Bank of India acquires 76% Bank Swadesi

Bank of India has acquired 76% shares of PT Bank Swadesi Tbk, a small bank with total asset of Rp958 billion as of Sept 2006 at undisclosed price. The bank's previous controlling owners were PT Panca Mantra Jaya and PT Putera Mahkota Perkasa with 39% shares respectively. In November 2005, Bank of India had also acquired 76% shares of another small bank PT Bank Indomonex for about USD6 million. While it's not clear yet of possible merger of Indomonex & Swadesi, under the existing single presence policy set by Indonesia Central Bank, it's likely that Bank of India would merge the acquired banks.

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Holding vs merger of state-owned banks

Responding the Central Bank's Single Presence Policy (SPP), government has launched an initiative to establish a holding company for state-owned banks (Mandiri, BNI, BRI, BTN & BEI). But some prefer merger of these banks. Which one is better?

Legislator Drajad Wibowo (former commisssioner at BNI) told Koran Tempo today that merger would be better to create a stronger bank. His view is completely different with his stance few months ago when he agreed on a BNI-BTN merger plan but rejected a Mandiri-BNI merger arguing the latter would create an overlap functions.
State-owned enterprises minister Sugiharto said earlier that government is reviewing the plan to respond Central Bank's policy. Establish a holding bank, either vertical or horizontal structure, is among the options available besides the merger. Kompas quoted Sugiharto last week saying out of so many options available, the holding company is the option left for further review. The review would be to decide whether to pick one bank as the operating holding or establish a new non-operating holding.
So far, there is no clear guideline from government about its policies on state-owned banks. VP Jusuf Kalla prefers a merger of Mandiri-BNI because of their similar functions, but keep BRI and BTN as independent banks with speficic tasks (BRI for SMEs, and BTN for housing). Guess why?
Previously some politicians argued against the merger saying that would be politically too sensitive. But Drajad told Tempo that a merger would be more sensible politically. Drajad's colleague, Dr Aviliani, who is also member of board of commissioners at BRI, prefers holding than merger. I'm not sure whether her view represents the BRI board or not. Drajad & Aviliani were economists at INDEF (think tank).
After the fuss over SBY's newly established team, it's interesting to watch the competition between the two camps (SBY & JK) over the holding vs merger issue.
Early this year, government scrapped a BNI-BTN merger plan on strong opposition from legislators and the management/workers of BTN. So, I just can't imagine the scale of political opposition on the merger of 5 state-owned banks.
Merger is also considered a violation of Govt Regulation No. 28/1999 about the merger, consolidation, and acquisition of banks which stated the bank emerged of the merger should not have assets more than 20% of the total national bank assets. The merger of 5 state banks would create a bank with 38% of national bank assets, Kompas reported.

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Single Presence Policy & Bank Consolidation Sweeteners

Indonesia Central Bank had issued two important decrees that would accelerate consolidation in the banking industry. The first, Bank Indonesia Regulation No.8/16 on single presence policy and the second, BI Reg No.8/17 on incentive packages for bank consolidation. Which banks should merge under the new policy? What's happen to state-owned banks? How about foreign-owned banks? Small banks? What are the sweeteners?

Exerpts from SPP according to BI Reg No.8/16 are as follows:
1) Parties could only be controlling shareholder in one bank, except
(a) Controlling shareholders of two banks with different banking principles, ie, conventional and sharia. Banks fall into the category are Bank Mega with Bank Syariah Mega or Bank Mandiri with Bank Syariah Mandiri, etc
(b) Controlling shareholder in two banks in which one of them is a joint venture bank. Like in the case of Standard Chartered and Bank Permata (JV between Stanchart and Astra Group), or branches of foreign banks
(c) bank holding company established by controlling shareholder to control and manage directly the shareholdings in more than one bank,

2) There are options for those who controls more than one bank:
(a) Divest shares partly or in full,
(b) merger
(c) establish a bank holding company by establishing new company as the holding company or appoint one of the banks as holding company.
3) The bank holding company should be a company registered under Indonesian law.

What are the sweeteners for those who want to consolidate their banking business?
WRITING IN PROGRESS

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Indonesia banking consolidation

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

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Market Watch

Central Bank would likely soften its stance on single presence policy allowing owners of two banks to establish a holding company as the first option. This would be the preferred choice than reducing shareholding in one bank or merger.

In the meantime, as the Central Bank cut its benchmark rate by 0.25% to 12%, banks pledged to follow with lowering interest rates to boost lending.
Investor Daily reported today that plantation company PT PP London Sumatra Tbk is looking for US$150 million loan to finance its expansion projects. London Sumatra (Lonsum) has been rumored as acquisition target, but it's not clear which company made the offer. Various attempts to acquire the company have been failed as existing shareholders put sky-high price.

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Rabobank acquires Indonesian bank for USD85 million

Netherland-based Rabobank is acquiring an Indonesian bank (HB) for USD85 million to be merged with its Indonesian subsidiary PT Rabobank International Indonesia.

"Rabobank is reportedly won the bid to acquire the bank at 3.2 of book value," an investment banker told me this morning.
The Indonesian bank is owned by a group which also own the largest listed private-owned bank in Indonesia. "It seems that the group is anticipating Central Bank's single presence policy as they would not be allowed to own more than one bank," he said.
What is the name of the bank?
Details of the acquisition will follow. Hints: The bank has total assets of Rp3.05 trillion as of December 2005 and booked net profit of Rp36 billion in 2005. The bank has a sister bank with almost the same name, but with one word added behind it. Watchout!

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Single presence policy delayed further

Indonesia's central bank decided to postpone the implementation of single presence policy to as early as 2008-2010, behind its initial schedule of second half 2006.

Under the single presence policy, someone or a company will not be allowed to own shares in two or more banks. Should the central bank implement the policy, companies like Singapore's Temasek Holdings, UOB, OCBC, Malaysia's Khazanah, Standard Chartered, and some local business groups should merge the banks or divest and exit.
Koran Tempo quoted Burhanuddin Abdullah, central bank governor saying there are three options available. First, the central bank will 'politely' ask bank owners to merge. Second, bank central will give direction to bank owners on what to do. Third, bank central will instruct bank owners to merge within two years starting 2008.
So, the central bank barks louder than its bite, as usual.

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DBS posts 103% profit increase in Indonesia

PT Bank DBS Indonesia, a subsidiary of The Development Bank of Singapore (DBS), booked net profit of Rp114 billion last year, jumped 103% from Rp56 billion it booked in 2004.

According to its financial report published this morning, DBS Indonesia also recorded almost 100% growth in total assets from Rp5.23 trillion to Rp10.67 trillion, surprisingly due to massive growth of rupiah denominated deposits. The bank's rupiah and foreign currency loans also increased significantly last year.

DBS owns 99% shares in Bank DBS Indonesia, while the remaining shares owned by businessmen Edwin Soeryadjaya and Sandiaga Uno.

Temasek Holdings is listed among the ultimate shareholders of the bank. Temasek is also the ultimate shareholder of Bank Danamon and Bank Internasional Indonesia (BII). Temasek controls Danamon through Asia Financial (Indonesia) Pte Ltd (69.6%), and BII through Sorak Financial Holdings Pte Ltd (56.78%).

Danamon booked net profit of Rp2 trillion last year with total assets of Rp66.76 trillion, while BII's profit was Rp725 billion with total assets of Rp47 trillion.

Indonesia's central bank would issue new regulation on single presence in which one ultimate shareholder won't be allowed to own shares in two or more banks. This prompted speculation of merger between DBS, Danamon, and BII which would create a bank with combined asset of Rp123 trillion or around US$14 billion.

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Single presence to be implemented Q3

Central Bank governor Burhanuddin Abdullah confirmed the implementation of single presence policy in Indonesia to be started in third quarter this year in a bid to consolidate the banking sector, Investor Daily reported today.

Under the new policy, an individual or enterprise is not allowed to be the controlling shareholder or beneficiary owner in two or more banks. With that, some banks should merge if the controlling shareholders decides to maintain ownership or should sell the stakes to other parties.

For example, R. Budi Hartono (owner of Djarum Group, ranked second behind PT Gudang Garam Tbk owner Rahman Halim in Forbes rich list) is listed as controlling shareholder at PT Bank Central Asia (BCA) Tbk, PT Bank Haga, and PT Bank Hagakita. BCA is the largest listed private-owned bank in Indonesia where Farindo (a joint venture between Farallon Capital and Djarum Group) controls 51% shares. It's not clear which option Budi Hartono would take.

Bisnis Indonesia reported that some bank owners have responded the plan with merger plans. "There are some who plan to merge their banks," said Rusli Simanjuntak, director at Bank Indonesia. He didn't disclose the names though.

Some bank owners have previously pledged their support and plan to merge under the single presence policy. Panin Group, for example, is ready to merge PT Pan Indonesia Bank Tbk with PT ANZ Panin Bank. Singapore-based OCBC is also considering the merger of its last year acquired PT Bank NISP Tbk with Bank OCBC Indonesia. Another Singapore-based bank UOB would also merge PT Bank Buana Tbk with PT Bank UOB Indonesia.

Meanwhile Temasek Holdings, the beneficiary owner of three banks in Idonesia---PT Bank Danamon Tbk, PT Bank International Indonesia, and PT Bank DBS Indonesia---is yet to respond the possible merger.

Standard Chartered Bank, the owner of wholly owned subsidiary PT Standard Chartered Bank and 31.55% shares in PT Bank Permata, is similar to Temasek. No respond. Malaysia's Khazanah National Berhad, beneficiary owner of Bank Lippo and Bank Niaga, is also tight-lipped on the issue.

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OCBC to merge Indonesian subsidiaries

OCBC Bank, one of the largest regional banks based in Singapore, is ready to merge its two banks in Indonesia in a move to comply with the single presence policy to be implemented next year.

Investor Daily reported today that president director of Bank NISP (a subsidiary of OCBC) Pramukti Surjaudaja indirectly signalled the merger of NISP and OCBC Indonesia (another subsidiary of OCBC).
OCBC, through its subsidiary OCBC Overseas Investments Pte Ltd, increased its shares in Indonesian Bank NISP to 70.62% in June 2005. NISP is a medium-size bank with total assets of 19 trillion rupiah (around US$2 billion), while OCBC Indonesia has total assets of 2.08 trillion rupiah (US$200 million).
OCBC has combined assets of S$128 billion and a network of 112 branches and representative offices in 14 countries and territories including Singapore, Malaysia, Indonesia, China, Hong Kong, Japan, Australia, UK, and USA.
Yesterday the newspaper also reported a possible merger of two Indonesian banks owned by Temasek Holdings (Singapore), the BII and Bank Danamon, a move that could create a fifth largest bank in the country.
Singapore-based UOB Group is not yet responding to the possible consolidation of its Indonesian subsidiaries, the UOB Indonesia and Bank Buana. UOB has increased its ownership at Bank Buana to 61% through a tender offer of another 8% shares with US$45 million.

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Temasek exercise the merger of Indonesian banks

Temasek Holdings is reportedly exercising the merger of two of its subsidiary banks in Indonesia, the Bank International Indonesia (BII) and Bank Danamon, ahead of Central Bank's plan to implement single presence policy sometime next year. The policy would ban cross-ownerships in banks.
Investor Daily reported today that Temasek is preparing the plan to merge BII and Danamon. "Discussions are underway, but they are purely for internal purpose," said a source to the newspaper.

Temasek controls 59% of Danamon and 31% of BII. The merger of BII and Danamon would create a bank with total assets of Rp110 trillion (US$11 billion) and ranked fifth in the country behind Bank Mandiri, Bank Central Asia, Bank Negara Indonesia (BNI), and Bank Rakyat Indonesia (BRI). Temasek has another subsidiary PT Bank DBS Indonesia. A three-way merger of BII-Danamon-DBS would create a bigger bank than BRI.

Other shareholder that might be forced to merge their banks is Khazanah Nasional Berhad, Malaysia. The company has shareholdings in Bank Niaga (indirectly through Commerce Asset Berhad) and Bank Lippo (through Santubong Investment).
Standard Chartered (UK) might also have to merge its recently acquired Bank Permata with Standard Chartered Indonesia.
Djarum Group should merge BCA (Djarum is the co-owner of Farindo Investment which controls 51% shares) with two banks, Bank Haga and Hagakita, controlled by founding family of Djarum Group. Panin Group also has cross-ownership in Bank Panin and Victoria.
While it is positive to consolidate the banking industry, opposition may come from minority shareholders, especially for publicly-listed banks. Besides, there is controversy surrounding the state-owned banks. If the policy should be implemented accross-the-board, government should merge five state-owned banks (Mandiri, BNI, BRI, BTN, and BEI) with most likely huge political shakeups.

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Single Presence Policy

As I mentioned in the previous article, Indonesia has too many banks and desperately needs a consolidation through merger and acquisitions. But I am afraid the Central Bank's plan to enforce a single presence ownership policy wouldn't do any help to force the consolidation and then improve local banks.

Today, newspapers quoted Bank Indonesia deputy governor Siti C. Fadjrijah saying the single presence policy is actually intended to be implemented on private banks, which are considered to be too numerous.
I've done extensive research on banks ownership in the country. I found that only two privately-owned local banks (Haga and Hagakita) have the same shareholders. Most of these medium to low size banks owned by hundreds of different shareholders. A single presence wouldn't work in that sense.

Government of Indonesia owns controlling shares in five banks (Mandiri, BNI, BRI, BTN, and BEI). I doubt the central bank could enforce single presence policy on these banks. Look at how difficult to merge even two state-owned banks BNI and BTN only to get the president's decision to drop the plan.

Fadjrijah seems to confirm that by saying state-owned banks may be exempted from the single presence policy. "For the state-owned banks, from what I know, there is a plan to release all (the government's ownership) in them, apart from several banks. So the government will in the end own two or three banks," she said.

Again, I am afraid this not the case for the government. Minister of State-Owned Enterprises Sugiharto once supported the BNI-BTN merger plan, but president SBY decided to stop it. Sugiharto also rejects any plan to divest more government shares in several banks.

Foreign banks and investors ultimately would be the prime target of this single presence policy. Standard Chartered, for example, might have to merge with Bank Permata (31% shares) even though it is not easy, as Astra International also owns 31% shares of Permata.
Singapore-based United Overseas Bank (UOB) might also have to merge its Indonesian wholly owned subsidiary (UOB Indonesia) with the recently acquired Bank Buana (53%) or OCBC Indonesia should merge with Bank NISP (70,66%). UOB and OCBC are Singapore-based banks.
Temasek Holdings, Singapore government's investment company, owns shares in three banks, directly or indirectly. (Remember that Central Bank Rule No.5/25/2003 stated the bank's ultimate shareholders/beneficiary owners are those who control directly more than 25% shares or in combination with others).
The Temasek-linked banks are DBS Indonesia, Danamon (through Asia Financial Holdings), and BII (through Sorak Financial, a joint venture with South Korean Kookmin Bank).
Malaysia's Khazanah Berhad also owns directly 52,05% of Bank Lippo through Santubong Investment and indirectly control Bank Niaga (through Commerce Asset Berhad in which Khazanah owns 25%).
In reality, I should say, it is not easy and potentially face legal battles. Today central bank officers admitted the single presence policy was still in its early stages of discussion and need a lot of reviews. But Central Bank believe the policy would help minimize the potential for fraudulent banking practices. There were many cases in the past where those owning more than one bank used these banks to shift funds around for the purpose of covering up irregularities in their bookkeeping, the Central Bank argued.

Well, it was particularly true to state-owned banks. Look at the amount of recapitalization bonds issued to bailout the state-owned banks in 1998-1999. So, I don't understand why state-owned banks should be exempted if the reasoning behind the single presence policy is too minimize fraudulent banking practices.

OK. Let say that Bank Indonesia will go ahead with the plan. Most likely the single presence policy would only consolidate the foreign-owned banks. They will be bigger and stronger. Imagine a merger of Danamon, BII, and DBS or Standard Chartered-Permata, UOB-Buana, OCBC-NISP, and Lippo-Niaga. They would pose a bigger threat to state-owned banks and make life even more miserable for local-owned medium or smaller banks.
An analyst, meanwhile, told me other possibility that stand-alone banks like BCA and the state banks might get better opportunity to takeover the remaining local banks. But I am afraid the chance is slim for this to happen.
I prefer an acceleration of minimum capital requirement as arranged in Indonesian Banking Architecture (API). The timing is just perfect when banks are struggling to deal with high inflation and narrow interest margin. It would be difficult for these banks to grow the capital from accumulated profits. The room for sub-debt issuance to raise capital adequacy ratio (CAR) is also limited.

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Banks forced to merge

For a country with per capita income of US$1,000 something, Indonesia ultimately has too many banks. We have 131 banks with total asset of US$130 billion. On average, it looks good with US$1 billion assets per bank. With total equity of US$10 billion, average equity is less than US$80 million.

But almost half of Indonesian bank assets are in terms of government bonds issued to recapitalize the almost-bankrupt-banks during 1998-1999 financial crisis. We, the taxpayers, support these banks. Without our tax, these banks would have collapsed. So, if you happen to be a banker or owner of these banks, better say thanks to the generous Indonesian people.

They sacrificed with higher fuel price (as government scrap the subsidy), but the state keep subsidize these banks through interest payment of government bonds. And Indonesian people (taxpayers) never default on their payments through State Budget.

But I don't want to write about that, this time. We're discussing the recent statement by Siti Ch Fadjrijah, deputy governor of Bank Indonesia (central bank). The lady said banks would be forced to merge through a new policy called single presence. The new rule will be implemented sometimes mid-2006.

What is single presence?

Well, if you are the owner (ultimate owner) of two or more banks in Indonesia, you should merge them. Such policy, the bank central argues, had been implemented in Thailand, Malaysia, and India.

Bisnis Indonesia put some banks with same owner like Bank Haga & Hagakita, Bank Danamon & Bank International Indonesia (BII), Bank Niaga & Lippo. Singapore's Temasek Holdings owned Danamon and BII, while Khazanah owned Niaga & Lippo.

Indonesian government owned all the state banks like Bank Mandiri, BNI, BRI, BTN, and BEI. I am not sure if central bank could force government to merge all these banks. Remember the cracks in cabinet recently on the proposed BNI-BTN merger?

Surprisingly, when journalists asked Fajdrijah about Danamon & BII, she said, "correct me if I'm wrong, both banks owned by two different companies. We have to look at that first."

What?

Go to Temasekholdings.com.sg and we will find Temasek owns 56% shares of Danamon and 35% of BII. On top of that Temasek owns 28% shares of DBS with operation in Indonesia as well.

How about Malaysia's Khazanah Nasional Berhad? Khazanah has 100% Santubong Investments BV which acquired controlling shares of Bank Lippo. The Malaysian government investment arm also has 25.95% shares of Commerce Asset which control Bank Niaga.

The problem with Bank Indonesia's plan is definition on who should be considered ultimate owner of the banks. As for us, the taxpayers, the least Bank Indonesia can do is to make these banks more efficient and prevent lousy investors to control the bank like in the past.

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