Cancellation of Niaga sale

What a shame! A three-month sale process, claimed to have been carried out through the cleanest and most transparent of competitive bids, ended in a shambles.

The government's decision to cancel Bank Niaga's strategic sale will certainly dampen investor interest in future divestment programs and slow down the process of rebuilding market confidence in the fragile banking industry.

Annulling a transaction because of what the government considered unacceptably low prices, which were, after all, made through one of the cleanest and most transparent bidding processes ever carried out by the Indonesian Bank Restructuring Agency, will cause uncertainty in future bank sales.

The government seems stubbornly unaware that it already owns or controls all the largest banks in the country, and unless most of these are made available to private investors the banking industry will remain fragile, held afloat mainly by the government's blanket guarantee on deposits.

Was it really that the Rp 20 to Rp 30 per share?? offered by the two final bidders, Australia's ANZ Banking Group and Malaysian Commerce Asset Holding -- for 51 percent of Bank Niaga -- was unacceptably low? Certainly so, as that is way below Rp 70, the current price of Bank Niaga shares on the Jakarta stock exchange, and the Rp 100 average share price over the past three months.

The government and several independent analysts argue that accepting such dreadfully low prices would have caused too great a loss to taxpayers, who had already injected Rp 9 trillion to recapitalize the medium-sized bank.

However, many other analysts argue that comparing the final bid prices with the Bank Niaga market quotation is not relevant because less than 3 percent of its 78.2 billion issued shares are traded on the stock exchange. The price formed on the exchange does not truly reflect market sentiment regarding the bank's prospects. Moreover, the Rp 20 to Rp 30 price range is already greater than the Rp 15 per share that is now the book value of Bank Niaga.

In assessing the bid prices, one should also consider that Indonesia's macroeconomic fundamentals are not yet sufficiently encouraging for banks to grow soundly and strongly. Investing in a bank under such critical economic conditions is highly risky.

It is worth recalling that almost all of Bank Niaga's capital consists of illiquid government bonds. Yet more disadvantageous is that most of these bonds carry a fixed coupon rate of 12.5 percent, much lower than the central bank's benchmark interest rate, now about 15.5 percent.

Neither does Bank Niaga possess a strong franchise in a particular market niche. Its bad loans of Rp 645 billion are only about 8 percent of total lending, or lower than the average in the industry. But it also carries Rp 2.8 trillion in its credit portfolio, which is on the verge of falling into the category of problem loans. The slightest deterioration in the economy could transform these loans into liabilities.

Given this fragile state of affairs and the fierce competition within the industry (as almost all domestic and foreign banks now compete in the retail market), Bank Niaga desperately needs a new controlling owner, a strategic investor with a good track record in bank management and sizable financial resources to strengthen market confidence in the bank.

Strategic sales are surely the best method for reinvigorating banks, not only because they are the best way of attracting long- term investors who can bring in synergy. The weak Jakarta stock exchange simply cannot absorb large-scale equity issues right now and the investing public is unlikely to be interested in buying bank shares until the economy regains a sustainable, robust growth.

Cancellation of the Bank Niaga strategic sale on highly subjective and debatable grounds will certainly affect the sales of Bank Danamon, Bank Lippo, Bank Mandiri and Bank International Indonesia (BII), which are scheduled for the second half of this year.

This is quite worrying indeed, because the longer the banks remain under state control or ownership the greater will be the contingent liabilities for the government under the blanket guarantee program, and the more hazardous will be the risk.

The government is well advised to realize that only strategic investors will be able to accelerate the restructuring of the fragile banking industry. The government simply does not have the technical competence, financial resources and, most importantly, credibility, to raise the banks onto a stronger footing. And without sound and strong banks the economy will not be able to return to sustainable, high growth.