The competition landscape of three financial giant

The competition landscape of three financial giant

Paul Sutaryono, Jakarta

The merger trend has struck not only Indonesia, but other
countries around the world as well. In Korea, Citibank of South
Korea, a member of Citigroup, the U.S-based financial group,
merged with South Korea's KorAm Bank in a US$2.7 billion deal in
February 2004, with the intention of improving South Korea's
banking industry.

Through Citibank of South Korea, Citigroup gained an edge
over its main rivals, Standard Chartered Bank (Stanchart) and
Singapore's Temasek Holdings (The Financial Times, Oct. 18,
2004). Of course, UK-based Stanchart has not simply admitted
defeat. In February, it teamed up with Korean First Bank in a
$3.2 billion deal.

What lessons can Indonesia's banking industry learn from the
competition of these three world giants? The obvious lesson is to
look for business opportunities in the niche market of retail and
consumer banking.

It is likely that most people neither know or precisely
understand that these three world-class financial groups are now
engaged in a tight competition around the world. Citigroup,
Stanchart and Temasek are competing with one another not only in
Indonesia but also elsewhere around the globe.

Let's take a look back at the history of this competition in
Indonesia.

Temasek was the first of the three to take a strategic step by
securing a majority stake in Bank Danamon and, later, Bank
International Indonesia (BII).

Stanchart could not simply allow Temasek to take the lead.
Stanchart last year teamed up with Astra International to acquire
a majority stake in Bank Permata.

Both Temasek and Stanchart are leading players in retail
banking. That is why, through the banks that they acquired, they
will have a broader customer base and a wider network of branch
offices as distribution channels for their various banking
products and services. They will be competing with each other for
years to come, and the competition in the retail banking sector
can be expected to get even fiercer.

Everywhere in the world, including in Indonesia, Citibank is
making its presence known in the retail and consumer banking
sector. Just observe developments in Citibank's issuance of
credit cards. Do not forget the credit card business is extremely
lucrative for all national banks. It promises earnings beyond the
corporate credit interest income.

With about 1.5 million Citibank credit cardholders, Citibank
ranks first in that department in Indonesia. Second to Citibank
is Bank BNI, with about 850,000 credit cardholders. BCA, BII and
Bank Mandiri come next. It would be easy to jump to the
conclusion that Citibank can maintain this dominance with its
vast global network. In fact, the crux of the matter is how
Citibank got to this position in the first place.

One of the most effective tools in this respect is to merge
with local banks. Citibank of South Korea just did this with
KorAm Bank.

KorAm Bank ranked 232nd in the world and ninth in South Korea
in terms of asset value. There is still a large gap between KorAm
Bank's world ranking and the rankings of Indonesian banks. Bank
Mandiri, the top bank in Indonesia, ranked only 262nd in the
world in terms of asset value.

To score a bigger success, Citigroup has set performance
targets in six pillars that the post-merger new group must reach.

First, to apply Citigroup's discipline to KorAm Bank's risk
and credit management. Second, to sell more Citigroup products to
the customer base of KorAm.

Third, to introduce the Citigroup system in evaluating
customers and marketing credit cards. Fourth, to give the same
rewards for the collection of deposit funds and the channeling of
loans.

Fifth, to overcome a backlog problems by introducing monthly
key managerial meetings. Sixth, to conduct cultural and systemic
integration.

The measures that Citibank has taken, however, still give
Stanchart room to secure its market share in South Korea. After
setting HSBC aside, Stanchart acquired Korean First Bank, at a
value of $3.2 billion, from Newbridge Capital.

After this acquisition, Stanchart will be better able to
compete in South Korea. Why? The answer is that this bank's
assets rose to 44.8 trillion won ($44.8 billion) and that it also
has 404 branch offices, 3.5 million retail customers as well as
1.1 million credit cards. Indeed, this is a really effective
weapon for Stanchart to control the retail market in South Korea.

The question is whether our national banks should begin taking
similar actions to win the competition in the retail and consumer
banking sector.

Our banks should not be reluctant to jump in and develop
various sources of earnings beyond revenue from corporate credit
interests. What examples can be given here?

First, micro, small and middle-sized enterprises. It is public
knowledge that this business sector was able to survive the
monetary crisis here. However, many national banks are still
reluctant to explore this area. Why? Because the cost of funds is
quite high and the yield is small. Understandably, banks help
this sector only to meet government requirements. It is required,
for example, that every bank must channel 20 percent of its total
credits to this sector.

Given this situation, it is necessary for the central bank to
provide an incentive of sorts as a stimulus. In this way,
national banks would compete with one another to channel loans to
the micro, small and medium-sized business sector.

Second, remittances. Remittances from migrant Indonesian
workers are a lucrative source of income for national banks.
Every month, these migrant workers send money back home in
foreign exchange, say, in US dollars. At the least, national
banks will enjoy the difference in the exchange rate between the
US dollar and rupiah, and at the same time get the remittance
fees.

Today there are some five million Indonesian migrant workers
abroad (mostly in the Asia Pacific and the Middle East), each
receiving an average monthly salary of $250. This means
remittances of about $1.25 billion per month, or about $15
billion (Rp 135 trillion) per year. Obviously, this means huge
foreign exchange earnings for the state.

All this means that remittances are a good source of earning
for banks. Business opportunities are open wide in this regard
because only a few banks, such as Bank Mandiri, BCA, BNI, BRI and
Bank Niaga, are involved in this area.

Third, rebate schemes. To augment earnings, national banks
must consider adopting rebate schemes in their dealings with
foreign banks as remitting banks for remittances. A rebate scheme
can be implemented in accordance with the volume or amount of
remittances every month.

Such schemes, which are win-win situations in establishing
business, are eagerly awaited by remitting banks abroad,
particularly in Malaysia and the Middle East.

Fourth, a trade processing center. At present, several
national banks have trade processing centers for export and
import activities. With the presence of such centers, branch
offices no longer have to deal with processing export and import
documents. The head offices take over this job. Branch offices
simply negotiate or advise on the documents as required in the
documentary letters of credit.

If these steps were followed, national banks would not be
crushed by the competition from giant financial groups in
Indonesia. Must national banks just be onlookers? As onlookers,
they will be easily crushed by global players that have
demonstrated their ability to maneuver in the retail and consumer
banking sector.

The author is a banking analyst.
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