Bank mergers not a solution for RI: Analysts

Bank mergers not a solution for RI: Analysts

HONG KONG (Reuters): Indonesia's policy of merging banks rather than letting bad institutions fail is ill-advised, analysts in Hong Kong said yesterday.

"It is a joke, this matter of mergers," said Philippe Dalhaise, president of Thomson BankWatch Asia.

"Mergers can only work out correctly if a good name swallows a small bad one. There are no good names in Indonesia any more."

The Indonesian government ruled out further liquidations after 16 banks were wound down in November, part of a US$43 billion bailout sponsored by the International Monetary Fund in response to the country's economic woes.

Over the weekend, Bank Umum Nasional and Bank Duta said they would merge with two other banks. About 50 banks were expected to merge into 12 institutions by June, the country's private banks association has said.

Indonesia has more than 200 private banks and the government has encouraged them to merge to consolidate the industry.

But Dalhaise said a review last week of Indonesia's private banks confirmed only seven names as potential survivors from the current debt crisis -- Bank Bali, Bank Panin, Bank Rama, Bank Bumi Arta, Bank Buana Indonesia, Bank NISP and Bank Umum Nasional.

Clearing the banks of bad assets was considered a precursor to returning stability to the crashing rupiah, now trading at 13,000-14,000 to the U.S. dollar after hitting 17,000 last week.

Indonesia's foreign debt burden of US$140 billion has fueled the rupiah's plunge.

As long as the rupiah slides, banks' ratios of non-performing loans will worsen, with foreign debt service costs soaring to levels that will destroy their capital bases.

Dalhaise said mergers would fail to assist either the banks' capital or efficiency. Merging banks always involved high up- front costs that required time to yield efficiency gains, he said.

"There is not the time to do this," Dalhaise said. "We suspect that quite a number of mergers being announced and consummated are rescues, in fact."

Indonesia should allow its bad banks to fail while protecting small depositors, Dalhaise said. And instead of mergers, banks in Indonesia and Thailand should allow foreigners to enter and recapitalize strong names in return for majority stakes.

"There are a number of foreign institutions ... that have a desire to buy non-performing loans and assets in both the Thai and Indonesian financial sectors at fire sale prices as low as 20 cents on the dollar," said Andrew Brown, head of banking research at Deutsche Morgan Grenfell.

"The governments in each of these countries have been very resistant to accept what they deem as low offers," Brown said.

Four ways

There were basically four ways to sort out the banking sector and its associated bad debt in both these countries, he said.

The first, issuing equity, was impossible under current conditions. Prevailing share prices would raise the cost of capital to prohibitive levels.

The second, a debt issuance, was also extremely expensive, following debt rating downgrades to junk status that implied very large risk premiums.

The third option was for the troubled institution to package the bad debt and sell it at a discount to book value, but the accounting adjustment would destroy the banks' capital bases, which are made up of loans.

This left only one option, Brown said: Allow foreign institutions to come in, package the bad debt, inject capital and expertise and in return, receive a majority stake.

"We will continue to see international banks seeking controlling interests in some of these institutions," said Brown. "The desire is there, and the ability is there."

Hongkong and Shanghai Banking Corp, Standard & Chartered, Development Bank of Singapore and Citicorp were all actively seeking access to the banking sector in Indonesia and Thailand, the analysts said.

In many cases, the currency depreciations were so profound that foreign banks could recapitalize these banks from cash flow and avoid issuing the bonds that typically accompany bank bailouts and recapitalizations, they said.

Although some said foreign interest was intense, Michael Fung, bank analyst at Bear Stearns, said it had waned because of Indonesia's policy of bank mergers.

"Instead of having 200 bad banks, they'll have 50 bad banks," he said.

Indonesia's inadequate bankruptcy code and refusal to allow foreigners to own land made foreign bank takeovers virtually impossible, Fung said. Many private banks also had links to powerful families that refused to give up control.

"Any institutional investors asking simple questions about proposals for repackaging of bank debt or corporate debt, before too long, they'll push away from the table. They cannot do it."