Retail Business Bright Spot For Indonesian Banks

["Ulhas Joglekar" <joglekarulhas@xxxxxxxxxxx>]

The Financial Express

Thursday, April 11, 2002

Retail Business Bright Spot For Indonesian Banks

Jakarta, April 10:  Indonesia's bruised and battered banks are likely to
experience consolidation and more foreign ownership in the years to come,
while retail and consumer banking will brighten an otherwise gloomy outlook.
The world's fourth most populous country has around 150 banks, but some 80
per cent of the banking sector in asset terms is in state hands after the
government spent US$68 billion to bail it out after a financial crisis hit
the region in 1997/98.
The economic calamity that swept Asia at that time hit the archipelago
especially hard, leading to the fall of its long-time ruler Suharto,
political instability, and sporadic ethnic and religious violence that
hindered recovery and scared investors.
Bank restructuring, a key aspect of the country's accord with the IMF, has
been painfully slow, though foreign investors took heart from a recent sale
of a 51 percent stake in Bank Central Asia (BCA), the largest retail bank,
to a US investment company, Farallon Capital Management.
As elsewhere in Asia, in the wake of the financial crisis, banks have turned
cool on lending to the debt-laden and often troubled corporate sector and
switched their focus to expanding income from retail customers.
"Our business is still largely in corporate banking but we have already
embarked on serious efforts to substantially increase our presence in the
commercial and retail markets which are fast expanding," said Omar Anwar,
executive vice-president in charge of retail banking at Bank Mandiri.
But, because of continuing weakness in the economy, one of the most
significant revenue sources for the next five to 10 years will continue to
be interest from the special government bonds used to recapitalise the
sector after 1998.
"For the next 5-10 years, there would not be significant changes in the
landscape, the government would continue to pay the interest on the
recapitalisation bonds," said GK Goh Securities banking analyst Tjandra
Lienandjaja.
According to a central bank document, government bonds contributed around 45
per cent of Indonesian banks' total interest income last year, meaning the
banks had not effectively functioned as intermediary institutions helping
stimulate growth.
For at least the next two to three years, the sector is expected to focus on
consumer and retail banking. Consumer demand last year was the major bright
spot in a spluttering economy.
Local and foreign banks have expanded aggressively in the highly competitive
retail market and see significant potential in the large population of
around 210 million.
The central bank document forecast 2002 total bank loans would increase to
427.4 trillion rupiah from 357.2 trillion in November last year, with the
commercial, retail and small business sectors the key elements in the rise.
(Reuters)
According to Anwar, at state-run Bank Mandiri - Indonesia's largest bank
with total assets of 262.3 trillion rupiah at the end of 2001 - its latest
efforts to tap retail and commercial banking have yielded encouraging
results.
Some analysts said the tight competition in the sector has helped push
interest rates for retail commercial business lower than those for corporate
customers because most banks want to enter the segment.
"The winners will be banks which know the local market very well with strong
networks including a lot of branches," said state-owned Danareksa Securities
banking analyst Joshua Tanja.
Privatised banks, particularly those under foreign control, could gain when
the government ends a blanket deposit insurance guarantee, one of the world'
s most comprehensive and costly.
"Now the blanket guarantee still exists but once it is (reduced) the small
banks would hardly compete, while banks taken over by foreign institutions
might be perceived safer even than state banks," said ING Securities
Indonesia analyst Liny Halim.
The scope of the guarantee is to be substantially reduced by 2004, and after
that depositors are likely to switch to banks backed by international names
with deep pockets.
Faith in locally owned institutions was badly shaken in the economic crisis.
Many banks were owned by magnates who controlled conglomerates and treated
the institutions as private piggybanks, funneling cash to failing companies
and piling up bad loans.
The banks ultimately fell into government ownership in the form of control
by Indonesia's Bank Restructuring Agency (IBRA), which plans to sharply
reduce its stake by the end of 2003.
"There is a keen interest from foreign investors...particularly after the
latest divestment of the government stake in BCA, to buy (Indonesian) retail
banks as well as those with core business in corporate banking," said
Akhabani, investment banking director at Trimegah Securities.
GK Goh analyst Lienandjaja said he expected consolidation in the near
future, mainly among small banks, because of rising capital requirements and
the inability of owners to inject funds.
"Maybe it hasn't been seen this year but in the years ahead several banks
must merge or be acquired by other banks because of insufficient CAR
(capital adequacy ratio)," he said.
Even banks sold to relatively well-off foreign buyers might be reluctant to
sell the government bonds given the risk of their CAR falling below
requirements when the bonds are gone.
- Reuters

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