FOCUS : CONFIDENCE IN INDONESIANFINANCIAL INDUSTRY GROWING

INDONESIAN COMMERCIAL NEWSLETTER

March 2008

FOCUS

CONFIDENCE IN INDONESIAN FINANCIAL INDUSTRY GROWING

The U.S. sub-prime mortgage crisis has hit various financial agencies in the world especially investment banking which suffered billions of U.S. dollars. The financial agencies suffering under the crisis are not only ones having large non performing credit in the housing sector but also in other financial sector not directly involved. The impact of the crisis has been more devastating than previously expected.

The fall of share prices with the weakening of dollar has prompted share and money market investors to turn to commodity market with the surge in the prices of several prime commodities like mine and plantation commodities.

The uncertainty in the financial sector and share markets in the world also has its impact on business in Indonesia both in the real sector or service sector. The increase in the prices of fuels and basic materials have served a big blow to the country's manufacturing sector.

The crisis has also discourage the business sector to raise fund from the stock market. Many companies in Indonesia have postponed plans to launch initial public offering (IPO) and issue bonds in 2008. They choose to wait until the market condition has improved.

However, despite the big challenged faced by the country's domestic economy , the country's banking sector has remained optimistic that they will perform better in 2008 than in 2007. They set a higher targets for his year. The optimism was expressed by banks at a meeting between the central bank leaders and leaders of 15 largest banks in the country known as Systemically Important Banks (SIBs), on March 17 at Bank Indonesia.

Based on the Banking Business Plans (RBB) 2008 presented to Bank Indonesia, the credit expansion target set by the banks for 2008 is Rp 246.2 trillion or an increase of 24.6%. The target represents higher optimism as it is higher than the growth target of 22% set earlier by the central bank.

Bankers said export opportunity is still high for certain commodities and they predicted strong growth in several other sector notably in the small and medium enterprises. They said banks want to take advantage of the healthy expansion of the small and medium businesses.

However, they warned of the need to observe developments in the share markets both domestic and regional markets.

Bank Indonesia noted strong growth of 25.5% in bank credits in 2007 overshooting the target of 22% set for that year followed by improvement of other banking indicators. Also noteworthy is the mind boggling increase in net profit reported by banks in the past two years -- up from a total of Rp 3.2 trillion in 2005 to Rp 49.8 trillion in 2007.

Sales of BII to Maybank

Improved performance of the country's banking industry has increase the confidence of foreign investors in the country's banking industry.

By the end of March 2008, Malayan Banking Bhd, the largest bank in Malaysia won a tender to sell 56% stake in PT Bank Internasional Indonesia Tbk defeating other bidders including Hong Kong Shanghai Banking Corporation (HSBC), China Construction Bank, and Bank of China.

Maybank will become the new owner of BII by paying US$ 1.5 billion to Fullerton Financial Holdings a shareholder of Sorak Financial Holdings. The bank will also provide US$ 1.2 billion for tender offer for the remaining 44% stake.

Maybank said acquisition of the stake will expand its operations in Indonesia indicating greater confidence of foreign investors in the country's banking industry.

Before the acquisition, Sorak Financial Holding was 75% owned by Fullerton Financial Holdings, a subsidiary of Temasek Group with Kook Min Bank from South Korea holding the remaining 25%.

Temasek, which also controls Bank Danamon, the country's fifth largest lender, was forced to sell its assets in BII under the central bank's single presence policy (SPP) which bans investors to have controlling stake in more than one bank in the country. Temasek, opted to maintain Bank Danamon and sell BII although to could have chosen merger between the two banks.

BII selling price hit record

The sales of the 56% stake in BII represented a big profit for Temasek Holding Singapore as well as Kookmin Bank Korea which joined in a consortium in 2003 to buy 51% of BII shares only at a price of US$ 217 million. The selling price paid by Maybank was a new record in banking share sales in the country even in Asia. The consortium Sorak bought the 51% stake in BII from the Indonesian banking rescue agency BPPN at a price to book value (PBV) of 1.32 in 2003.

The government set relatively cheap prices for banks its sold at the start of the divestment process in 2000. BCA, which was sold earlier was priced only at 1.20 times its book value (Price to book value/PBV). Similarly it was the same in the case of Bank Niaga, which was sold in 2002 with a PBV of 1.48. Bank Danamon and BII were sold a year later.

Bank Lippo was sold in 2004 precisely at its book value although the country's econmy has improved that year. Swissasia, gained much from the resale of the bank in 2005 to Santubong at a price of 2.5 times its book value.

The selling prices of private banks such as Bank NISP and Bank were relatively higher. Buana, which was acquired by foreign investor was sold at a price 2.5 times higher than its book value although the sales involved only the minority stake.

On March 22, 2004 an agreement was signed for the acquisition of 22.5% of Bank NISP at a price of US$ 70.4 million or 2.5 times higher than its book value. It was the same when UOB acquired 23% stake in Bank Buana at a price of Sin$196 million or 2.5 times its book value.

Bank Permata was the most recent bank sold. The bank was sold by the government in November, 2004 when the bank already regained health condition. The PPA, which replaced BBPN, sold 51% stake in Bank Permata to a consortium of Standard Charter Bank and Astra International at a relatively high price of US$ 305 million or 2.72 times its book value.

On December 8, 2004, PPA again sold 20% more stake in Bank Permata at a price of Rp 750 per shares or 2.91 times its book value. PPA earned Rp 1.16 trillion gross from the deal.

The PBV of Bank Permata was higher compared to those of other banks in Asia The highest record earlier was recorded by a Hong Kong bank by a bank from Singapore with a PBV of 2.7. Now BII achieved a new record with a PBV of 4.7.

Conclusion

The increase in PBV recorded by Indonesian banks reflected improved confidence of foreign investors in the country's banking industry. Amid the devastating impact of the global financial crisis, Indonesian banking industry has continued to expand. The central bank has assumed tight control over banking operation because of the trauma of monetary crisis that almost crippled the country's banking industry. The central bank has been careful in observing the prudential banking principle.

Improvement of the banking performance is also reflected by the decline in non performing loan (NPL) ratio.

The World Bank also has noted the global crisis has little effects on the country's banking industry. The bank revised down only slightly its prediction of the country's economy from 6.4% earlier to 6% for this year. Cut only slightly it is relatively high compared to those of many other countries.

It is, however, necessary to remain careful as the financial storms have not stopped inflicting more injuries to the economies of many countries.

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