A Temasek subsidiary, Fullerton Financial Holdings, sold its 75% interest in Sorak Financial Holdings (with the balance held by KoreaÆs Kookmin Bank) which owned 56% of the shares in BII to government-owned Maybank at a rich 4.6 times 2007 price-to-book value. Maybank said it would also launch an offer for the remaining 44% of IndonesiaÆs sixth largest lender for about $1.2 billion.
Temasek was advised by Credit Suisse and Goldman Sachs. The purchase agreement is subject to Bank Indonesia (central bank) approval within 30 days, and if granted, MaybankÆs acquisition is likely to be completed within six months.
HSBC, Bank of China and Kookmin Bank had been reported as rival suitors. All of the bidders were strategic buyers with limited presence in Indonesia that were seeking a bridgehead into the country. A source familiar with the deal says Maybank has no immediate plans to change the BII franchise significantly, although it should soon be able to transfer its Islamic finance expertise to a market which is still undeveloped.
Although there were two parameters set by Temasek û price and execution risk û it is clear that price was the more important since none of the rival bidders could be rejected for fear that they would not be able to stump up the cash or gain domestic regulatory approval. Mayback offered the highest price.
However, central bank approval could be less than straightforward. Maybank is majority-owned by the Malaysian government, which is also the ultimate owner of Khazanah, the state investment arm. Khazanah owns Lippo Bank which it merged with another of its Indonesian bank holdings, Bank Niaga, at the end of last year to comply with IndonesiaÆs single presence policy (SPP).
The SPP is part of a reform package introduced by Bank Indonesia to streamline and strengthen the fragmented banking industry, which includes about 130 banks; companies that own more than one bank were required to announce by the end of 2007 whether they planned to merge them, reduce their controlling stakes or create a single holding company. It is unclear whether MaybankÆs acquisition will breach the SPP rule.
Although, ostensibly the country looks over-banked, the top 15 players control around 70% of its bank assets û and of the top 10, seven are already foreign owned. So, the BII auction provided Maybank with a rare opportunity to enter the market û and it was prepared to pay a hefty premium to do so.
Banks attract attention after a tarnished past
A history of embezzlement, fraud or honest incompetence is an unlikely legacy for a sector that has been attracting praise from analysts and sustained interest from investors. But many Indonesian banks, once known as cash-dispensers for family members and cronies of former-president Suharto, are scoring well for key ratios as foreign banks hunt for opportunities in a fast growing economy, buoyed by even faster expanding loan growth.
The performance of Indonesian banks improved last year, spurred by stronger economic growth and lower domestic interest rates. Net interest margins rose to 6.3% from less than 6% in 2006, while NPLs (non-performing loans) fell to 6% at the end of 2007 compared with 7.7% the previous year-end and 10.4% at end-2005, according to Fitch Ratings. But loan loss provisions were raised to cover lingering NPL problems following more stringent regulatory requirements on NPL classifications, and also due to general loan expansion, which was up 20% last year compared with 14% in 2006. The loan-to-deposit ratio is high at around 70% (still lower than the 90% ratio pre-1997), but loans make up just 25% of GDP, compared with 50% before the Asian crisis. In contrast, the loan-to-GDP ratio is 79% in South Korea and 76% in Thailand.
Apparently, Temasek preferred to hold on to Danamon because of its high-margin microfinance business. It seems to be the right choice.
A Jakarta-based banking analyst points out that the countryÆs best banks have a ROE (return-on-equity) of more than 20%: BRI has 27% because it has a low cost of funds due to its focus on micro-lending, and enjoys an 11% interest margin. BCA earned a 22% ROE from a transaction banking model that has attracted lots of individual and corporate customers, about 70% of whom place their money in low cost deposit accounts. DananonÆs funding costs are higher than BCA and Bank Mandiri because it is medium sized, but it also micro-lends at 35%-45% - which might seem usurious but loan sharks charge 100% or more. Other banks have ROEs of less than 20%, although Mandiri should reach 18%-19% in 2008, up from 16% last year.
The analyst notes that banks with ROEs of more than 20% trade on price-to-book values of about three times, and those with ROEs of 12%-14%, which he expects BII to achieve this year (after a disastrous 7%-8% in 2007 due to a failure in its motorcycle financing division), are currently trading at under two times book value. Maybank, of course is paying around 4.6 times for BII.
The Temasek-led consortium originally bought a 51% stake in BII for $232 million in 2003, which implies it made nearly a five-fold gain on the sale.
Fitch warned in a report in January: ôAsset quality management amid rapid loan growth and a still evolving (and weak) regulatory and legal climate will remain a key challenge for the banksö, even among foreign-owned banks where best practices are being introduced. The ratings agency estimates that loan composition was split about 30:40:30 between corporate, commercial and consumer loans in 2007, compared with a 60%-70% share for corporate loans and less than 10% for consumer loans in the pre-financial crisis period. Clearly, this is a better balanced ratio, but the portfolio of retail loans is largely unseasoned and banks are generally inexperienced in managing them. Also, a revival of larger lot lending through more infrastructure financing could cause future problems, ôgiven the weak debt history on large corporate loans in the past and the banksÆ general lack of expertise in these areasö.
Fitch concludes that operating conditions should remain good this year, underpinned by real GDP growth of 6% and domestic loan growth of more than 20%. Capital adequacy ratios (CARs) are high at 20%, so a reduction in levels due to increased weights for credit risk and greater operational risk during the phasing in of Basel II throughout this year should be manageable û although Fitch is concerned that the central bank cut the risk-weights on some categories of retail loans from March 2006 when there is a lack of reliable default data.
But, in any case, the clear message is that Indonesian banking is no longer a basket case or depository of toxic abuse, but actually looks like a going concern.
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