Bank mergers not a solution for RI: Analysts<\/p>\n
HONG KONG (Reuters): Indonesia's policy of merging banks
\nrather than letting bad institutions fail is ill-advised,
\nanalysts in Hong Kong said yesterday.<\/p>\n
\"It is a joke, this matter of mergers,\" said Philippe
\nDalhaise, president of Thomson BankWatch Asia.<\/p>\n
\"Mergers can only work out correctly if a good name swallows a
\nsmall bad one. There are no good names in Indonesia any more.\"<\/p>\n
The Indonesian government ruled out further liquidations after
\n16 banks were wound down in November, part of a US$43 billion
\nbailout sponsored by the International Monetary Fund in response
\nto the country's economic woes.<\/p>\n
Over the weekend, Bank Umum Nasional and Bank Duta said they
\nwould merge with two other banks. About 50 banks were expected to
\nmerge into 12 institutions by June, the country's private banks
\nassociation has said.<\/p>\n
Indonesia has more than 200 private banks and the government
\nhas encouraged them to merge to consolidate the industry.<\/p>\n
But Dalhaise said a review last week of Indonesia's private
\nbanks confirmed only seven names as potential survivors from the
\ncurrent debt crisis -- Bank Bali, Bank Panin, Bank Rama, Bank
\nBumi Arta, Bank Buana Indonesia, Bank NISP and Bank Umum
\nNasional.<\/p>\n
Clearing the banks of bad assets was considered a precursor to
\nreturning stability to the crashing rupiah, now trading at
\n13,000-14,000 to the U.S. dollar after hitting 17,000 last week.<\/p>\n
Indonesia's foreign debt burden of US$140 billion has fueled
\nthe rupiah's plunge.<\/p>\n
As long as the rupiah slides, banks' ratios of non-performing
\nloans will worsen, with foreign debt service costs soaring to
\nlevels that will destroy their capital bases.<\/p>\n
Dalhaise said mergers would fail to assist either the banks'
\ncapital or efficiency. Merging banks always involved high up-
\nfront costs that required time to yield efficiency gains, he
\nsaid.<\/p>\n
\"There is not the time to do this,\" Dalhaise said. \"We suspect
\nthat quite a number of mergers being announced and consummated
\nare rescues, in fact.\"<\/p>\n
Indonesia should allow its bad banks to fail while protecting
\nsmall depositors, Dalhaise said. And instead of mergers, banks in
\nIndonesia and Thailand should allow foreigners to enter and
\nrecapitalize strong names in return for majority stakes.<\/p>\n
\"There are a number of foreign institutions ... that have a
\ndesire to buy non-performing loans and assets in both the Thai
\nand Indonesian financial sectors at fire sale prices as low as 20
\ncents on the dollar,\" said Andrew Brown, head of banking research
\nat Deutsche Morgan Grenfell.<\/p>\n
\"The governments in each of these countries have been very
\nresistant to accept what they deem as low offers,\" Brown said.<\/p>\n
Four ways<\/p>\n
There were basically four ways to sort out the banking sector
\nand its associated bad debt in both these countries, he said.<\/p>\n
The first, issuing equity, was impossible under current
\nconditions. Prevailing share prices would raise the cost of
\ncapital to prohibitive levels.<\/p>\n
The second, a debt issuance, was also extremely expensive,
\nfollowing debt rating downgrades to junk status that implied very
\nlarge risk premiums.<\/p>\n
The third option was for the troubled institution to package
\nthe bad debt and sell it at a discount to book value, but the
\naccounting adjustment would destroy the banks' capital bases,
\nwhich are made up of loans.<\/p>\n
This left only one option, Brown said: Allow foreign
\ninstitutions to come in, package the bad debt, inject capital and
\nexpertise and in return, receive a majority stake.<\/p>\n
\"We will continue to see international banks seeking
\ncontrolling interests in some of these institutions,\" said Brown.
\n\"The desire is there, and the ability is there.\"<\/p>\n
Hongkong and Shanghai Banking Corp, Standard & Chartered,
\nDevelopment Bank of Singapore and Citicorp were all actively
\nseeking access to the banking sector in Indonesia and Thailand,
\nthe analysts said.<\/p>\n
In many cases, the currency depreciations were so profound
\nthat foreign banks could recapitalize these banks from cash flow
\nand avoid issuing the bonds that typically accompany bank
\nbailouts and recapitalizations, they said.<\/p>\n
Although some said foreign interest was intense, Michael Fung,
\nbank analyst at Bear Stearns, said it had waned because of
\nIndonesia's policy of bank mergers.<\/p>\n
\"Instead of having 200 bad banks, they'll have 50 bad banks,\"
\nhe said.<\/p>\n
Indonesia's inadequate bankruptcy code and refusal to allow
\nforeigners to own land made foreign bank takeovers virtually
\nimpossible, Fung said. Many private banks also had links to
\npowerful families that refused to give up control.<\/p>\n
\"Any institutional investors asking simple questions about
\nproposals for repackaging of bank debt or corporate debt, before
\ntoo long, they'll push away from the table. They cannot do it.\"<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/bank-mergers-not-a-solution-for-ri-analysts-1447893297",
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