Bank Permata and nationalism

Foreign and domestic investors should naturally be very interested in joining the competitive bid being prepared by the government's Asset Management Company for the sale of 51 percent of its 97.17 percent stake in Bank Permata, one of the ten largest banks in Indonesia.

Not only is Bank Permata, which in Indonesian means jewel, truly the last jewel of Indonesia's banking industry available for sale, but the government's sale also offers a final chance for foreign investors to take control of a major bank through a single transaction.

Bank Permata -- the merger of five small, private banks nationalized during the height of the financial crisis in 1997- 1999 -- has become a very attractive retail franchise with a broad base of 1.2 million depositors and customers, more than 300 branches and over 460 automatic teller machines.

Most importantly, the bank made a sharp turnaround last year with a net profit of Rp 558 billion and booked another Rp 127 billion in net earnings in the first quarter of this year. Its net non-performing loans have fallen sharply to a mere 2.6 percent as of March, while its assets rose to Rp 29.77 trillion (US$3.2 billion), of which Rp 1.85 trillion was equity capital.

The government, therefore, should see to it that the strategic sale of Bank Permata -- in addition to contributing greatly to the state budget -- also contributes to a quicker restructuring of the banking industry before the phase-out of its blanket guarantee of bank deposits and claims next year.

This objective will be achieved only if the new investors in Bank Permata bring in synergy, credibility and better management, and provide easy access to fresh capital. These requirements may easily be interpreted as a preference for a major foreign investor with an extensive network and good reputation.

It is obviously counterproductive to be narrow-minded and nationalistic in assessing the bidders for Bank Permata's control in view of the huge amount of taxpayers' money the government has already spent to recapitalize and restructure this bank.

Given the restrictions encountered by domestic banks, both in terms of equity capital and the 10 percent (of equity capital) ceiling imposed by the central bank on a bank investments in one affiliated entity, domestic bidders may have to form a consortium to be able to make a viable bid.

Some national investors have been whipping up narrow-minded nationalistic sentiment, suggesting that since the four large banks previously sold through strategic sales - Bank BCA, Bank Danamon, Bank Niaga and Bank International Indonesia - were bought by foreign financial groups, the government now should give preferential treatment to national bidders for Bank Permata.

As a bank is an institution of trust it does not matter at all whether the winner of the 51 percent stake is a foreign or national investor. What does matter is that the bidding process is seen by the market as fair, with all the bidders being treated equally and the new investors seen to be capable of bringing in a synergy, credibility, better management and fresh capital.

The issue of foreign control is irrelevant here. In fact, there are striking differences between the conditions of the government-controlled banks and the four aforementioned banks that were bought by American, Singaporean, Malaysian and South Korean investors. Those four have succeeded, since their sale, in significantly speeding up their operational restructuring under the foreign majority shareholders. This is clearly evident when one observes how the market value of these banks (as measured by their share prices on the Jakarta Stock Exchange) has increased so markedly.

Experiences in most other countries, including Malaysia, South Korea and Thailand, which were also hit by the financial crisis in 1997, point to the great benefits of the entry of major international banks with good reputations in terms of the development of good governance practices within the domestic financial services industry.

Strategic investors with good reputations will be able to accelerate Bank Permata's operational restructuring, which is most imperative now to enable it to devote more resources to viably marketing loans to the corporate sector, developing a more reliable information system to determine creditworthy borrowers and rebuilding trust with borrowers.