BCA's profit

BCA's profit

I refer to the article BCA books 50% raise in pre-tax profit
in Q1, which appeared in The Jakarta Post on May 22, 2001.

Once again the spin doctors at BCA have succeeded in
publishing an incomplete and misleading report of the bank's
financial condition. The recent press release announcing the
bank's first quarter results and stating that pretax profit had
risen 50 percent over earnings for the same period last year, is
another example of the type of selective reporting and
questionable accounting that bank management has become noted
for. While gross revenue may have increased over last year's poor
results, the statistics are misleading and the bank's overall
financial condition actually appears to have weakened.

The press release states that the bank now has total assets of
Rp 99.73 trillion and outstanding loans of Rp 9.14 trillion. What
these figures really reveal is that less than 10 percent of the
bank's assets are earning assets in the form of loans to the
public. If fixed assets have not increased significantly in the
past year or if the bank is not sitting on a pile of cash, then
by far the majority of total assets consist of government
recapitalization bonds. Absent in the publication of a complete
balance sheet, exact percentages cannot be calculated.

As has been well reported over the past two years, these
recapitalization bonds yield an interest rate well below the
market and have demonstrated their extreme illiquidity. Currently
there is no, nor has there ever been, active secondary market for
these instruments. Despite their implied government backing,
proper accounting would not allow these bonds to be considered to
have a zero risk-weight for the purposes of determining any
bank's capital adequacy ratio. BCA does not have a 35.66 CAR,
except in the minds of those who still labor under the false
belief that this exercise really "recapitalized" the bank.

The incomplete press release which touts the bank's "amazing"
increase in profitability, cannot hide the fact that the majority
of these earnings come from interest on government bonds and not
from a bank's normal intermediation role as a lender to the
economy. The fact is that BCA, as with most other banks under
control of the Indonesian Bank Restructuring Agency (IBRA),
remains illiquid and unable to expand its loan portfolio without
further deterioration in its fragile financial structure. It also
appears that a significant number of the new loans that have been
made are not paying as agreed.

The bank reports that 7.6 percent of its increased portfolio
is now nonperforming, up from 6.03 percent on a much smaller
base. Such an increase would mean that approximately Rp 695
billion in credits or 9 percent of all new loans are already in
trouble. So much for improved risk management competence at BCA.

Meanwhile, operating expenses have increased by 132 percent
(greater than loan growth) while other operating income increased
at a pace only slightly above the annual inflation rate.
Contrary to what the bank announced, the third party fund
composition (i.e. deposits) has not improved during this period.
It appears that total deposits grew by less than 0.6 percent this
past year, which in itself is a less than stellar performance,
and the composition is in fact more volatile than last year.

While demand checking account deposits grew by 14 percent, the
more stable time deposit base decreased by 19 percent. Such
movement often reflects the publics' wariness of a bank's long-
term viability. The bank's incredibly low loan to deposit ratio,
if revealed, would also reflect the institution's troubled past
and the fact that IBRA removed some Rp 63 trillion in bad loans
from its books before "going public" last year.

Only when the bank is finally subjected to an audit by a
qualified independent accounting firm employing international
accounting standards, which require a proper classification of
all risk assets (not only the loan portfolio but the government
recapitalization bonds as well), will the true picture of BCA's
financial condition emerge.

MELVILLE BROWN

Jakarta