Wed, 07 May 2003

Synergy for Bank Danamon

Another confidence-building deal is about to be wrapped up in the banking industry.

The Indonesian Bank Restructuring Agency (IBRA) selected on Monday afternoon Asia Finance Indonesia Pte. Ltd., the consortium of Singapore government-owned Temasek Holdings and Deutsche Bank of Germany, as the preferred bidder for a 51 percent stake in Bank Danamon.

The foreign consortia predictably edged out the other two final bidders -- Bhakti Capital-Bank Mega and Bank Artha Graha consortia. These two national bidders are indeed too tiny compared to the Singapore-German group on account of all basic criterion imposed by IBRA.

Bhakti Capital offered only Rp 1,025 (11.5 U.S. cents) a share, much lower than the Rp 1,160 floor price set by IBRA, while Artha Graha withdrew from the bid at the eleventh hour. Asia Finance bid Rp 1,202 or 1.27 times Bank Danamon book value.

Even if the national bidders offered much higher prices, they could still not match the Temasek-Deutsche Bank consortium in terms of reputation or credibility that is most vital to a bank as an institution of trust with high fiduciary responsibility.

Besides generating more than Rp 3 trillion to the state budget, the deal will provide a new building block for the restructuring of national banks and will make competition within the banking industry much healthier.

Bank Danamon, the country's 5th largest bank with about Rp 47 trillion ($5.2 billion) in total assets, is the third nationalized bank to be sold to new investors after Bank Central Asia and Bank Niaga.

IBRA indeed is now racing against time in completing the overall restructuring the country's largest banks that it now controls under the government-funded massive recapitalization program in 1999 and 2000.

Unless these banks are released to private investors who are able to bring in fresh money, better management and, most important, higher credibility, these banks could be doomed to failure when the government begins phasing out its blanket guarantee on bank deposits and claims later this year.

That only five consortia, including two foreign ones, took part in the preliminary bidding for Bank Danamon and only two of them made the final bids further shows how uncomfortable foreign investors are about the investment climate in Indonesia.

The small number of bidders, however, did not decrease the quality of the final winner. In fact, the Temasek-Deutsche Bank will bring in strong synergy to Bank Danamon in all areas most vital to a sound bank such as capital strength, market reputation, human resources and networking.

This is the right kind of synergy Bank Danamon badly needs to bolster its market competitiveness in view of the fragile economic condition and the fierce competition within the banking industry as most domestic and foreign banks now compete in the retail market.

It is therefore misguided to assess the strategic sale of the bank simply from its price. Yet more important is the credibility and better management that will be brought in by the new majority owners. A strategic investor with as good reputation as Asia Finance will jump start Bank Danamon's operational restructuring.

A stronger Bank Danamon not only will increase its share value but also will benefit the banking industry and the economy as a whole. That too will enable the government to recoup a greater portion of its more than Rp 20 trillion investment in the bank as it can later sell its remaining 48 percent stake at a much higher value.

This is the most fundamental thing politicians, who like to whip up narrow-minded nationalistic sentiments, should be fully aware of.

A successful deal for Bank Danamon will also create a virtuous circle within the restructuring of the banking industry and a conducive condition for the forthcoming government divestment of nationalized Bank Lippo and Bank International Indonesia and state Bank Mandiri within the next six months.

The deal should also be welcomed as one of the most transparent and accountable transactions. Different from previous divestments, the whole process of Bank Danamon's strategic sale was supervised simultaneously by an independent review team, a financial adviser and IBRA's internal audit committee.

However, given the legal and political harassment faced by many foreign investors that had acquired Indonesian assets -- such as the ones undergone by Temasek's acquisition of PT Indosat late last year -- the government should not take the Bank Danamon deal for granted.

Even though the House of Representatives had approved the divestment of Bank Danamon last year, the government should immediately start an effective communications program to enlighten all Bank Danamon stakeholders of the great benefits the new investors will generate for the bank.