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. --------------