Banks' merger deal plan will speed up reform

JAKARTA (JP): The merger deal planned by publicly listed banks Bank Internasional Indonesia (BII) and Bank Dagang Nasional Indonesia (BDNI) would encourage other banks to accelerate similar steps, analysts and bankers said yesterday.

BII announced Sunday it would wed with BDNI to form one entity under the BII banner, which will also be joined by Bank Sahid Gajah Perkasa, Bank Dewa Rutji and Bank Tiara Asia.

"I think this is positive. It will accelerate the merger process in the domestic banking industry," said Laksamana Sukardi, executive director of ReForm Consulting.

Parveen Gandhi, a director at listed Bank Bira, agreed. "In fact, I've just met with two foreign investors, and they found this to be a positive major step by large banks."

Ferry Y. Hartoyo, a banking analyst at securities firm Vickers Ballas Tamara, had a similar opinion. He said the new entity would boost its status and market position. The new bank would have combined assets of Rp 50 trillion (US$5.5 billion), compared to Rp 40 trillion owned by state-owned Bank Negara Indonesia, the country's largest bank. "Other banks will have to follow suit if they want to stay in the market," he said.

The country's monetary authorities had long called on ailing banks to merge with healthier ones, only to be confronted with ignorance until the monetary crisis broke out in August last year.

"In the current crisis, Indonesian banks will have to come up with merger proposals, with or without the BII-BDNI plan," said Rino Agung Effendi, an economist with PT Danareksa Securities.

Anwar Nasution, an economist at the University of Indonesia, was also positive about the merger plan, saying the merger, the largest ever made by private banks, would help create a healthy banking system.

Sofyan Wanandi, chairman of the Gemala Group, said the merger would boost the public's trust in private banks which had been ruined by the liquidation of 16 banks last November. "This is the first step. There will be a second step where small banks will choose big banks as their partners. You will hear the news soon."

Industry watchers say several merger plans are expected to be announced soon. These include plans to combine Bank Central Asia, the country's largest private bank, with Bank Danamon; Bank Umum Nasional, Bank Universal, Bank Duta and Bank Bukopin; and Bank Niaga with other smaller banks controlled by Hashim Djojohadikusumo, the bank's majority owner.

A combination of mounting bad loans and soaring overseas debts had caused many domestic banks to fall on their knees. In an effort to secure bailout funds from the International Monetary Fund, the government had announced sweeping reforms, including plans to overhaul the banking system.

However, Laksamana said positive results of the merger plan would depend on what positive action was taken after completing the process. He said if the merger improved efficiency and saved on operational costs, it could help solve the bad debt burden. "The new merged banks will have to lay off many employees and shut down several branches which are in close proximity."

Vickers Ballas Tamara said the combination of BII and BDNI would boast a total of 12,000 employees. He said the new operation would become efficient if it was staffed by about 7,000 people.

According to Ferry, the BII-BDNI restructuring is not a merger process but an acquisition of BDNI and its affiliates by BII. "Although we already have a law on mergers, the details are not yet available. So the restructuring will have to be done through an acquisition process, in which founders of BDNI and Bank Tiara will become minority shareholders in the new entity."

He expected BII to offer a rights issue to complete the deal.

He said BII had been looking for a suitable partner and found BDNI appealing. It is cheap and it has got a strong retail operation. On Jan. 12, its shares were trading at a 50 percent discount over its par value.

Ferry said that the acquisition of BDNI and its affiliates would put pressure on BII's fundamentals in the short term. He said BII had been considered superior to other banks in terms of return on equity and investment, efficiency, profitability, and liquidity. "These ratios will be negative."

"BDNI is high risk." He said the bank had a huge amount of loans to third parties in U.S. dollar terms. "Before the crisis, it was 40 percent of its total loan exposure. Now it's about 70 percent and its collateral is in domestic assets." He said BDNI might have difficulties in getting back their money under the current economic crisis.

He said the appreciation of the dollar against the rupiah had slashed the bank's capital adequacy ratio to lower than the central bank's 9 percent minimum requirement. "At an exchange rate of Rp 2,373 to the dollar in September, the ratio stood at 10 percent. But now its way below that level." A similar thing happened with Bank Tiara, Ferry said.

He expected the acquisition deal would benefit BII in the long term. "The acquisition will make BII more appealing to both investors and depositors." (08/09)