The Bank Bali fiasco

Several analysts and members of the House of Representatives have welcomed Standard Chartered Plc.'s withdrawal from its Bank Bali investment deal. They argued that the move would open up opportunities for new investors to buy stakes in the bank after its rights issue between Jan. 6 and Jan 12. But the Indonesian Bank Restructuring Agency (IBRA), foreign analysts, and most other officials are greatly worried that Standard Chartered's decision will spook foreign investors intending to acquire Indonesian assets.

After Standard Chartered's withdrawal, the politically charged scandal, an employee revolt, negative publicity over the past five months and a lawsuit pending at the State Administrative Court, can the Bank Bali name remain attractive as an investment proposition? What is the value of a bank that lacks public trust and cooperative employees?.

These questions are certainly looming in the Bank Bali rights issue, in which it is hoped that about Rp 4.03 trillion (US$560 million) in recapitalization funds will be raised to elevate the bank's capital adequacy ratio (CAR) to the minimum 4 percent.

The Standard Chartered move marks the latest, but surely not the last, episode in the eight-month Bank Bali saga. The saga began in late April as a landmark deal by the first foreign investor willing to stake funds in Indonesia's crippled banking industry. But the deal later developed into a politically charged scandal which implicated several ministers, senior officials and Golkar party leaders.

It is true that until the monetary crisis hit Indonesia in August 1997 Bank Bali was rated as one of the best-managed banks in the country, and the only major bank that was not part of a widely diversified conglomerate. But as their capital became negative, the economic woes drove all major private and state banks, including Bank Bali, into technical bankruptcy.

It is no wonder that when the majority owner -- the Rudy Ramli family -- experienced difficulties in raising capital to meet the minimum CAR level, six foreign investors, including ABN AMRO, GE Capital and Citibank, expressed an interest in holding a stake in the bank and started negotiations in September, 1998.

Standard Chartered, which only joined the negotiations with Bank Bali in late March, was unexpectedly successful in clinching a deal with Rudy Ramli. On April 23 this year, the two signed an agreement that would allow the British bank to have a 20 percent stake in the bank. Negotiations progressed smoothly until Standard Chartered cried foul in July after uncovering during a three-month due diligence, an "improper" Rp 546 billion payment made in early June by Bank Bali. The payment was made to a politically well-connected company as a commission to recover Rp 904 billion in interbank claims from IBRA.

The fund scandal immediately escalated into a political scandal and prompted IBRA to pit Bank Bali-embroiled Rudy on one side and IBRA and Standard Chartered on the other in a public- opinion war. Both leveled accusations of improper conduct at each other. More information and documents were leaked regarding the implication of officials and politicians in the scandal, the takeover and the investment and management agreements between IBRA and Standard Chartered.

Over time, Rudy built up a broader sympathy base and was perceived by the public as the victim of a high-level political conspiracy. Most employees who were sympathetic to Rudy revolted in October. In early November, they booted out the Standard Chartered managers from the bank's headquarters.

But with Standard Chartered now out of the game, the coast is far from clear for Bank Bali's recapitalization. The bank still carries a potential "land mine" which will deter new foreign investors from buying stocks. The mystery buyer, which accumulated between May and early August through German clearing house Deutsche Boerse almost 40 percent of Bank Bali's shares, remains unidentified, even after the scandal's revelation.

The securities commission, Bapepam, which is supposed to conduct an insider trading investigation into the mystery buyer has yet to come up with conclusive results. In a highly questionable statement, the commission recently announced that the 40 percent stockholding was owned by about 1,200 small, independent investors.

If the mystery investors and the Rudy Ramli family, which still owns more than 18 percent of the bank, exercise their preemptive rights, IBRA, as a standby buyer of the rights shares, may find it difficult to quickly sell its shares as planned because new investors will not be assured of management control.

Given this uncertainty and Bank Bali's battered condition, we would not be surprised if the next episode of the Bank Bali saga ends with the bank's wholesale nationalization -- at the taxpayers' expense.