Report on Bank Central Asia: Setting the record straight

By Irma Stamboel

JAKARTA (JP): There are several misconceptions related to the analysis contained in the equity research report on Bank Central Asia prepared by its lead underwriter PT Danareksa, as reflected in the article by Melville S. Brown (The Jakarta Post, May 29 and May 30, "BCA's initial public offering: Let the buyer beware").

If the writer had diligently read the whole report, he could have found that:

The review of the bank's past financial performance for the period of 1996-1999, contained in the research report, clearly stated that the bank's cost of funds in the past was high relative to other listed banks with similar assets, and that in the past the bank had a profitability below the sector's average.

However, the bank's core deposits (demand and savings deposits) as of December 1999 were indeed higher than the sector's (at 51.4 percent of the total third party funds versus 43.7 percent for the sector), and BCA's nonperforming loans of 9 percent was lower than the sector's average of 42 percent.

In fact, now that all banks under Danareksa's coverage have published their 1999 financial statements, the actual nonperforming loans of these aggregate banks was 59 percent.

Our reference to the bank as one with strong core deposits and a low cost of funds was based on our expectation for year 2000.

If we now look at the financial figures of the bank for the period ending March 31, 2000 and compare it with other listed banks which have published their financial statements for the same period, the average cost of funds for BCA was 8.7 percent compared to the sector's average of 8.9 percent.

Meanwhile the core deposits of BCA as of March 31 were 56.9 percent of the total third party funds, compared to the sector's 43.1 percent.

If the above writer had bothered to call BCA, he could have found out that the bank started to offer an 8 percent per annum interest on its Tahapan savings from Jan. 3 and a 10 percent p.a. interest rate on its one-month time deposits from Feb. 21 this year.

BCA booked a net interest income for the three month period ending March 31, 2000 of Rp 465.2 billion, a total operating income of Rp 687.5 billion and a net income of Rp 322 billion.

At the time the research report was put into print, the bank had not published its March 31 financial statements.

In deriving the estimated value of the bank, the Deposit Franchise Value and Adjusted Book Value per Share (ABVS) were used. To arrive at the ABVS, the forecasted 2000 equity base was reduced by the fixed asset revaluation and deferred income tax, totaling Rp 2.7 trillion, which the bank booked in its 1998 and 1999 financial statements.

Hence, the effect of positive tax adjustments in both 1998 and 1999 had been eliminated in the share valuation, which is contrary to what is stated in the above article.

We question the writer's statement that Indonesian banks are currently trading at lower than 1x multiple. Based on our estimation, Indonesian banks under our coverage are trading at more than 2x their forecasted 2000 ABVS.

The research report did not state that the cleaning up of the loan portfolio and recapitalization of the bank were internal management driven actions per se.

Based on the research report, the cleaning up of the loan portfolio was part of the recapitalization, details of which can be found in the research report.

The bank's loan recovery division successfully restructured around Rp 505 billion loans from the period Feb. 1 to Dec. 31 1999, which included the transfer of loans to the Indonesian Bank Restructuring Agency (IBRA) resulting in a drop of total non- performing loans to 9 percent of the total gross loans.

BCA had excess liquidity of around Rp 28 trillion as of March 31, 2000 which is believed to be more than sufficient to fund additional loans which we predict will grow by Rp 2.7 trillion this year, Rp 4 trillion in 2001 and Rp 5.1 trillion in 2002.

The above writer deeply misunderstands the concept of bank recapitalization, deferred income tax as well as methods used in valuating banks.

PT Danareksa's research report is independent and based on the audited financial statements of the bank, discussions with the bank's management and other sources which we believe to be reliable. Moreover, its forecast is derived through a thorough analysis which takes into account the Indonesian banking sector as a whole as well as the general macroeconomic conditions.

The writer is head of equity research at the state-owned PT Danareksa Securities.