Farallon wins Bank BCA

By selecting Farallon Capital Management of the United States as the winner of 51 percent of Bank Central Asia (BCA) over the favorite, Standard Chartered Bank of Britain, last week, the government decided to give higher priority to the credibility and fairness of the transaction over the integrity, competence and reputation of the investor.

The decision is rational in view of forthcoming government divestment in several other major banks, such as Bank Niaga, Bank Danamon and Bank Mandiri. Selecting Farallon as the final winner will quell criticisms over the preferential treatment allegedly given to the British bank and improve the government's credibility in future bank tenders.

But then the transaction is no longer a strategic sale in the real sense because the "strategy" component that was supposed to be brought in by the new investor's high integrity, competence and reputation in the banking industry was missing. What the bidding process produced was the Farallon-Djarum consortium, the strange coupling of an investment firm with a cigarette maker.

The government actually had the right, and good reason, to expect Standard Chartered as the final winner because in contrast to Farallon, the UK bank would have brought synergy and its high integrity, competence and reputation in the banking industry to BCA.

The dilemma, though, is that selecting Standard Chartered as the winner would have produced a deal that was perceived to be unfair and not credible. That would have inflicted greater costs in that potential investors would simply have stayed away from any future asset sales by the government.

Anyway, Farallon, as one of the two final bidders that successfully passed the fit-and-proper test by the central bank, has won the prize through a fair and credible process. True, Farallon, as an investment company, will not have a long-term interest in the bank as its main objective is a high return on investment and capital gain. It will divest as soon as high profits are on the horizon.

But there is nothing wrong with this goal. Even Standard Chartered would also have aimed at that goal, though with a much longer time-horizon, because it would not have seen BCA simply in terms of its operations in Indonesia but also within the framework of its business and brand name in Asia, possibly, even the world.

In fact, in view of BCA's great role in Indonesia's payments system, those who believe that domestic ownership of key industries, such as banks, is a vital symbol of national independence and interest, may prefer Farallon as the majority owner of BCA. They can rest assured that national interests can later take over the bank because the investment company will sooner or later sell its shares.

It is also encouraging to note, at least judging from the business plan Farallon submitted as required in the bidding, that the U.S. investment company will ask Deutsche Bank to help manage BCA. Its plan to emphasize the development of effective risk management and to expand lending operations by at least 34 percent within three years, demonstrates its right perception of sound bank operations.

BCA, though the largest retail bank, with a customer base of more than eight million accounts, still depends mainly on the interest on its government bonds for its income, and its loan-to- deposit ratio is still very low, at around 17 percent. Only by expanding loans, but under effective risk management, will BCA be able to build a stronger footing for long-term growth.

BCA's main weakness is poor risk management and credit assessment. Before its collapse in 1998, BCA was virtually the treasury unit of the Salim business group. Hence, its staff members had not developed and acquired adequate skills in those two core elements of banking operations. In this context, Farallon is actually not the best choice.

Farallon's success will depend on how far and how long it will tap Deutsche Bank's resources for developing BCA human resources. Its cooperation with an international bank with high integrity and high competence is vital to improve public confidence in BCA, which, like most other national banks, is still quite fragile. This is because the bulk of its capital comprises illiquid government bonds, and the adverse economic and political situation in the country still poses unusually high risks on banking operations.

Yet, we are still worried until the detailed shareholding structure of the Farallon-Djarum consortium and the terms and conditions of the sale and purchase contracts disclosed. The public especially wants to know the identity of the majority owner of the 51 percent stake. This factor is quite vital because, in contrast to other industries, a bank is a trust institution, and a good bank starts with the integrity, reputation and competence of its owners. This is especially true in Indonesia, where good corporate governance has yet to be developed and the central bank's bank supervision capability is largely inadequate.

The market would be nervous if the majority owner were the Djarum group -- rumored to have bought 14 percent of BCA through the stock market -- as the public is still traumatized by the 1998 banking crisis, caused mostly by conglomerate-owned banks.