Obstacles may slow down bank merger process

JAKARTA (JP): Indonesia's ambitious plan to speed up mergers in its troubled banking sector may not be going as smoothly as expected, analysts say.

One of the hurdles, according to an analyst, could be the difficulty of assessing the share value of each bank in the share-swap mechanism.

Stakes in a new bank will be based on the share value of each merging bank.

"Each party will try to inflate the value of its shares so as to have a larger holding in the new entity," the analyst said.

Legal consultants Rudy Lontoh and OC Kaligis also said this could be a problem.

Even publicly listed banks' share prices did not reflect the real value of each share, he said.

"Share prices are also often manipulated."

The problem of making a valuation stems from big differences in banks' financial positions, he said.

He said this could be seen by looking at indicators like capital adequacy ratio (CAR), asset quality, legal lending limit and loan to deposit ratio (LDR).

Measuring a bank's asset quality and bad debt level in relation to a share appraisal could be tricky, he said.

"I cannot tell you much about the prospects because details of merger procedures are still being discussed at Bapepam," said a banking analyst from a joint venture securities firm, who declined to be named, referring to the share-swap mechanism for mergers of public banks.

Bapepam is Indonesia's capital market watchdog.

He admitted, however, that there were several constraints that could put the brakes on the pace of the merger process.

The first major merger proposal in the wake of the crisis was announced early this week by publicly listed Bank International Indonesia (BII), Bank Dagang Nasional Indonesia (BDNI), Bank Tiara Asia, and two other small banks affiliated to BDNI.

Because of BII's superiority, he said, BII would probably buy the other four banks.

"The other four banks will try to place a high value in their shares, while BII will try to press them," he said.

The volatility of the rupiah against the U.S. dollar should pose another problem.

Before the crisis, the CAR ratios of BDNI and Tiara were above Bank Indonesia's 9 percent minimum level, the analyst said. Once the rupiah plunged to Rp 10,000 against the dollar, their ratios dropped to below 5 percent.

The CAR ratios could fall because the deflating rupiah's value would force banks to use their equity to compensate the increase in the value in their foreign currency borrowings.

"In addition, the Loan to Deposit Ratios of local banks are generally more than 100 percent," he said, meaning the banks had been overextending their loans, raising the possibility of more bad debts arriving amid the economic crisis.

Given such conditions, he said, BII would probably want about 70 percent of the new entity.

"With the other two non-listed banks in real messes, BII should be able to get them for free." The two banks are affiliated to BDNI.

Another analyst, from a local securities firm, said that with the high risk attached to BDNI, especially with the U.S. dollar getting mightier, BII might back off from the plan.

"BII may consider such step even though they've signed an MOU."

He said that another stumbling block on the path to fast mergers might be bank owners.

If they feel they won't get significant loans if they merge with other banks, this could pose a problem.

"It is no secret that many banks have violated the strict legal lending limit," said the local analyst.

He said that if banks merged, and especially if they then became the minority voice in the new bank, they could no longer use the public's money to finance their private businesses.

Lippo Bank's denial of rumors this week that it planned to merge with Bank Danamon may be a case in point.

Industry sources said Danamon's financial state had not impressed Lippo, and it wanted to keep the Lippo name in the new operation.

Rumors also said Lippo wanted a larger stake than the one proposed by Danamon.

Sofyan Wanandi, president commissioner of Bank Danahutama, was quoted by the daily Merdeka as saying that there were several technical differences between the owners of the banks, including the share valuation problem.

Many bank owners say they would prefer to remain independent. Wibowo Ngaserin, president director of Bank Prima Express, did not believe banks should be forced to merge.

"The important thing is health, not size."

Finding a suitable partner with a strong financial position and a similar vision is difficult. admitted a Bank Bali official.

The National Private Banking Federation expects about 50 banks to merge into 12 new entities this year.

The federation has 146 bank members with total assets of about Rp 300 trillion and paid-up capital of Rp 30 trillion.

If the capital requirement was raised by the central bank to Rp 1.5 trillion (rumors said it will be Rp 2 trillion), the banks would have to merge into about 20 new operations. (08)