Acquisition saves BII, analysts say

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)