamon takeover a blow to DBS, but it also represents the inability of the country's regulators (BI and the Monetary Authority of Singapore [MAS]) to reach satisfactory terms regarding banking reciprocity. As we wrote recently, the DBS-Danamon deal has shed some light on how far the MAS is willing to go to support the expansion of Singaporean banks into other markets. While we had expected the MAS to potentially allow increased access for Indonesian banks into the Singaporean market (likely in the form of additional branch and services allotments), we nevertheless note that the central bank seems to have stopped short on this occasion in order to refrain from setting a more liberal overall precedent for foreign bank's operations in the city-state. With BI's refusal to indicate that DBS could assume a majority stake in Danamon before the expiration of the share purchase agreement, it appears that Indonesia's central bank did not expect the MAS's concessions to meet its demands.
That said, we continue to believe that the MAS will slowly but surely allow increasing access to the Singaporean market as the ASEAN economic community becomes more fully integrated. Despite the fact that we are skeptical on a number of fronts regarding the more aspirational goals of the ASEAN integration plan, we note that Singapore's big three lenders (DBS, UOB, and OCBC) are hamstrung by the limited growth potential in the city-state's highly developed banking sector. As such, the MAS will continue to evaluate opportunities in which Singaporean banks can gain a stronger foothold in the region's faster-growing and underbanked markets, and the three largest banks will likewise continue to seek to expand into promising markets like Indonesia. As it stands, DBS will be left to pursue organic growth in Indonesia for the time being, with the bank's CEO Piyush Gupta estimating that it will take up to five years to meet the growth that the Danamon deal would have provided.
Keeping Watch On Rising Debt Levels
As we wrote recently ( see 'Interest Rate Normalisation Poses Risk, But Economy On Sound Footing', August 15 2013), Singapore's household debt levels have soared on the back of a real estate boom, easy credit, and extremely low interest rates. Indeed, Singapore's household debt to income ratio is now approximately 150%, up from just 120% in 2008, reflecting substantially more leveraged household balance sheets. The majority of the increase in household credit is attributable to rising mortgage obligations, which comprises about 75% of total household debt.
While much has been made of the rapid run-up in debt, we maintain that both Singaporean households and banks are relatively well-positioned, even in the event of a global interest rate normalisation that would take monthly mortgage payments higher. Total household debt to GDP, perhaps a stronger indicator of sustainability than median income given the fact that mortgage debt is skewed towards higher income individuals, remains very manageable at 75% of GDP and, as we wrote earlier this year ( see 'SG/HK Property: Justifiably Expensive', February 2 2013), household debt service ratios (DSRs) are still in manageable territory, with the DSR for a 41 st-50 th decile family at approximately 25.6% assuming a home price of SGD450,000 (at the highest end of government HDB BTO housing). As such, even in the event that interest rates rise by 2.00%, DSRs should, on the whole, remain at affordable levels. Additionally, Singapore's employment outlook is bright, with strong job creation and extremely low unemployment of 2.1% unlikely to deteriorate substantively any time soon.