Foreign banks that have been frustrated trying to break into one of the world’s most-profitable countries for banking, Indonesia, now might have a way. Buy two lenders, merge them — you might get management control while Indonesia gets to cut its weakest players and consolidate its banking sector.
After Indonesia imposed rules three years ago that limited foreign ownership of its banks to 40 percent, the ground shifted again this year. Regulators started saying that bidders could go above the threshold if they bought and merged two local lenders. At least two deals, by China Construction Bank Corp (CCB, 中國建設銀行) and South Korea’s Shinhan Bank, have been given the go-ahead.
“It may be an odd way of being allowed to enter the market, but maybe it’s a relatively small price if you are taking a long-term perspective on Indonesia,” Fitch Ratings Asia-Pacific financial institutions ratings head Mark Young said. “This market is something that any regional bank that has ambitions would look to enter.”
Indonesia’s four largest banks, with market value exceeding US$5 billion, have a return on equity of 20.4 percent, the highest among similar-sized banks in the 20 biggest economies of the world, data compiled by Bloomberg show. The banking sector’s average net interest margin of 5 percent is more than double that of Southeast Asian neighbors Singapore and Malaysia, data show. Loan growth is expected to accelerate as much as 13 percent next year, Indonesian Financial Services Authority chairman Muliaman Hadad said.
However, the problems and costs of merging two banks’ differing operational systems and family owners who might not want to fully cede management control make such acquisitions tricky, Mizuho Securities Asia Ltd Hong Kong-based analyst Jim Antos said.
In addition, the Basel III global regulations require more liquidity buffers for banks, meaning that lenders could be spending precious capital for an acquisition that might not end up delivering results for years — especially in an economy that is heavily tied to commodities, which are currently in a down cycle.
“It might be double the trouble actually,” Antos said. “A two-for-one sale is something that you find in a retail shop, not in a banking sector. It’s not a bad idea in theory, but the reality is going to be very tough.”
Valuations of Indonesia’s smallest banks have risen in the past year as indications emerged that regulations were shifting. Shares in Indonesia’s 10 smallest listed lenders have risen an average of 38 percent in the past 12 months.
By comparison, the top 10 have fallen an average of 29 percent.
CCB in September said it would become the controlling shareholder of Jakarta-based Bank Windu Kentjana International, which handles trade financing and foreign currency from 78 outlets — primarily on the island of Java — after the Indonesian bank in July bought Bank Antardaerah, a small commercial bank with 30 offices in Java, Bali and Lombok.
CCB said the acquisition would help it offer infrastructure lending in Indonesia as well as financing for cross-border settlements to facilitate trade with China.
“This is a critical step for CCB in entering the Indonesian market,” CCB strategic planning and investment deputy general manager Qi Jiangong (齊建功) said at the Sept. 18 purchasing ceremony in Jakarta. “Indonesia has always been a high priority market for CCB’s overseas development.”
Indonesia, with 118 commercial banks, is pushing for banking consolidation. With its top 10 banks accounting for more than 60 percent of total assets, the country is trying to weed out the bottom performers.
Hadad last year said that the regulator would push small lenders to merge or seek strategic investors, as well as increase industry oversight by tightening non-performing loan levels.
“For consolidation, it’s not enough for them to acquire just one bank,” Financial Services Authority banking supervision deputy commissioner Irwan Lubis said on Sept. 18, adding that the CCB deal “should be a lesson for other investors interested in acquiring Indonesian banks. Hopefully with this example, they will know what to do next.”
Regulators would consider previously stated criteria such as reciprocity between Indonesia and the buying bank’s country, and whether the buyer would help to grow the economy, when deciding whether to approve controlling-stake acquisitions, he said.
Financial Services Authority banking supervision chief executive Nelson Tampubolon said by text message that there are no plans by other foreign banks to buy another Indonesian lender at this time.
In addition to the CCB and Shinhan deals, Tokyo-based J Trust Co bought 99 percent of PT Bank Mutiara one year ago, with regulators making an exception for the Japanese financial-services firm because it was buying a distressed bank. The bank is aiming for as much as 20 percent loan growth this year.
Others are content with less. Taiwan’s Cathay Financial Holding Co (國泰金) in January said it was buying 40 percent of Bank Mayapada International, while Sumitomo Corp in February paid US$460 million to raise its stake in Bank Tabungan Pensiunan Nasional to 20 percent.
“If you look long-term the Indonesia market is very attractive, but it will need capital to support the growth,” Young said.
The government’s efforts at pushing banking consolidation “makes life easier for themselves, and if it means mopping up weaker entities, that’s smart too,” he said.
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