DBS Group Holdings, Southeast Asia's biggest bank, has agreed to pay $7.24 billion for Indonesia's Bank Danamon, offering a 52 percent premium for a middle-ranking lender with high funding costs, raising questions on the price.

The takeover, Asia's fourth-largest financial services deal, would make Singapore-based DBS the fifth-biggest lender in Indonesia, one of the region's hottest markets where bank penetration is low and annual loan growth runs at 20 percent.

However, Danamon has lower returns on equity than some of its peers and a heavy exposure to auto financing, an area vulnerable to recently announced policymakers' steps to curb excessive lending in Southeast Asia's largest economy.

"We have the capacity to unshackle these businesses," chief executive Piyush Gupta said in Jakarta on Monday, briefing investors and media on his first major deal since taking over as boss of DBS in late 2009.

He said the DBS would use its balance sheet to cut Danamon's funding costs and unleash its potential - and also break DBS' perception as a low-margin, mature-market bank.

"What this deal does for us is changing DBS from being 11 percent in high-growth markets to 33 percent exposure to high-growth markets," Gupta added.

But the price - S$6.2 billion ($4.93 billion) in shares and the rest in cash - surprised some investors. DBS is also buying most of Danamon from Singapore state investor Temasek Holdings , also a major shareholder in DBS.

"They will have to show that their strategy is adding value to shareholders," said Roger Tan, head of SIAS Research, an arm of the Securities Investors Association of Singapore.

Though the offer, worth 7,000 rupiah ($0.77) per Danamon share, looked steep on a premium basis, it looked less generous using another valuation yardstick: at 2.6 times book value, the deal was below some other big banking takeovers in Indonesia.

"The price of the acquisition is quite surprising for us given Danamon now trades at 4,600 (rupiah)," said Jemmy Paul, head of equity fund, Sucorinvest Asset Management. But he added that it looked fair when viewed as multiples of both Danamon's book value and its earnings, estimating that DBS was paying about 18.4 times the Indonesian bank's profits.

DBS also signalled on Monday it wanted to expand as well in Malaysia, saying it had received approval to begin talks to buy an effective 14 percent stake in Alliance Financial Group  - again from Temasek.

The Alliance stake is worth about $270 million. Shares in the Malaysian bank jumped 3 percent on the news. - Reuters