Indonesia’s banking system is emerging from years in the doldrums and its banks, once stalwarts of corruption and mismanagement, have become favoured targets of other acquisition-hungry banks, both in the region and internationally. But bankers and analysts warn that major problems still need to be addressed in the banks themselves and in the broader political environment if progress is to be maintained.
When the Asian financial crisis hit in the late 1990s, it exposed the rotten core of Indonesia’s banking system. For years, cronies of disgraced President Suharto had set up banks, which they then plundered for capital. When the crisis came, they collapsed like a house of cards. Many were taken over by the government, reorganised and recapitalised, and have since been reoffered into the market.
International interest
Larry Berger of McKinsey & Co, which assisted Indonesia’s central bank in developing a 10-year programme for the country’s banking architecture, says increasing local and international interest in the banks that have been sold by the Indonesian Bank Restructuring Agency, which was wound up in February, is a reflection of an improved environment.
Bank Danamon and Bank Internasional Indonesia have been bought by the Singapore government’s holding company, Temasek, and initial public offerings launched for two other banks that are still controlled by the Indonesian government were strongly oversubscribed.
Another bank, Bank Permata, which the bank restructuring agency formed by merging five banks it had taken over, is to be sold off by the government before October. “From what we are hearing, both in country and from offshore, there could be significant interest,” says Mr Berger.
Expansion opportunity
Indonesia provides a unique opportunity for foreign banks keen to expand their operations. “If you want to buy a controlling interest in a banking franchise in arguably one of the most profitable markets in east Asia, Indonesia is one of the few markets where this is possible,” says Mr Berger.
He expects the sector to consolidate and mature. The recent move by two of Indonesia’s best-run banks, NISP and Bank Buana, to sell non-controlling stakes to Singaporean investors to bolster their capital base and maintain growth, is encouraging, he says. “That’s a tough decision and a decision that many family-controlled businesses in south-east Asia, or east Asia, seem to have great difficulty making.”
One bank mentioned as a possible buyer for Bank Permata is Standard Chartered. Stewart Hall, CEO of Standard Chartered in Indonesia, would not confirm or deny its interest, but says the country offers opportunities for the bold player. “The longer-term view of Indonesia is of tremendous potential, tremendous opportunities, but along with that comes a lot of risk,” he says.
Top of the risk list is Indonesia’s corrupt and arbitrary legal system. The problems with the courts were underlined last month when the Indonesian subsidiary of Prudential Assurance, the British insurance giant, was declared bankrupt because of a dispute over a $400,000 payment demanded by a former agent.
As with a similar decision against the Canadian company Manulife in 2002, the decision has since been overturned by the Supreme Court. “At the time, the courts went through with the decisions that were obviously not appropriate,” says Mr Hall. “You know they will be overturned, but in the short term they can do some damage to the image of the country.”
The lack of legal protection has limited the risk that banks have been willing to take on their loan portfolios, and, on the macroeconomic scale, limited the growth of the economy. “What we are missing is real sector investment, investment in underlying infrastructure and if we don’t get that soon, not only are we going to get infrastructure problems, but also I can see a growing social problem out there.” He says that ideally the money raised from the privatisation programme should have been used for infrastructure projects, but the government’s hands have been largely tied by the need to service foreign debt.
Although asset-backed loans to retail customers have grown strongly, many corporate customers have had difficulty obtaining loans because banks fear not being able to get redress from defaulters. They are overhauling their risk assessment procedures and some, like Citibank, are making profits in areas that have been traditionally high-risk in Indonesia, such as credit cards.
Political risk down
Political risk is no longer the factor that it once was, despite the drawn-out election process that Indonesia is going through. The legislative elections went ahead peacefully in April but resulted in a split government. Now all eyes are on the presidential elections, the first round of which is to be held on July 5. Polls show Susilo Bambang Yudhoyono, a former security minister, as the strong frontrunner but all the leading candidates are regarded as market-friendly and likely to maintain the current fiscally conservative policies.
“I’d be encouraging people to look at Indonesia quite seriously, but they have to come in with their eyes wide open, very much looking to the long term. There are risks here but they can be managed,” said Standard Chartered’s Mr Hall.
