Farallon wins Bank BCA

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.