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.