The Ministry of State-Owned Enterprises is looking to sell about 3.48 billion existing shares at a price between Rp2,050 and Rp2,700, which could see it raise up to Rp9.38 trillion ($1.03 billion). The price range is very wide to allow the top end of the range to include the level where the share price is currently trading, but sources say the deal is most likely to price within the lower third of that range.
Bank Negara closed at Rp2,650 last Friday after gaining 148% in the past 12 months and after the details of the offering became known yesterday it added another 3.8% to a new multi-year high of Rp2,750. Because the free-float is less than 1% at present, the market price is not necessarily a true reflection of the fundamental value, but market watchers say the offering price range also pitches the bank at a price to book value of about 1.7 times, which would suggest a discount of more than 30% to its peer group.
The free-float will increase to about 27% as a result of this sale, assuming that the greenshoe of up to 473.9 million existing shares, or 13.6% of the base offering, is also fully exercised.
ôThis is one of the few large liquidity issued from this market,ö the sources says, noting that this in itself may help attract Indonesia-friendly investors to the deal. In fact, at just over $1 billion it will be the largest equity sale out of Indonesia.
In connection with the follow-on offering, which is arranged by joint bookrunners JPMorgan and Bahana Securities, the bank will issue up to 1.99 billion new shares that will be offered to the existing shareholders through a rights issue. The reason for this structure is that Indonesian companies arenÆt allowed to sell more than 5% of its share capital in the form of new shares unless these shares are first offered to existing shareholders.
The price of the rights offer has been set at Rp2,025, although this is still subject to change. The government has said it intends to buy its full entitlement, which at the current price would suggest Bank Negara will raise Rp4.03 billion ($442 million) in fresh capital from the government sell-down.
Because of the limited free-float, Bank Negara isnÆt very well known or understood among international investors, which may explain why there are three separate teams on the road at the moment trying to drum up support for the deal in Asia, Europe and the US, respectively. A majority of the shares are expected to be sold to international investors, although the final domestic/international split has yet to be determined. There will also be a small separate offering to retail investors. The final price is expected to be set by July 30 or 31.
Aside from the discount to other Indonesian banks, one source says Bank Negara should appeal to investors partly because of it being a turnaround story. Since a new management took the helm a couple of years ago, it has put more focus on improving the performance and reducing non-performing loans, which is reflected in the rising share price and increasing valuations.
It is also the largest bank in the country in terms of customer reach with 918 regular branches and 53 Syriah branches. Established in 1946, Bank Negara was the first Indonesian bank to open an overseas office and now have branches in Hong Kong, London, Singapore and Tokyo.
It ranks as the third largest lender in terms of total assets, which stood at $19.2 billion at the end of March this year. It is also the second largest credit card provider with 1.25 million cards in issuance.
In the offering circular, the bank said it views its credit card business as one of its ômost important business segments due to its historically higher operating margins and the significant growth potential represented by an under-penetrated domestic market.ö
On top of that the Indonesian economy is doing well at the moment and interest rates are coming down, which is helping to fuel domestic spending and loan growth.
In a report on the Indonesian banking sector issued in June, Fitch Ratings said the profitability of the countryÆs 10 largest banks remained quite good in 2006 despite a more difficult operating climate in the first half of that year. At an average return on assets of 1.7% and a net interest rate margin of 6.0%, the banks are among the strongest in Asia, it said.
However, asset quality issues are still prevalent as the NPL ratio among these 10 banks doubled to 10.8% in the first half of 2006 before declining to 7.5% by the end of the year. The majority of these problems can be found at Bank Negara and Bank Mandiri, which both have had to grapple with big legacy loans. The two banks are systematically important in Indonesia as they account for a combined 30% of the assets in the banking system.
ôNevertheless, these problem loans are gradually being tackled, with the sharp decline in domestic interest rates since the second half of 2006 expected to aid in overall debt servicing ability,ö Fitch said.
Bank NegaraÆs net NPL ratio amounted to 6.6% at the end of the first quarter this year, which marked a significant improvement to the 10.4% level recorded 12 months earlier.
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