Govt plans to merge Bank Mandiri with BII

JAKARTA (JP): The government said on Thursday it planned to merge the country's largest bank, state-owned Bank Mandiri with publicly listed Bank Internasional Indonesia (BII), as part of efforts to consolidate the banking industry.

Finance minister Rizal Ramli said the two banks would make a good match, with Bank Mandiri being the successor entity following the merger.

"The government hasn't made a decision yet. It (the merger) is still under discussion, we're looking at various options," he told reporters.

Rizal said that Bank Mandiri and BII would complement each others with their different products and services.

Bank Mandiri itself is the outcome of a merger involving four state banks, and is now the largest bank in terms of assets.

However, the local giant has been struggling hard to find a foothold in the retail market where BII has a strong presence.

Bank Mandiri president E.C.W. Neloe said BII's consumer banking infrastructure was attractive.

"It has internet banking, and its (credit) card customer base is the second largest. We just don't have that," he said.

Nonetheless, the acquisition of BII may prove costly for Bank Mandiri, given the former's financial woes.

BII is a unit of the heavily indebted Sinar Mas Group, which in March declared a US$ 13 billion debt moratorium to local and foreign creditors. Sinar Mas owes BII more than Rp 13 trillion.

Following the declaration of a debt standstill, the government, through the Indonesian Bank Restructuring Agency (IBRA), took over the loans from BII. IBRA will pay the bank the Rp 13 trillion (about US$1.1 billion) should Sinar Mas default.

To offset the extraction of these loans, the government injected BII with so-called "recycle bonds."

Bank Mandiri lent Rp 4.5 trillion from its excess recapitalization bonds to help bolster BII's assets.

But it remains unclear how the recycle bonds will affect the acquisition value of BII, as Bank Mandiri may have to pay for the BII assets that originally belonged to it.

Also, despite the extraction of Sinar Mas nonperforming loans, BII may still not be able to meet the year-end minimum capital adequacy ratio (CAR) requirement of eight percent.

CAR measures a bank's capital against its risk-weighted assets, which include loans.

BII is among the banks that were issued with government bonds to boost their CARs to a minimum of four percent. For this year, however, Bank Indonesia has raised the minimum level to eight percent.

This ruling spells trouble for many undercapitalized banks such as BII, whose CAR is just 6.75 percent. On the other hand, Bank Mandiri's CAR stands strong at 32 percent.

Neloe said the acquisition of BII would cost Bank Mandiri a decline in its CAR level, though not steep enough to violate Bank Indonesia's CAR limit.

The government plans to privatize Bank Mandiri via an initial public offering later this year.

According to legislator Paskah Suzetta, a merger between the two was the least expensive alternative for improving BII's CAR.

"Liquidation (of BII) is out of question, injecting more recapitalization bonds is against the law, and restructuring BII's nonperforming loans would take too long," he explained.

Should the government approve the merger plan, it would mark the first merger between recapitalized banks.

BII is 18 percent owned by Sinar Mas, 57 percent by IBRA, and 25 percent by the investing public. (bkm)