A decade ago, Indonesia had 240 banks. Financial crisis in 1998 had cut significantly the number to 131 banks at the moment. It was the crisis that forced the consolidation in the country’s banking industry. But with per capita income of below US$1,500, the number is way too big and it cost the country a huge inefficiency of banking operations.
Under Indonesia Banking Architecture (API) launched in 2004, entry to the market has been tightened with minimum capital of Rp3 trillion (US$335 million) to open a new bank. Besides, banks, including the banks established by regional administrations, should have minimum capital of Rp100 billion by 2010.
In June 2005, Bank Indonesia (the central bank) launched the banking consolidation policy to anticipate the implementation of Basel II Accord by 2008. Under the policy, banks should have minimum core capital of Rp100 billion (US$11 million) as of 2010 and a minimum of Rp80 billion by the end of 2007. Those who failed to meet the requirement will be punished with limited operation such as maximum amount of third party funds at 10 times of core capital and maximum loans of Rp500 million (US$550,000).
The central bank actually hoped for voluntary mergers before 2007. But there are only few voluntary mergers and acquisitions so far. Some small-medium banks have tried to raise capital through stock market, but the progress has been slow. The latest major merger was back in December 2004 when three banks (CIC, Danpac & Pikko) merged. Last year, two banks (Arta Graha & Inter Pacfic) merged and Sinar Mas reentered the banking business with the acquisition of small bank PT Bank Shinta. But overall, the consolidation has been too slow.
Currently total capital of 131 banks is Rp120.8 trillion or average of Rp916 billion. It seems bigger than the requirement of Rp100 billion. But the Top 20 banks contributed to most of the capital and leave others with big question mark. There are way too many banks that serve one or two customers only, sometimes related to the owners or related parties/families with core capital less than US$10 million.
According to financial report as of June 2006, the Top 20 banks has combined capital of Rp114 trillion which leaves another 111 banks with combined capital of only Rp6 trillion or average of Rp54 billion. Most foreign-owned banks in the country have core capital above Rp100 billion with Bank of America as the only exception, raising the question of its future in Indonesia.
Profitability is also a big issue in Indonesian banking industry. As of May 2006, total assets in Indonesian banking system is Rp1514 trillion (around US$165 billion) while total profit is Rp15 trillion, reflecting a return on asset (ROA) of 1%. But why these banks don’t want to merge?
Central Bank and bankers argues that banking consolidation needs tax incentives, the authority of government. But no such incentives provided.
Desperate on the bank’s owners to merge voluntarily and the slow progress in banking consolidation through capital requirement, Bank Indonesia then launch the single presence policy, which practically forbid a company or someone owns more than a bank. But the policy most likely would only consolidate big banks, not the small banks. For example, Temasek-related banks (Danamon, BII & DBS Indonesia), Khazanah (Bank Niaga & LippoBank), Panin Group (Panin & Victoria), Standard Chartered (Standard Chartered Indonesia & Bank Permata), or Rabobank (Rabobank Indonesia and two banks it acquired recently—Bank Haga and Hagakita, from Djarum Group which controls Bank Central Asia/BCA) and ANZ-ANZ Panin.
If the central bank fair enough to implement the policy, state-owned banks should be merged or consolidated as well. But in normal situation, it’s difficult to merge state-owned banks. Efforts to merge PT Bank Negara Indonesia (BNI) Tbk and PT Bank Tabungan Negara (BTN) collapsed last year on political maneuvers from the proponents and opponents.
Vice President Jusuf Kalla indirectly opposed the idea to merge state-owned banks arguing they have different functions in the economy. Strong resistance has always been at the state-owned banks themselves, especially workers and the management, something the government can’t just neglect.
This is great dilemma and political test for Indonesian government as neglecting the consolidation based on single presence policy would be discriminative and against the fair competition law.
Confronting such dilemma, Central Bank has softened its stance on single presence policy. Instead of forcing the owners to divest or merge the banks, they’re given option to establish a holding company to manage the banks.
Some banks have responded the move in different ways. Djarum Group, who owns the largest private bank PT Bank Central Asia (BCA) Tbk with Farallon Capital, for example, decided to sell two other banks (Haga & Hagakita) to Rabobank last month. But this had leave Rabobank with further question, whether it will merge its subsidiary with the two banks. Singapore’s OCBC has decided to merge OCBC with NISP.
Singapore’s Temasek is yet to decide the future of its banking ownership in Indonesia (Danamon, BII & DBS Indonesia). Malaysia’s Khazanah has repeatedly denies speculation about merger of its Indonesian banks (Niaga & Lippo). While market has speculated the possible offloading of Niaga and keeping LippoBank, Khazanah has option to merge Niaga & Lippo or establish a new holding. The same would apply to Stanchart or Rabobank.
How about the small local banks?
Some small-medium banks have entered the stock market to raise capital. There are some, which plans to float their shares in the coming months. But most of them are being the targets of acquisition by bigger groups. There are around 20 banks in this category. And we will see more mergers and acquisitions to come.
Further consolidation is subject to Central Bank’s firm decision to implement the architecture it drafted. Under the architecture, there will be three categories of banks operating in Indonesia. First is international bank, those with capital above Rp50 trillion (US$5.6 billion); second, national bank (capital from Rp10 trillion to Rp50 trillion); and focus bank (Rp100 billion to Rp10 trillion). None of the banks operated in Indonesia falls into the first category. A merger of state-owned banks could create one. And only three existing banks are eligible to get the national bank status with nation-wide operation.
Such categorization would consolidate further the banking industry and streamlining the operation of many banks which then boost average assets per customer in most banks and reduce significantly the banking operational costs. We will see more the merger of small-to-medium size banks to get the status as national banks.
Those who will be affected by single policy
Group Indonesian Banks
OCBC OCBC Indonesia
Bank NISP
UOB UOB Indonesia
Bank Buana
Khazanah Niaga
Lippo
Temasek Danamon
BII
DBS
Stanchart Stanchart Indonesia
Permata
Rabobank Rabobank Indonesia
Haga
Hagakita
Panin Panin Bank
ANZ Panin
State-owned banks Mandiri
BRI
BNI
BTN
BEI
Labels: Bank BNI, Bank Mandiri, BCA, Djarum Group, Jusuf Kalla, Khazanah, LIPPO, Sinar Mas, Single Presence, Temasek
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