Banking sector moves into recovery phase<\/p>\n
By Reiner S.<\/p>\n
JAKARTA (JP): After two devastating years of crisis marked by
\nbank runs and huge losses of capital, there are signs the
\nIndonesian banking sector is moving into a recovery phase
\nproviding investors with substantial opportunities.<\/p>\n
Experts point to the determination of the new, democratically
\nelected government to press ahead with its bank restructuring and
\nrecapitalization program, combined with favorable macroeconomic
\nconditions.<\/p>\n
\"There are signs that we're now entering the recovery phase,\"
\nsaid senior banker I Nyoman Moena.<\/p>\n
A banking analyst at PT Vickers Ballas Tamara Securities,
\nFerry Y. Hartoyo, concurred. \"The lower interest rate environment
\nhas allowed an acceleration in the bank recapitalization
\nprogram.\"<\/p>\n
The lower interest rate also means greater opportunities for
\nbanks to recover nonperforming loans and strengthen their profit
\noutlook, he added.<\/p>\n
\"We can expect almost all banks to start recording positive
\nspreads by the start of next year.\"<\/p>\n
A bank records a positive spread if its interest rate revenue
\nis greater than the interest rate charged for deposits.<\/p>\n
Bank Indonesia deputy governor Subarjo Joyosumarto said the
\nnonperforming loans of the banking sector dropped to 39 percent
\nin November from 60 percent in December last year.<\/p>\n
The government aims to reduce the nonperforming loan level to
\nbelow 5 percent by 2001.<\/p>\n
Restructuring<\/p>\n
The government has done much of the bank restructuring work.
\nOf the 160 private banks in existence before the 1997 crisis
\nstruck, the government has closed 66 institutions, recapitalized
\nseven major private banks and nationalized 13, of which four also
\nwere recapitalized.<\/p>\n
The remaining 74, popularly termed \"category A\" banks which
\nwere relatively unscathed in the crisis, were exempted from the
\ngovernment-sponsored recapitalization program. The banks
\nachieved a capital adequacy ratio (CAR) better than the minimum
\nrequirement of 4 percent.<\/p>\n
The recapitalization of the private banks and nationalized
\nbanks this year was aimed at lifting their CAR to the 4 percent
\nlevel; the government expects the CAR to double to 8 percent by
\n2001.<\/p>\n
Recapitalization of the seven private banks was jointly
\nconducted by the government and the bank owners, with the latter
\ncovering around 20 percent of the total cost by injecting cash,
\nwhile the former provided up to 80 percent financing by issuing
\nbonds.<\/p>\n
The government fully covered the recapitalization of the
\nnationalized banks through a bond issuance.<\/p>\n
It also partly recapitalized giant state Bank Mandiri, which
\nwas the merger of the four ailing state banks of Bank Expor Impor
\n(Bank Exim), Bank Bumi Daya, Bank Pembangunan Indonesia (Bapindo)
\nand Bank Dagang Negara (BDN). The country previously had seven
\nstate banks.<\/p>\n
The banking authority plans to complete the recapitalization
\nof Bank Mandiri by the end of this year, and expects to be able
\nto float the bank on the stock market next year.<\/p>\n
The government is also determined to complete the
\nrecapitalization of the other three state banks, including
\npublicly listed Bank Negara Indonesia, in the first semester of
\nnext year.<\/p>\n
As part of the recapitalization program, the banks' huge
\nnonperforming loans were cleared from their balance sheets by
\ntransferring them to the Indonesian Bank Restructuring Agency
\n(IBRA).<\/p>\n
In sweeping moves to right the ailing sector, the central bank
\nalso imposed stringent, more prudent banking measures, addressed
\nthe problem of unprofessional managers and kicked out bad bank
\nowners.<\/p>\n
\"The huge financial crisis is a blessing in disguise for
\nIndonesian banks as the regulator was finally forced to adopt
\nstronger regulatory measures and improve the level of integrity
\nand conduct of management and commissioners,\" said a Jakarta-
\nbased European banker, noting the government was allowing
\nforeigners a role in the administration of local banks.<\/p>\n
Opportunities<\/p>\n
After it has picked up the pieces, what does the Indonesian
\nbanking sector have to offer?<\/p>\n
To some, the most attractive opportunities may come from the
\nnationalized Bank Central Asia (BCA), which has been
\nrecapitalized by the government.<\/p>\n
The government initially planed to sell a 30 percent stake in
\nBCA in February through an initial public offering to raise
\naround Rp 3 trillion (US$428.57 million). However, a source said
\nthat the government changed its mind and decided to sell a
\nmajority stake to obtain a premium price.<\/p>\n
BCA is one of the country's largest banks with an extensive
\nbranch network and considerable deposits. It became more
\nattractive after the removal of the influence of the founding
\nshareholders in the bank's management.<\/p>\n
In the past, the bank's owners wielded extensive influence in
\nthe management, including through reportedly forcing it to
\nchannel much of the bank's money to affiliated business groups.<\/p>\n
\"The bank has the strongest liability products,\" said one
\nanalyst.<\/p>\n
Analysts also said that publicly listed Bank Danamon showed
\nsimilar features. The nationalized bank may become greater in
\nsize because the government plans to merge it with eight other
\ninstitutions.<\/p>\n
Also with potential investment appeal are Bank Bali and Bank
\nNiaga.<\/p>\n
IBRA is in talks with two foreign strategic investors to help
\nfinance the recapitalization of Bank Niaga.<\/p>\n
Bank Bali is also set to launch a rights issue in January to
\nfacilitate its recapitalization program.<\/p>\n
The government will act as the standby purchaser of rights
\nshares which are not exercised by existing public shareholders.<\/p>\n
Standard Chartered Bank (SCB) was initially slated to buy a 20
\npercent stake in Bank Bali from the government, but the plan was
\nterminated after mass protests from Bank Bali's employees.<\/p>\n
IBRA deputy chairman Arwin Rasyid said that despite the
\npullout, SCB may still enter Bank Bali by purchasing the rights
\nissue because the UK bank spent a great deal of time and effort
\nto audit Bank Bali and negotiate with the government.<\/p>\n
The withdrawal of SCB raised concerns that foreign investors
\nmight be reluctant to participate in the country's bank
\nrecapitalization program.<\/p>\n
Analysts also consider the seven recapitalized private banks
\noffer attractive opportunities because their profitability
\noutlook has been strengthened. Banks in this category include
\nBank Lippo, Bank Internasional Indonesia, Bank Universal, Bank
\nArta Media, Bank Prima Express, Bank Bukopin and Bank Patriot.<\/p>\n
Only the first three are publicly listed banks. Analysts note
\nthat because the government has forced the owners to inject fresh
\ncapital, there is an incentive for the banks' management to work
\nhard, particularly to recover problem loans which could be used
\nto redeem government ownership.<\/p>\n
Although the government owns up to an 80 percent stake in the
\nbanks, the government is not involved in the day-to-day
\nmanagement of the banks.<\/p>\n
\"This means that the recapitalized banks are more efficient
\nthan nationalized or state banks,\" one analyst said.<\/p>\n
\"And the faster a bank can reduce the government's effective
\ncontrol over it, the better.\"<\/p>\n
Until 2001, shareholders which participate in the
\nrecapitalization of the banks are entitled to repurchase stock
\nowned by the government.<\/p>\n
After 2001, the government can sell its remaining equity stock
\nto the public after offering them to the banks' shareholders.<\/p>\n
Moena is particularly sanguine about the prospects offered by
\nthe A category banks.<\/p>\n
\"One of the positive factors is that most of these banks have
\nbeen able to survive the crisis,\" he said.<\/p>\n
\"Banks in category A are in a very good position to get
\nadditional market share as their capital level is much higher
\nthan other banks.\"<\/p>\n
Ferry championed publicly listed Bank Panin, which is one of
\nthe A banks, as his top pick among Indonesian banks.<\/p>\n
He said Bank Panin weathered the crisis and achieved the
\nhighest CAR level in the industry.<\/p>\n
The bank's strategic partnership with New Zealand's ANZ Bank
\nbodes well for its efforts to penetrate a greater market share,
\nhe added.<\/p>\n
Ferry explained that Bank Panin did not have to suffer the
\n\"equity dilution effect\" experienced by the other listed banks
\nparticipating in the recapitalization program due to the high
\nrecapitalization cost.<\/p>\n
He said the cost forced recapitalized banks to launch large
\nrights issues, causing dilution in their earnings per share and
\nbook value.<\/p>\n
\"The recapitalization cost is simply too large.\"<\/p>\n
Other analysts believed the management of the A category banks
\nwas not necessarily better than the recapitalized or nationalized
\ngroups of banks.<\/p>\n
\"Many of the A category banks are nonforeign exchange banks,
\nwhile those with foreign exchange status are too conservative,\"
\none said.<\/p>\n
He added that the balance sheets of the A category banks were
\nno better than the recapitalized banks because the nonperforming
\nloans of the A banks were not transferred to IBRA.<\/p>\n
Ferry discounted this as a problem because the A banks were
\nallocated a full provision for nonperforming loans.<\/p>\n
He noted that one of the discouraging factors for investors to
\ninvest in the recapitalized banks was the relatively huge
\nrecapitalization cost.<\/p>\n
\"The price of Indonesian (listed) banks is now much higher
\ncompared to their peers in the region.\"<\/p>\n
State banks are the least attractive because their
\nrestructuring still has a long way to go.<\/p>\n
\"There's a big question on how to deal with the state banks'
\nhuge nonperforming loans owed by well-connected businesspeople,\"
\nFerry said.<\/p>\n
Analysts have advised investors to take a close look at banks'
\noperating margins.<\/p>\n
Liquidity<\/p>\n
Liquidity in the banking industry is currently excessive,
\nindicated by the low loan to deposit ratio (LDR). However, banks
\nremain cautious in channeling their money to the still troubled
\nreal sector.<\/p>\n
Banks are currently putting their money in Bank Indonesia's
\npromissory notes and other money market instruments which only
\nprovide slim margins.<\/p>\n
Analysts said that banks which could funnel their lending
\nactivity into the retail or consumer sectors would emerge the
\nwinners.<\/p>\n
\"The recapitalization program did address the solvency issues.
\nBut banks will not lend their money unless they see improvement
\nin the business sector outlook,\" an analyst warned.<\/p>\n
Investors also can size up the bank recapitalization bonds to
\nbe tradable in the secondary market starting in February.<\/p>\n
The government has issued over Rp 200 trillion worth of
\ntreasury bonds, including Rp 103 trillion for the initial
\nrecapitalization of Bank Mandiri and the remainder for the
\nrecapitalization of the seven private banks, nationalized banks
\nand several provincial development banks.<\/p>\n
The government is expected to issue another Rp 70 trillion
\nworth of bonds at the end of this month to complete the
\nrecapitalization of Bank Mandiri.<\/p>\n
The total amount of bank recapitalization bonds is estimated
\nto reach Rp 390 trillion by next year.<\/p>\n
Subarjo Joyosumarto said the banks would be allowed to sell up
\nto 10 percent of the bonds to the secondary market in February to
\nprovide the banks with cash for credit expansion.<\/p>\n
The bonds are expected to be offered at a coupon rate of
\nbetween 12 percent to 14 percent.<\/p>",
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