Bank Danamon to remain focussed on consumers, SME loans

Bank Danamon, the country's fifth largest bank in terms of assets, is currently undergoing a reevaluation of its business strategy after Asia Financial Indonesia Pte. Ltd (AFI), a consortium of Temasek Holdings Pte. Ltd. and Deutsche Bank, became its new owner in June, following the purchase of a 51 percent stake from the Indonesian Bank Restructuring Agency (IBRA).

The Jakarta Post's Rendi A. Witular interviewed Francis Andrew Rozario, president of Danamon, to get a hint of the strategies and expectations of the new owner.

The following is the excerpt of the interview.

QUESTION: What is Danamon's new business strategy?

ANSWER: My first priority is to understand the quality of the organization, to visit regions to understand how we operate. Danamon has a very wide network, so I need to go out there and understand what businesses we do in the region and to get to know the people.

While that is happening, we are doing a very detailed assessment of our portfolios, to understand the customers and to enhance the quality of our resources by being absolutely sure that we had regraded all the portfolios based on international standards.

I guess the difference between what we do and what was done previously is that we do not classify our borrowers just on the basis of their payment performance. We take into account the quality of their credit. We are willing to downgrade some of the names and take additional reserves; that applies across the business sector.

The other initiative we are taking is to start a whole strategic planning effort, and we are still in the middle of it. It is a little premature to talk about what will be the final outcome of the strategy reevaluation. But I think it would be quite fair for me to say that our strategy will not change, we will remain very committed to the consumer sector, and in this regard we will focus (our lending) on various sub-segments within the consumer market. We have not been very active in the mass consumer and the affluent segment. We have been underweight in those areas. For the middle income (segment) I think we have a fairly decent franchise.

The other aspect of the strategy will be the small and medium- sized enterprises (SMEs). For this sector we will give a bigger focus on the commercial end of the SMEs, which is the upper end. We are still underweight. Our goal is to try to build that up from where it is today.

The corporate business will be a specialized business. It will require us to develop much more sophisticated products and services. We remain committed to this sector. We think it is a good market if it is managed carefully and exposed it to the right people.

I think given the current weighting and expected scale of the opportunities, my own guess is that the consumer segment and SMEs will be about 80 percent of our lending business, and the remainder will be for the corporate sector. We are now running at that level and all businesses will grow by maintaining that composition. I think that is a good composition.

What makes you think that it is good?

Because we want to have broad exposure rather than a highly concentrated one. Generally, corporate business by nature creates concentration. A lot of companies are still restructuring, and haven't completed the process. Not all of them are performing successfully. So there is a lot to be done by the corporate sector to improve their performance and remedy their balance sheet. There are a lot of good companies, and we are hoping to support them.

The revival of the corporate sector has started, but how long it will take for them to be eligible to get loans from Danamon is hard to say. It depends on the people behind the companies and how they had handled their previous relationships with the bank; that is the most important.

How would you distinguish Danamon from other banks that engage in the same business?

I think those are the very precise things that we are still trying to find out. It will take us six months to complete our strategy reevaluation. By the end of January it should be done. But the roll out will not be all overnight, I have even told the analyst community that the full impact of what we do will be seen in 2005, not immediately. So it's a very deliberate process.

What will be your market share target?

We have today about 3 percent to 5 percent market share. I don't think there is any area where we have more than 5 percent of the market share. We would like to double the market share in five years time.

What will be your profit and loan growth this year?

For the third quarter of this year we have already booked a 44 percent increase (in profit) compared to last year, and we hope to sustain that until the end of this year. As for loans, they may grow by around 25 percent.

What about next year?

We have not finalized it yet, but I think we should grow by at least 20 percent next year. I don't think the general election next year will dent our target. In some way it may lead to additional consumption as many people feel there will be a lot of activities.

Can you explain the bank's future revenue composition?

Around 80 percent to 90 percent of our revenue will be from the lending (business), while the remaining will be from the recapitalization bonds. Our recap bonds carry a floating rate, in which the return is very close to those of the Sertifikat Bank Indonesia (Bank Indonesia SBI promissory notes). So we cannot earn a lot from them. We now only have a smaller portfolio of fixed-rate bonds because we have sold some of them. We can't sell the floating-rate recap bonds because no one will buy them. So we don't put a high percentage on earnings from bonds. Protecting ourselves from losing money because of volatility is our primary objective.

Will AFI further increase its stake in Danamon?

They now have 62 percent. There will be no plan to increase it if the government decides to sell their shares again. I think it is good to have a float of Danamon shares in the (capital) market.