Mandiri may use recapitalization bonds for BII buy

JAKARTA (JP): State Bank Mandiri said on Friday it planned using its recapitalization bonds to finance the acquisition of publicly listed PT Bank Internasional Indonesia (BII), amid difficulties to raise revenue.

Bank Mandiri president E.C.W. Neloe said the bank had proposed the plan to the government.

"There haven't been any decisions yet, but we have stated that we want to pay (for the acquisition) with the recapitalization bonds," Neloe told reporters, following a signing ceremony of MoUs to extend loans for shrimp farmers.

Bank Mandiri plans to provide an estimated Rp 60 billion (about US$6 million) in commercial loans to shrimp farmers.

Neloe said in financing BII's purchase, Bank Mandiri would pay the bonds to the Indonesian Bank Restructuring Agency (IBRA), which owns a 56.7 percent stake in BII.

He declined to explain the plan in more detail, saying he was still awaiting BII's due diligence for the details to become available.

Earlier this month, Bank Mandiri announced plans to acquire BII as part of a plan to boost the bank's retail market segment.

Under the plan, BII would hold the right to accommodate Bank Mandiri's entrance and turn the former into a subsidiary of Bank Mandiri.

So far, no estimation has been made over the value of the acquisition.

Neloe said the amount of bonds required to finance the acquisition remains unknown, until after BII's due diligence.

According to him, the due diligence may take about two months, after which he expected to finalize the acquisition by September at the latest.

Many believe the acquisition is aimed at saving BII from closure, on threats that its non-performing loans would become unmanageable.

Most of these loans have been extended to the affiliated Sinar Mas Group, the bank's former majority owner. At $1.2 billion the loans account for about half of BII's credit portfolio.

As part of the acquisition deal, the government has agreed to extract the loans from BII's balance sheet.

Commenting on Bank Mandiri's earnings, Neloe said Bank Indonesia certificate rates of over 17 percent made it difficult for them to raise earnings.

According to him, half of Bank Mandiri's recapitalization bonds carry fixed coupon rates.

Once SBI rates hover above the coupon's fixed rates, a bank becomes exposed to negative spread. This occurs when the bank cannot cover the cost of its deposit interest rates with earnings it made from the rates on loans or bonds.

Fixed-rate bonds carry a coupon rate of 12 percent or 14 percent.

Neloe said to raise revenue, the bank tried to recover some Rp 22 trillion in written-off bad loans, which it inherited from its four founding banks.

Bank Mandiri was founded in 1999 from the merger of four state banks.

"Of the Rp 22 trillion, Rp 1.2 trillion had been recovered by July; our target for the end of this year is Rp 2.5 trillion" he said.

Neloe said the recovery of bad loans had dropped Bank Mandiri's nonperforming loan (NPL) ratio to some 16 to 17 percent as against 27 percent last year.

He said the bank was targeting an NPL ratio of 3.5 percent by the end of this year.

"But achieving that target looks difficult, it's more likely that we'll end up with 5 percent," he added.

He also hoped to channel Rp 15 trillion in loans this year, of which half would consist of new loans and the remainder from IBRA under a deal to swap bonds with loans.

"Our new loans have already reached some Rp 8 trillion, but on the other side, the IBRA's bond swap doesn't work," he said.

Under the bond swap proposal, he said, Bank Mandiri would swap its recapitalization bonds with restructured loans from IBRA.

He said Bank Mandiri had asked for the transfer of Rp 1.5 trillion in IBRA loans in exchange for the bonds.

"It (the bonds swap proposal) was approved by the Financial Sector Policy Committee (FSPC), but so far, there has been no implementation," Neloe said.

He said that his bank has currently refrained from aggressive lending, given the still unfavorable business climate and the high lending rates that made investment expensive.

"In these times being aggressive is too risky, we might get caught in more bad loans," he said. (bkm)