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.