Banking sector moves into recovery phase

Banking sector moves into recovery phase

By Reiner S.

JAKARTA (JP): After two devastating years of crisis marked by
bank runs and huge losses of capital, there are signs the
Indonesian banking sector is moving into a recovery phase
providing investors with substantial opportunities.

Experts point to the determination of the new, democratically
elected government to press ahead with its bank restructuring and
recapitalization program, combined with favorable macroeconomic
conditions.

"There are signs that we're now entering the recovery phase,"
said senior banker I Nyoman Moena.

A banking analyst at PT Vickers Ballas Tamara Securities,
Ferry Y. Hartoyo, concurred. "The lower interest rate environment
has allowed an acceleration in the bank recapitalization
program."

The lower interest rate also means greater opportunities for
banks to recover nonperforming loans and strengthen their profit
outlook, he added.

"We can expect almost all banks to start recording positive
spreads by the start of next year."

A bank records a positive spread if its interest rate revenue
is greater than the interest rate charged for deposits.

Bank Indonesia deputy governor Subarjo Joyosumarto said the
nonperforming loans of the banking sector dropped to 39 percent
in November from 60 percent in December last year.

The government aims to reduce the nonperforming loan level to
below 5 percent by 2001.

Restructuring

The government has done much of the bank restructuring work.
Of the 160 private banks in existence before the 1997 crisis
struck, the government has closed 66 institutions, recapitalized
seven major private banks and nationalized 13, of which four also
were recapitalized.

The remaining 74, popularly termed "category A" banks which
were relatively unscathed in the crisis, were exempted from the
government-sponsored recapitalization program. The banks
achieved a capital adequacy ratio (CAR) better than the minimum
requirement of 4 percent.

The recapitalization of the private banks and nationalized
banks this year was aimed at lifting their CAR to the 4 percent
level; the government expects the CAR to double to 8 percent by
2001.

Recapitalization of the seven private banks was jointly
conducted by the government and the bank owners, with the latter
covering around 20 percent of the total cost by injecting cash,
while the former provided up to 80 percent financing by issuing
bonds.

The government fully covered the recapitalization of the
nationalized banks through a bond issuance.

It also partly recapitalized giant state Bank Mandiri, which
was the merger of the four ailing state banks of Bank Expor Impor
(Bank Exim), Bank Bumi Daya, Bank Pembangunan Indonesia (Bapindo)
and Bank Dagang Negara (BDN). The country previously had seven
state banks.

The banking authority plans to complete the recapitalization
of Bank Mandiri by the end of this year, and expects to be able
to float the bank on the stock market next year.

The government is also determined to complete the
recapitalization of the other three state banks, including
publicly listed Bank Negara Indonesia, in the first semester of
next year.

As part of the recapitalization program, the banks' huge
nonperforming loans were cleared from their balance sheets by
transferring them to the Indonesian Bank Restructuring Agency
(IBRA).

In sweeping moves to right the ailing sector, the central bank
also imposed stringent, more prudent banking measures, addressed
the problem of unprofessional managers and kicked out bad bank
owners.

"The huge financial crisis is a blessing in disguise for
Indonesian banks as the regulator was finally forced to adopt
stronger regulatory measures and improve the level of integrity
and conduct of management and commissioners," said a Jakarta-
based European banker, noting the government was allowing
foreigners a role in the administration of local banks.

Opportunities

After it has picked up the pieces, what does the Indonesian
banking sector have to offer?

To some, the most attractive opportunities may come from the
nationalized Bank Central Asia (BCA), which has been
recapitalized by the government.

The government initially planed to sell a 30 percent stake in
BCA in February through an initial public offering to raise
around Rp 3 trillion (US$428.57 million). However, a source said
that the government changed its mind and decided to sell a
majority stake to obtain a premium price.

BCA is one of the country's largest banks with an extensive
branch network and considerable deposits. It became more
attractive after the removal of the influence of the founding
shareholders in the bank's management.

In the past, the bank's owners wielded extensive influence in
the management, including through reportedly forcing it to
channel much of the bank's money to affiliated business groups.

"The bank has the strongest liability products," said one
analyst.

Analysts also said that publicly listed Bank Danamon showed
similar features. The nationalized bank may become greater in
size because the government plans to merge it with eight other
institutions.

Also with potential investment appeal are Bank Bali and Bank
Niaga.

IBRA is in talks with two foreign strategic investors to help
finance the recapitalization of Bank Niaga.

Bank Bali is also set to launch a rights issue in January to
facilitate its recapitalization program.

The government will act as the standby purchaser of rights
shares which are not exercised by existing public shareholders.

Standard Chartered Bank (SCB) was initially slated to buy a 20
percent stake in Bank Bali from the government, but the plan was
terminated after mass protests from Bank Bali's employees.

IBRA deputy chairman Arwin Rasyid said that despite the
pullout, SCB may still enter Bank Bali by purchasing the rights
issue because the UK bank spent a great deal of time and effort
to audit Bank Bali and negotiate with the government.

The withdrawal of SCB raised concerns that foreign investors
might be reluctant to participate in the country's bank
recapitalization program.

Analysts also consider the seven recapitalized private banks
offer attractive opportunities because their profitability
outlook has been strengthened. Banks in this category include
Bank Lippo, Bank Internasional Indonesia, Bank Universal, Bank
Arta Media, Bank Prima Express, Bank Bukopin and Bank Patriot.

Only the first three are publicly listed banks. Analysts note
that because the government has forced the owners to inject fresh
capital, there is an incentive for the banks' management to work
hard, particularly to recover problem loans which could be used
to redeem government ownership.

Although the government owns up to an 80 percent stake in the
banks, the government is not involved in the day-to-day
management of the banks.

"This means that the recapitalized banks are more efficient
than nationalized or state banks," one analyst said.

"And the faster a bank can reduce the government's effective
control over it, the better."

Until 2001, shareholders which participate in the
recapitalization of the banks are entitled to repurchase stock
owned by the government.

After 2001, the government can sell its remaining equity stock
to the public after offering them to the banks' shareholders.

Moena is particularly sanguine about the prospects offered by
the A category banks.

"One of the positive factors is that most of these banks have
been able to survive the crisis," he said.

"Banks in category A are in a very good position to get
additional market share as their capital level is much higher
than other banks."

Ferry championed publicly listed Bank Panin, which is one of
the A banks, as his top pick among Indonesian banks.

He said Bank Panin weathered the crisis and achieved the
highest CAR level in the industry.

The bank's strategic partnership with New Zealand's ANZ Bank
bodes well for its efforts to penetrate a greater market share,
he added.

Ferry explained that Bank Panin did not have to suffer the
"equity dilution effect" experienced by the other listed banks
participating in the recapitalization program due to the high
recapitalization cost.

He said the cost forced recapitalized banks to launch large
rights issues, causing dilution in their earnings per share and
book value.

"The recapitalization cost is simply too large."

Other analysts believed the management of the A category banks
was not necessarily better than the recapitalized or nationalized
groups of banks.

"Many of the A category banks are nonforeign exchange banks,
while those with foreign exchange status are too conservative,"
one said.

He added that the balance sheets of the A category banks were
no better than the recapitalized banks because the nonperforming
loans of the A banks were not transferred to IBRA.

Ferry discounted this as a problem because the A banks were
allocated a full provision for nonperforming loans.

He noted that one of the discouraging factors for investors to
invest in the recapitalized banks was the relatively huge
recapitalization cost.

"The price of Indonesian (listed) banks is now much higher
compared to their peers in the region."

State banks are the least attractive because their
restructuring still has a long way to go.

"There's a big question on how to deal with the state banks'
huge nonperforming loans owed by well-connected businesspeople,"
Ferry said.

Analysts have advised investors to take a close look at banks'
operating margins.

Liquidity

Liquidity in the banking industry is currently excessive,
indicated by the low loan to deposit ratio (LDR). However, banks
remain cautious in channeling their money to the still troubled
real sector.

Banks are currently putting their money in Bank Indonesia's
promissory notes and other money market instruments which only
provide slim margins.

Analysts said that banks which could funnel their lending
activity into the retail or consumer sectors would emerge the
winners.

"The recapitalization program did address the solvency issues.
But banks will not lend their money unless they see improvement
in the business sector outlook," an analyst warned.

Investors also can size up the bank recapitalization bonds to
be tradable in the secondary market starting in February.

The government has issued over Rp 200 trillion worth of
treasury bonds, including Rp 103 trillion for the initial
recapitalization of Bank Mandiri and the remainder for the
recapitalization of the seven private banks, nationalized banks
and several provincial development banks.

The government is expected to issue another Rp 70 trillion
worth of bonds at the end of this month to complete the
recapitalization of Bank Mandiri.

The total amount of bank recapitalization bonds is estimated
to reach Rp 390 trillion by next year.

Subarjo Joyosumarto said the banks would be allowed to sell up
to 10 percent of the bonds to the secondary market in February to
provide the banks with cash for credit expansion.

The bonds are expected to be offered at a coupon rate of
between 12 percent to 14 percent.