BCA: Major deal of the year

BCA: Major deal of the year

By Vincent Lingga

JAKARTA (JP): Barring opposition from the House of
Representatives, the strategic sale of 51 percent of Bank Central
Asia (BCA) could become the deal of the year.

The winning bidder will, in one stroke, be able to control
Indonesia's largest retail bank with a depositor base of about
seven million, 2,075 ATMs that are linked to the international
settlement system and 795 branches across the country.

The government's bold decision to further divest 51 percent of
its remaining 60.30 percent stake in the bank, and not 30 percent
as previously planned, therefore deserves full support from the
House because the transaction could jump-start the consolidation
of the banking industry.

The deal could become the catalyst, an icebreaker in
rekindling the interest of foreign investors, who have so far
written Indonesia off from their business plans.

The offer should be more attractive now that the political
uncertainty has been removed, and the stake put up for auction
will allow the new investors (buyers) to control management.

However, many things could still go wrong even before the
bidding process starts.

It is therefore most imperative for the government to do it
right by involving, right from the outset, all stakeholders --
House members, employees, the investing public and customers --
in the process.

What is most important is that the bidding process should be
designed in such a way that the deal will be seen as fair and
credible by the stakeholders, particularly the market.

A conducive public opinion environment is vital, especially
since the government divestment of BCA has caused a lot of
controversy and allegations of corruption, collusion and
nepotism.

BCA's initial public offering of 22.5 percent of its shares
was postponed several times before it was finally launched in May
2000. Its secondary issue in July left behind allegations of
price manipulation and a further divestment of 30 percent through
a strategic sale in June, which ended in tatters as only two
investors submitted bids at very low prices.

The government often wrongly assumes that the public is not
knowledgeable enough to comprehend complex financial
transactions. Hence, why bother with disseminating information
that they cannot digest.

On the contrary, given the bitter experiences of the past, the
first step in the whole process should be a massive campaign to
sell the divestment plan to the stakeholders by enlightening them
on why the deal is so pivotal for the consolidation of the
banking industry and the sustainable recovery of the economy.

The public should be made well-informed on how the transaction
will give greater value to BCA, its employees, its investing
public, who now own 32.2 percent of the bank, and on how foreign
investors will accelerate the bank's growth.

The House should be especially convinced that foreign control
of BCA will not mean foreign domination of the national banking
industry. Foreign banks now account for only about 10 percent of
the total banking assets in the country.

House members need not make a comparative study overseas,
however great is their penchant for such a foreign tour, to learn
about the great benefits accrued from a foreign bank entry into
the national banking industry.

The stronger economic recovery in Thailand and South Korea has
been attributed partly to a fast consolidation of their financial
industry brought about by foreign investors.

Take Korea, for example. The Korean government recapitalized
in 1998 the Korea First Bank, one of the largest banks in that
country, by injecting US$1.2 billion. But the government sold 51
percent of the bank to Newbridge Capital for only $500 million in
January 2000.

Even this low price was sweetened with a clause stipulating
that the Korean government would take over any loans that turned
sour within a year after the acquisition transaction.

But Newbridge spectacularly succeeded in rehabilitating the
bank within one year, turning it around from a loss of $850
million in 1999 to a respectable profit of $243 million in 2000.

A recent study by the International Monetary Fund (IMF) shows
that foreign institutions (investors) have increased their role
in the banking industry in crisis-ridden countries, especially in
the late 1990s.

In Latin American countries, for example, the foreign banks'
share of the domestic banking industry ranged from 18 percent in
Brazil to as high as 53.5 percent (of total bank assets) in
Chile.

In Central Europe, foreign domination of the national banking
industry was even more stronger, ranging from 53 percent in
Poland to as high as 80 percent in Hungary.

Restrictive policies before 1997 had kept the foreign
institutions' share of national banking industries in Asia
relatively small. But their role has been expanding rapidly,
especially since the 1997 financial crisis, with a range of 7
percent in Thailand, 12 percent in Malaysia and 17 percent in
South Korea.

The IMF report that compiles empirical evidence gathered from
studies in various countries concludes that a foreign bank entry
brings in competitive pressure to the industry to increase
efficiency and help improve quality, pricing and availability of
financial services.

As most major foreign banks have developed a good training
system, they also have become the source of skilled banking
personnel who will introduce the practices and technology of the
foreign banks when they move to domestic banks.

Foreign banks have a more sophisticated system for evaluating
and pricing credit risks associated with derivative products.
They have more stringent disclosures, accounting and reporting
requirements that are closely aligned with international
practices, thereby gaining stronger trust from the public.

During the height of the economic crisis in Indonesia in 1998,
foreign banks in Jakarta indirectly added to the stability of the
banking system by allowing domestic residents to do their capital
flight at home.

Although rich residents lost trust in national banks, not all
of them transferred their financial assets overseas. Many simply
shifted their deposits to foreign bank branches in Jakarta,
thereby helping stabilize the overall stock of deposits.

The divestment will not be able to entirely recoup the Rp 60
trillion (US$6.6 billion) in bonds the government injected to
recapitalize BCA in 1999.

But without new investors, BCA capital could erode steadily to
a point that would force taxpayers to make a new
recapitalization.

With so small a loan portfolio (8.5 percent of Rp 96.2
trillion total assets), and the bulk of its capital consisting of
liquid government bonds, BCA significantly needs fresh funds to
expand lending to generate earnings growth over time.

True, BCA has almost seven million savings accounts, totaling
over Rp 40.5 trillion, which provide the bank with a strong
cushion for funding.

But this large number does not automatically translate into
account profitability, the factor that counts most for the bank's
earnings. It seems the average account balance at the bank is
relatively small, and individual customers with low balances are
not a steady source of revenue for the bank as most limit their
banking transactions to regular usage of the ATM network.

Demand deposit accounts at BCA, which normally make most of
the high-value transactions to generate fee-based income, totaled
only 16,208 with a Rp 18.43 trillion balance as of last December.

It should be noted realized that the 51 percent strategic sale
will not bring in additional funds to the bank as the proceeds
will be entirely transferred to the state budget.

Whoever wins BCA's majority stake should not only think long-
term. The new owners should be willing to inject fresh funds,
both to improve the bank's capital structure and to further
modernize its information technology.

Amid the globalization of the financial services industry,
banking is now inherently an information, communications and
computation intensive industry.

Efficient and credible banks are vital to the economy because
they reallocate money or credit from savers to borrowers and are
at the heart of the clearing system to help individuals and firms
fulfill transactions. No wonder that, in spite of the mounting
deregulation drive all over the world, banks remain the most
regulated industry.

It is no exaggeration then to say that the strategic sale of
BCA could make or break the new LoI with the IMF. The deal is
also a litmus test as to whether foreign investors have now
reconsidered Indonesia as a potential place for business.

The issue here is not primarily whether BCA is attractive or
not, but whether investors want exposure to the Indonesian
banking sector in view of the weakness of the legal system and
the persistently fragile economic condition that makes banking
operations still highly risky.

The writer is a senior editor of The Jakarta Post