Confidence-building deals

Confidence-building deals

Amid the great controversy over the US$200 million lending
scam at state-owned Bank BNI, Indonesia's second largest bank,
there are two developments last week that contributed to
strengthening the public's confidence in the banking industry.

One is the Indonesian Bank Restructuring Agency's (IBRA)
announcement that it had selected a consortium led by South
Korea's Kookmin Bank and the Singapore government investment arm,
Temasek Holdings Pte. Ltd, as the winner of 51 percent of its
shareholding at Bank Internasional Indonesia (BII), contingent
upon approval from Bank Indonesia.

IBRA now holds 93.50 percent of BII with the other 6.50
percent owned by the investing public.

The other confidence-boosting development is the great
enthusiasm of the investing public, notably foreign investors, in
the initial public offering of state-owned Bank Rakyat Indonesia
(BRI) shares. Even before the Nov. 3 to Nov. 5 subscription
period, BRI had booked buying orders for 65 billion shares,
almost 14 times as large as the initial offering of 4.76 billion
shares or 40.50 percent of its total shares.

These developments show how local banks have been coming under
increasingly intense market scrutiny despite the government's
blanket guarantee of bank deposits and claims. Even domestic
investors have become more capable of distinguishing the good
banks from the bad.

Witness how IBRA was recently forced to cancel the strategic
sales of its 52 percent equity holding at Bank Lippo, Indonesia's
ninth largest bank, because not a single credible bidder was
interested in the controversy-ridden bank.

These encouraging developments which occurred only three
months after the successful IPO (initial public offering) of
state-owned Bank Mandiri, Indonesia's largest bank, will surely
bolster the vicious circle within the banking industry and
accelerate its restructuring.

The BRI IPO will not only bring in almost the equivalent of
$490 million to the state coffers but most importantly will speed
up the reform of the bank. As a publicly-listed bank, the
country's fourth largest bank will be subject to much tougher
disclosure requirements and to higher standards of
accountability.

Likewise, BII's strategic sale will contribute to accelerating
its operational restructuring as its new controlling shareholders
-- Kookmin Bank, Korea's largest bank, and Temasek, which is also
a major shareholder at Bank Danamon -- will bring strong synergy
to BII in all the areas most vital to a sound bank, such as
capital strength, market reputation, human resources and
networking.

Even though the divestment will likely bring in only about
$230 million, just a fraction of the $1.3 billion the government
had invested to recapitalize the bank in 1999 and 2002, the
strategic sale is still a much better way of securing a higher
rate of recovery of its investments.

The new investors are the kind of synergy BII badly needs to
bolster its market competitiveness, in view of the fragile
economic condition and the fierce competition within the banking
industry, as most domestic and foreign banks now compete in the
retail market.

IBRA's decision to select the Temasek-Kookmin alliance as the
preferred bidder, even though the second final bidder, the Bank
Panin-Raiffeisen consortium, offered a higher price, is quite
wise a choice.

Price should indeed be a secondary yardstick to assess the bid
in the strategic sale of such a trust institution as BII. Much
more important is the reputation of the bidders. It is these
factors that will determine the credibility and the quality of
the management that will be brought in by the new majority owners
to BII.

We are glad to learn that the Singapore-Korean consortium
scored much higher than the Bank Panin alliance in terms of
market reputation, quality (capital, networking), the conditions
of the sales and purchase agreement and business plan for BII.

We are confident that the new majority owners will be able to
immediately increase BII's shareholder value -- through better
management, stronger capital and more extensive networking --
thereby enabling the government to get big capital gains from its
remaining 42.50 percent stake in the bank. Take, for example, how
new majority owners of previously divested banks, such as Bank
Central Asia, Bank Niaga and Bank Danamon, succeeded in
significantly raising their share value.

However, much more important than the direct benefit to BII
itself, the strategic sale of this sixth largest bank in
Indonesian to the Temasek-Kookmin consortium will be another
building block in strengthening the foundations of the whole
banking industry.