CIMB says RI needs to consolidate local securities sector

CIMB says RI needs to consolidate local securities sector

Malaysia's second largest financial group Commerce
International Merchant Bankers Berhard (CIMB) has recently
launched its Indonesian securities house PT CIMB Niaga
Securities, with the aim of becoming a major player in
Indonesia's growing capital market industry.

CIMB, which has a total market capitalization of US$1.35
billion, has arranged 55 percent of merger and acquisition deals,
75 percent of initial public offering (IPO) deals, and 21 percent
of bond issues in Malaysia last year.

Chief executive officer (CEO) of CIMB Dato' Nazir Razak, who
is the son of former Malaysian Prime Minister Tun Abdul Razak,
spoke with The Jakarta Post's Rendi A. Witular along with other
reporters from three local newspapers on the prospects of
Indonesia's capital market and its obstacles.

Here is the excerpt of the interview:

Why did you choose Indonesia as your first area of expansion? How
optimistic are you?

We are confident that the country will become one of the
largest economies in Asia, and I am sure that the country can
wrap up its upcoming general election peacefully.

When we bought Bank Niaga, the international fund managers
sold down our stock in Malaysia. We have lost 30 percent of our
market capitalization because they thought that it was a stupid
idea. But today they said that it was one of the best decisions
we have made. This success story will encourage others.

We have chosen to come to Indonesia because we have found the
right partner, that is Bank Niaga. Such a similar strategy will
also be applied if we want to operate in Thailand or Hong Kong.

Another reason why we came is that we want to regionalize our
operation and become one of the preferred investment banks in
Indonesia; an alternative to the existing global investment
banks, such as JP Morgan and Credit Suisse First Boston. We are
cheaper than the global houses.

I am optimistic that in this business you can scale very fast.
We have a lot of customers already, mostly international
investors in Malaysia. So once we have set up an operation here,
we will invite the same customers to invest in Indonesia.

It shouldn't be that difficult to get into the country's top
10 ten securities houses in the next two years. We are now ranked
79. Most likely we are going to acquire other local brokerages to
achieve our goals.

How do you compare the Indonesian stock market with Malaysia's?

It is a very different market. The most important thing is
that in terms of size the Indonesian stock market is still
relatively small compared to its potential size, and we think
that it will grow very rapidly in the next couple of years.

However, for a stock market to grow, there are a lot of
factors; the first is that more companies should be listed on the
market, and the second is that there should be a consolidation
among the securities houses, in order to form bigger and stronger
securities, financially. In Indonesia, there are numerous small-
scale securities (member securities on the Jakarta Stock Exchange
currently reaching a total of 143, but most are small-scale).

In Malaysia, we have seen quite a significant consolidation
process (of the securities houses). We used to have 64
securities, but now it is down to 40 and soon is going to be
reduced to 20. In the future, investment banks will dominate the
securities.

Of the total 64 securities, 10 are investment banks, which are
part of a banking group. In terms of finances, such securities
are stronger because they are backed up by their respective
banks. Indonesia should consider such consolidation and form
local investment banks.

Contributions from investment banks account for 40 percent of
the daily volume in the Malaysian stock market, while in the bond
market, investment banks account for 95 percent.

The main players in the Indonesian bond market are still
dominated by securities' houses. In order to develop the market,
investment banks should play a greater role because they have
stronger financial capability than securities. Securities just
don't have the financing capability to intermediate in the bond
market.

What is actually needed for Indonesia to make a greater role for
the investment banks in developing the capital market?

In Malaysia, the process of turning securities houses into
investment banks have started since 1990. At that time, we have
allowed banks to fully engage in the securities business and the
capital market.

In Indonesia, we have Bank Niaga and we also have PT CIMB
Niaga Securities. But Niaga Securities has yet to operate as an
investment bank due to the existing regulations.

From my view, it is inevitable for a bank to go to the capital
market. I know that in Indonesia the central bank has prohibited
banks from investing in the stock market because of concerns over
the safety of depositor money.

But you have to ensure safety by making more appropriate
rules. In Malaysia, banks are allowed to engage in the capital
market. Concerning worries over risk management, there are
several regulations dealing with how to manage the risks.

Reorganization of Indonesia's capital market can be done very
quickly, even in 12 months. But the authority has to get the
regulation done right.

In Malaysia we have a capital market master plan as a
development guidance. I don't know whether Indonesia has one.

Concerning investment in the corporate sector, what factors
prevent more Malaysians from coming in?

The issues that worry Malaysians are the Indonesian legal
system and the political stability issues.

The country should also improve its certainty over the
investment process. Unfortunately, there have been projects that
have been opened up to investors but then canceled.