Pre-marketing will begin today (Monday) for the IPO of Bank Rakyat Indonesia (BRI). Formal roadshows under the lead of UBS and Bahana Sekuritas are expected to start the week beginning October 13, with pricing of the institutional book scheduled for the middle of the week beginning October 27. The retail offering will then take place during the first week of November, with trading to begin the week of November 17.
At $300 million to $400 million, the deal size is now larger than had originally been anticipated. This is because the company is planning to issue a tranche of new shares alongside the government sell-down. Including both the greenshoe and the redshoe, the government is expected to divest 30% of its 100% stake, while the company will issue 10% to 15% of new shares to bolster its capital base in anticipation of high loan growth. Post offering, the freefloat should, therefore, be a relatively large 40% to 45%.
The company's pricing targets are likely to be viewed as ambitious, since the bank is setting out on a range of 1.2 to 1.4 times 2003 book. This will place it at a 10% to 20% discount to Bank Central Asia, which is trading at 1.5 times 2003 book, but at a premium to Bank Mandiri, which is trading at 0.9 times 2003 book. Many have long thought it would come at a discount to both and its market capitalization will be roughly half.
The situation is also complicated slightly by an asset re-valuation being undertaken by Bank Mandiri. This will significantly lift its 2003 book value and hence widen the discount at which it trades to BCA. At the time of its IPO in late June, Mandiri was priced at 1.1 times 2002 book. This represented a 20% discount to BCA, which was then trading at 1.4 times 2002 book.
Against 2003 book, however, Mandiri is now trading at a 40% discount to BCA even though its share price has risen nearly 30% from its Rp675 issue price to close at Rp875 on Friday. Over the same period, BCA has risen a more modest 15%.
But BRI's prospects have been given a boost by the success of its debut subordinated debt issue on September 21. Ahead of pricing, few thought BRI would be able to price its $150 million deal through Mandiri, but it came over 40bp through on a Libor basis.
Observers also argue that BRI should not be solely valued on a price to book basis, because the bank enjoys an incredibly high ROE (return on equity), which means it can extract a lot more earnings from a lower book value. The bank currently enjoys the highest ROE of the entire Indonesian banking sector and reported a 39.1% level for the first half of this year compared to 24.5% for Mandiri.
Virtually all of the bank's ratios top the sector because of the profitable microfinance niche it enjoys. It has the highest net interest margins of the sector (8.9% versus 3.1% for Mandiri) and low NPLs (6.6% gross versus 7.3% for Mandiri). Its average loan nets the bank 24% versus a 12% prime funding rate.
And because BRI has a relatively low ratio of government re-capitalization bonds to total assets (31% versus 59% for Mandiri), it looks more like a normal bank. Bankers also argue that because 75% of BRI's re-cap bonds are fixed rate, the bank is immune to a trending down of domestic interest rates.
And while BRI's niche may come under threat of competition, its unique franchise gives it a strong advantage that will be difficult to chip away. As Moody's concluded in a research report earlier this year, "Any erosion of BRI's market share is likely to occur in the longer-term. BRI's massive branch network and infrastructure reach out expansively to the mass market (3,700 local units serving 2.8 million borrowers and 27.1 million savings accounts), well ahead of the competition.
"The local units enable BRI to have a direct relationship with borrowers and grant loans in a simplified credit process in the rural areas within a short time, which other banks may find difficult to compete with."
On the downside, investors are likely to be wary of any moves to re-engage the large corporate customers that proved to be responsible for BRI's government re-capitalization during the financial crisis. As of June 2002, 47% of its loan portfolio was retail, 30% micro, 12% mid market and 10% corporate. The bank has said it intends to continue reducing its exposure to the corporate sector.
A second key investment decision is likely to concern how much further upside remains from the Indonesian market given that the Jakarta Composite Index is now up over 40% year-to-date and even more on a dollar basis. The new deal further represents nearly a week's trading volume on the exchange.
At least two thirds of the deal is expected to be placed offshore. Alongside UBS, co-leads are CLSA, DBS and Fox Pitt Kelton.
