Obstacles may slow down bank merger process

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)