Banks' merger deal plan will speed up reform

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)