S&P says RI needs fewer but strong banks

S&P says RI needs fewer but strong banks

JAKARTA (JP): Rating agency Standard & Poor's has suggested
Indonesia reduce the number of banks in the country and
strengthen their capital bases to meet future competitive threats
from overseas players.

As Indonesia became more involved in the global marketplace
decreased restrictions on overseas banks in Indonesia and the
growing demands of a sophisticated customer base would be major
threats to the domestic banking system, it said.

"To overcome these challenges Indonesian banks need to
strengthen their finances, product systems and human resources,"
Standard & Poor's said in the January edition of its Asia Focus
publication.

"To reach those goals, decreasing the number of banks would
give them adequate resources in the areas of products, processes
and people, while achieving economies of scale," it added.

The report said the existing 239 commercial banks were far too
many for the Indonesian banking sector at its present level of
development.

Indonesia's banking sector has too many banks but not enough
branches relative to other financial systems. A bank which is too
small cannot take advantage of economies of scale in information
technology, the agency said.

"Standard & Poor's is not confident that the small to midsize
Indonesian banks can compete with fellow Association of Southeast
Asian Nations (ASEAN) banks when the barriers to entry fall," the
agency said.

Banking in ASEAN, along with other financial services, is
likely to be liberalized under the ASEAN Framework Agreement on
Services (AFAS).

ASEAN finance ministers will meet next month in Phuket,
Thailand, to discuss the possible liberalization of financial
services.

Negotiations on financial services under the World Trade
Organization (WTO) will also start soon. And most developed
countries, which have a competitive advantage in services, will
continue to press developing countries like Indonesia to open up
their financial sectors.

Therefore, Indonesia should strengthen its financial services,
especially its banking sector, because it only has five years or
so before overseas banks enter the market because of relaxed
barriers on the heels of pressure from the AFAS and WTO, the
agency said.

But Standard & Poor's commended the unheralded shift in market
share dominance to private sector banks from state-owned
institutions.

The shift signaled "an important trend toward heightened
professionalism in Indonesian banking," the agency said.

Standard & Poor's assigned new public information ratings to
13 Indonesian banks last November.

The public information rating is graded from the highest AAA
to the lowest D, but with a "pi" subscript indicating the rating
is based on analysis of an issuer's published financial
information and information in public domain.

Such ratings do not reflect in-depth meetings with an issuer's
management or incorporate nonpublic information. So the ratings
are based on less comprehensive information than ratings without
a "pi" subscript.

Of the 13 banks four were rated BBBpi: Bank Dagang Negara,
Bank Ekspor Impor, Bank Rakyat Indonesia and Bank Tabungan
Negara.

The remaining nine were rated BBpi. They were Bank Bali, Bank
Bumi Daya, Bank Central Asia, Bank Dagang Nasional Indonesia,
Bank Duta, Bank Internasional Indonesia, Lippo Bank, Bank Niaga
and Pan Indonesia Bank.

Standard & Poor's said government support was a major factor
leading to generally higher ratings among state-owned banks.

As privatization continued government support of state banks
might change.

While the government was likely to provide financial support,
state banks with difficulties might find the government's
willingness to do so decreases as continuing financial
deregulation leads to the partial privatization of state banks.

But over the medium term the outlook for large private sector
banks is more favorable than for state banks, Standard & Poor
said. (rid)