UPDATE 2-DBS less keen on M&A after Indonesia bank deal failure
* CEO says difficult to buy banks in Asia
* Deal failure to deter foreign interest in Indonesian banks
* Rabobank also pulls sale of Indonesia unit -sources
* DBS Q2 beats market expectations, shares hit 2-month high
(Adds CEO comments on Indonesia, analyst comments)
SINGAPORE, Aug 1 (Reuters) - Singapore's DBS Group Holdings said it has little appetite for acquisitions after a $7.2 billion bid for PT Bank Danamon Indonesia Tbk stumbled, adding that it would instead redouble efforts to expand its existing Indonesian operations.
The Danamon deal was seen as part of Chief Executive Piyush Gupta's push to diversify DBS's earnings base away from Singapore and Hong Kong, which contributed about 88 percent of net profit in the first half of the year.
The collapse of Southeast Asia's biggest banking takeover after Indonesia in May limited single ownership in domestic banks to 40 percent from 99 percent was quickly followed by news of another failed Indonesian banking deal.
Dutch lender Rabobank has pulled the sale of its Indonesian unit as prospective buyers were not able to gain control, people familiar with the matter told Reuters.
But while some investors have been deterred, experts say the Southeast Asian nation's growth prospects will still attract others willing to settle for less control.
DBS was, however, not one of those investors and Gupta stressed that the collapse did not mean the bank was eager to divert its resources to other deals.
"I really have no compulsion to do any acquisition," Gupta told a news conference on quarterly earnings. "All over Asia, it is very difficult for you to do a deal."
"Danamon was an opportunity to accelerate that growth. These opportunities can come and go, but the fundamentals of our strategy actually don't change that much."
DBS waited 16 months since making its offer before walking away on Wednesday. It had invested S$10 million dollars ($7.9 million) in the deal to buy a controlling stake in Indonesia's sixth-largest bank from Singaporean state investor Temasek Holdings Pte Ltd. Temasek owns about 67 percent stake in Danamon and a 29 percent stake in DBS.
For DBS, buying just a 40 percent stake in Danamon would also have resulted in a less-optimal use of capital, Fitch Ratings agency said. Under the Basel III capital rules, banks buying stakes below 50 percent have to make a relatively higher capital deduction than if they buy a majority interest.
Melissa Ng, a partner at law firm Clifford Chance who specialises in Southeast Asia M&A deals, said while some investors were obviously put off by the failure of the Danamon deal, others were willing to take 40 percent stakes just to get their foot in Indonesia's door.
"Our clients are still seeing the potential - we have all heard the numbers in terms of the huge population and potential for growth - and the returns some investors are seeing cannot be ignored," she said.
Gupta said it would take DBS, which has 39 branches in Indonesia, around five years of organic growth for its Indonesian earnings to reach the level that Danamon would have provided. Southeast Asia, excluding Singapore, and South Asia accounted for 6.6 percent of its net profit.
DBS, Southeast Asia's biggest lender, posted a 10 percent rise in quarterly profit from a year earlier to S$887 million ($696 million), boosted by strong growth in loans and higher fees, beating expectations and sending its share up 2.7 percent to a two-month high.
Gupta, an ex-Citibanker who took the helm in late 2009, has turned the bank from a laggard to an outperformer, helped by double-digit loan growth and strong fee income from capital markets and wealth management.
But DBS's earnings momentum is under threat from China's economic slowdown and the spillover effect on Hong Kong, its second-biggest market, as well as from recent Singapore government measures to tighten property-related financing.
Gupta said, however, that said so far his bank is not seeing any stress in its trade finance portfolio while growth in Hong Kong remains strong.
The bank is much more exposed to China compared to its domestic rivals, Oversea-Chinese Banking Corp and United Overseas Bank.
The Singapore property sector has also started to present risks, with Moody's Investors Service this month changing the outlook for Singapore's banking system to negative from stable.
Fresh steps to cool the market include the introduction of rules to ensure a buyer's monthly payments do not exceed 60 percent of income, a move designed to ensure investors are not caught out by a rise in interest rates.
(Additional reporting by Kevin Lim in Singapore, Umesh Desai and Denny Thomas in Hong Kong; Editing by Edwina Gibbs)