Acquisition saves BII, analysts say

JAKARTA (JP): The government has no other option than to let state-owned Bank Mandiri acquire publicly listed PT Bank Internasional Indonesia (BII) to prevent the bank from collapsing, analysts said on Tuesday.

Senior banking analyst I Nyoman Moena said the government had made the right decision in acquiring BII, as no other options were left to save the bank.

"This (acquisition) wasn't fully based on commercial considerations," he told The Jakarta Post, adding that Bank Mandiri would most likely have preferred to make its own selection.

Yet the government could not allow a bank the size of BII to fold as the repercussions would be enormous, he explained.

"The impact of liquidating a bank the size of BII would be devastating," he said.

As is common among banks, BII is entangled in a web of loans and debts in what is called the interbank market.

A default on these interbank claims would have a domino-effect on other claims, sending shockwaves throughout the banking industry.

This could trigger a bank rush and drain the liquidity of affected banks. Ultimately, however, it is the government that must reimburse all deposits under its guarantee blanket scheme.

"People's confidence in the banking industry will collapse," Moena continued.

This scenario occurred in late 1997 when the government closed down 16 private banks, thereby destroying the public's confidence in the industry and forcing the government to eventually pay out some Rp 144 trillion (about US$12.74 billion) in emergency liquidity funds to bail out the industry.

To nurse the ailing banking sector back to health, the government spent another Rp 430 trillion on recapitalization bonds, making it among the world's costliest banking bailout program.

This year alone, more than Rp 61 trillion has been allocated in the state budget to pay the interest cost of domestic debts.

BII is in dire need of additional capital as its capital adequacy ratio (CAR) is barely above the minimum required level of eight percent. CAR measures a banks capital against its risk- weighted assets.

To prop up its CAR level, BII must either inject more capital or reduce its high-risk assets, the non-performing loans. But the bank can meet neither of the two requirements.

BII was formerly a unit of the heavily indebted Sinar Mas Group, to which the bank had extended loans worth $1.3 billion.

Sinar Mas loans, which account for more than half of BII's total loans channeled, are almost certain to go sour after the Singapore-based Asia Pulp & Paper (APP), another Sinar Mas subsidiary, announced recently a payment standstill on debts worth $13 billion to foreign and local creditors. The moratorium also covers a $1 billion debt to BII.

Leaving BII's fate dangling like this could also incite a rush on the bank that the government must later cover.

BII has been recapitalized before, and is now 56.78 percent owned by the government. Sinar Mas owns 17.86 percent with the remaining 25.36 percent owned by the public.

Moena said that allowing Bank Mandiri to acquire BII would transfer the latter's financial woes to Bank Mandiri.

Under the acquisition plan, the Indonesian Bank Restructuring Agency (IBRA) would take Sinar Mas loans out of BII's balance sheet. In return, IBRA would inject the bank with additional recapitalization bonds, called recycle bonds, plus restructured loans.

It remains unclear though, whether BII would be merged into Bank Mandiri or be allowed to exist as a wholly owned subsidiary.

Moena did not rule out that other undercapitalized banks would follow a similar acquisition scheme, but added that he saw no signs of such a development.

"Most of the undercapitalized banks are small ones, they can raise the capital, seek investors or merge with stronger banks," he said.

Banking analyst Hans Anggito from Kim Eng Securities and research director Lin Che Wei of SG Securities, concurred with Moena, saying that the acquisition was the best possible option.

Che Wei added that, should BII become a subsidiary of Bank Mandiri, the latter would benefit from BII's strong brand name within the consumer market.

Bank Mandiri was founded in 1999 following the merger of four state banks. Unlike BII, the bank has focused on the corporate market.

Bank Mandiri has said its CAR level might drop to around 26 percent from the current 32 percent once it assumes BII's non performing loans.(bkm)