BCA strategic sale

BCA strategic sale

The government's commitment to sell a 51 percent controlling
stake in publicly listed Bank Central Asia (BCA) before the end
of this year, as stipulated in the Aug. 27, 2001, letter of
intent (LoI) with the International Monetary Fund (IMF), will be
the first test of President Megawati Soekarnoputri's government
in executing its reform agenda.

The divestment plan will make or break the government's
ability to gain political acceptance for its reforms. It will
show whether the strong support Megawati is supposed to be
enjoying in the House of Representatives (DPR) is real.

Members of the House who immediately opposed the plan, arguing
that the divestment will not benefit the country, may not have
realized the real condition of the local banks, notably BCA, and
the vital role banks play in accelerating economic recovery.

The fact is as long as the majority shares of all major banks
are owned by the government, as they are now, the banks will not
have enough financial muscle to support the economy as the bulk
of their capital are in the form of illiquid government bonds.

Yet more important than the quality of capital is public
trust, which is the bedrock of a bank as a fiduciary institution.
The banks will not regain the full trust of the public, let alone
the international financial community, unless strategic or
internationally reputed investors join the banks.

Just look how foreign banks in the country have been reaping
huge profits simply because rich customers, concerned about
security, keep the bulk of their savings at these banks although
their interest rates are five percentage points below the
benchmark interest rates set by the central bank for its
certificates of deposits.

Nor will the economy be able to enjoy a robust recovery unless
banks fully resume their intermediation role of injecting
lifeblood into cash-strapped businesses. At present, major banks
are surviving primarily on the interest revenue from government
bonds and the latter's blanket guarantee on bank deposits and
claims.

BCA is undoubtedly the country's largest retail bank with the
strongest core deposit base, a clean balance sheet and an
extensive and modern branch network.

However, its strengths will remain inconsequential as long as
more than 62 percent of its Rp 96.2 trillion assets consists of
illiquid government bonds and its loan portfolio is negligible,
amounting to only 8.7 percent of its total assets as of last
December.

House members who tout BCA as one of the most profitable
banks in the country should be fully aware that most of the
bank's revenue is currently derived from the taxpayers' pockets.
In fact, investors who bought BCA's shares at its initial public
offering (IPO) in May 2000 have lost, on paper, 18 percent of
their investment due to a fall in its share price from Rp 1,400
(its IPO price) to about Rp 1,150 now.

Only new investors with big capital and long-term views would
be able to introduce a good management system and create
credibility to turn BCA around within two to three years. BCA is
not for short-term investors or fund management intending to make
a kill within a year after investment.

This means the strongest candidates to buy the 51 percent
stake in BCA are foreign investors. It would be better if a major
foreign bank won the bid as it would create a strategic alliance.

An international bank will bring to BCA a better risk
management system and expertise to develop new products. A
foreign-controlled BCA with disclosure, accounting and reporting
requirements closely aligned with international best practices
will competitively pressure other banks to improve their
efficiency too.

The House will be well-advised to remember that the delay in
the government's divestment of BCA was one of the reasons that
prompted the IMF to withhold its loan tranche since last
December. And more importantly to realize is that the economy was
brought down primarily by the collapse of the banking industry in
late 1997. Consequently, the economy will not be able to pick up
without the recovery of the banking industry.