Bank Niaga's sale

Bank Niaga's sale

A further delay, let alone a cancellation once again, in the
sale of nationalized Bank Niaga, could do irreparable damage to
the image of the midsized bank and eventually destroy the
public's trust in its credibility.

The House of Representatives should be commended for its great
concern to recoup as much as possible of the Rp 9.4 trillion
(US$1.04 billion) in taxpayers' money already invested in the
bank.

However, as it now seems futile for the Indonesian Bank
Restructuring Agency (IBRA) to bargain for a higher bid price
from Commerce Asset Holdings Bhd for the 51 percent equity stake
in the bank, there is no other choice but to finalize the process
of closing the deal with the Malaysian finance company.

IBRA is now racing against time in completing the overall
restructuring of all the country's largest banks that it now
controls under the government-funded massive recapitalization
program in 1999 and 2000.

Unless these banks are released to private investors who are
able to bring in fresh money, better management and, most
important, higher credibility, these banks could be doomed to
failure when the government begins phasing out its blanket
guarantee on bank deposits and claims in January.

The Rp 26.5 per share bid-price (1.45 times Bank Niaga's book
value) submitted by Commerce, as the only bidder taking part in
the second tender, is indeed far below what the government and
the House expected. But that is close to the highest price
offered by the two final bidders taking part in the first tender
in June which was aborted by the government due to what it
considered was an unacceptably low bid.

The final bid price is not what some critics have rejected as
a fire-sale price as it was formed through an open, competitive
bid. It is simply the price the market is willing to accept.

Certainly, the price should be assessed against the condition
of Bank Niaga, whose capital consists almost entirely of illiquid
government bonds bearing a coupon rate of 12.5 percent.

Moreover, investing in such a bank as Bank Niaga, which does
not possess a strong franchise in a particular market niche, not
only exacts a long gestation period but also is highly risky,
especially under the still fragile economic conditions at
present.

It is precisely because of the fragile economy, in addition to
the fierce competition within the banking industry as most
domestic and foreign banks now compete in the retail market,
that Bank Niaga desperately needs a new controlling owner, a
strategic investor with a good track record in management and
massive financial resources to bolster its market
competitiveness.

Without new strategic investors of high credibility, Bank
Niaga, which is now being kept afloat mainly by the government's
blanket guarantee on bank deposits and claims, might lose the
public's trust after the guarantee scheme is phased out beginning
in January.

In fact, the longer the bank is under the management of IBRA,
which has of late increasingly been perceived as a "den of
thieves", the worse would be its condition. The hard truth is
that the government, which now owns 97 percent of Bank Niaga,
simply does not have adequate resources nor credibility to bring
the weak bank up on to a stronger footing.

It is therefore misguided to assess the strategic sale of the
bank simply from its price. Of more importance is the synergy,
credibility and better management that will be brought in by the
new majority owners.

A strategic investor with a good reputation will be able to
jump start Bank Niaga's operational restructuring and create a
virtuous cycle within the bank and Commerce Asset seems to fit
the bill.

The central bank has yet to conduct a fit-and-proper test on
Commerce Asset as the only candidate for a new controlling owner
of Bank Niaga. But this Malaysian finance company seems to be
fully committed to the long-term development of the bank, at
least seen from the fact that it was also one of the final two
bidders selected in the first tender and is the only bidder
willing to take part in the second tender.

A stronger Bank Niaga not only will increase its share value
and create greater capital gains for the government's remaining
46 percent stake in the bank but also will benefit the banking
industry and the economy as a whole. One or two years down the
road, the government can sell its remaining equity at a much
higher value and recoup a greater portion of its investment in
the bank.