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.