Michael Shari, Jakarta – What happens when a government puts its biggest bank up for sale and no one's much interested? Cacuk Sudarijanto doesn't even want to think about it. As head of Indonesia's vast debt cleanup operation, he's responsible for unloading Bank of Central Asia later this month. The initial public offering will be Sudarijanto's first and the government's largest so far. It's supposed to be a symbol of Indonesia's imminent recovery. Instead, it could be a sign of the country's continuing troubles.
Two months ago, underwriters were hoping to raise $2 billion. But with many foreign investors shunning the issue, they're now talking about as little as $200 million. Even BCA's former owner isn't bothering to try to regain control. Anthony Salim, one of Indonesia's biggest tycoons and now its biggest debtor, is only promising to hold onto his remaining 7% stake for six months after the launch at Sudarijanto's request.
Rioting
Prior to Indonesia's crash, BCA was the financial heart of the Salim family empire. The government took the bank over in 1998, after many of its 8 million depositors tried to withdraw their money within one week. The run was triggered by the resignation of Indonesian President Suharto, whose family owned 30% of BCA, and by riots that left the Jakarta home of Anthony's father, the 84-year-old patriarch Liem Sioe Liong, in ruins. The government feared BCA's collapse would destroy what remained of the banking system. So it backed the bank up with some $12 billion in bonds and cash. Jakarta has since taken over 12 other banks, bailed out seven, and suspended operations at another 48.
Now begins the process of selling off what banks Jakarta can. Sudarijanto expects to unload 30% of BCA's equity. The shares will be priced by May 23 and are supposed to start trading on the Jakarta Stock Exchange on May 31. If the launch goes well, it could prove that Indonesian banks can be nursed back to health, that foreign investors are regaining confidence, and that Jakarta may actually make good on its promise to the International Monetary Fund to raise $2.5 billion by December 31 to cover its budget deficit. If the IPO flops, it could be a long while before Indonesia sees any more money from the IMF. In short, BCA's fate has never been more important to Indonesia than it is now.
But there are already signs that the deal could go badly. Sudarijanto, a 52-year-old former IBM executive who took over the Indonesian Bank Restructuring Agency in January, postponed a March launch because of an internal dispute about how to boost BCA's balance sheet. And investors, at least those who heard BCA's presentation in Singapore last month during its global road show for the IPO, still have plenty of worries. First, they aren't convinced of BCA's ability to start lending like a normal commercial bank. In the past, its main borrowers were linked to the Suharto and Salim families.
Skeptics believe the bank's stock will be priced too high and that its accounting isn't up to international standards. Most of all, they want to know what IBRA plans to do with the 63% of shares that the agency could still hold after the IPO.
Working the phones
There are other hints of possible trouble with the issue: The underwriters – Merrill Lynch, Lehman Brothers, Bahana Securities, and Danareksa Sekuritas – have been working the phones since mid-April to sell the stock. Fund managers say they get calls from brokers every day. "If it were a really good issue, they wouldn't keep calling us," says Flavia Cheong, who manages a $3 million Indonesia equity fund for Aberdeen Asset Management Asia Ltd. in Singapore. Cheong says Aberdeen won't subscribe. At this point, few investors would be surprised if IBRA sold far less than 30% of BCA.
Granted, BCA was in terrible shape when IBRA took it over. BCA admits that the Salim and Suharto families borrowed much more than insiders are legally allowed in order to finance everything from their toll roads to auto plants. By the end of 1998, most of the Salim and Suharto businesses were insolvent – and 85% of BCA's loans, worth $5.6 billion, were nonperforming. Last year, IBRA assumed all of the bank's bad loans. It also replaced the bank's board with executives from Salim's car assembler, Indomobil, and from two restructured state-owned banks. BCA's new finance director and consumer banking director also come from Indomobil.
In theory, the bank should be salvageable. Twelve percent of Indonesians who bank do so at BCA, and its deposits have risen 54% since April, 1998. Most other Indonesian banks were decimated during that time. BCA has by far the largest number and deepest penetration of branches and automatic-teller machines in Indonesia. It is the only Indonesian bank that will allow a deposit to be made at one branch and withdrawn the same day at another. The bank also has 5,000 terminals in retail stores that allow customers to make purchases with debit cards instead of cash.
Indeed, with its dud loans written off, BCA earned a profit of $85 million last year, after losing nearly $4 billion in 1998. That makes BCA one of the very few Indonesian banks operating in the black. At the end of last year, the bank could claim capital equal to 43% of its assets, well above the 4% required by the government. "With all of these ingredients, I think BCA could be a success story," says Sudarijanto.
But investors just don't seem to see it that way. For starters, analysts question the quality of BCA's balance sheet. Its assets include $173 million in tax write-offs and $140 million in revalued land rights and buildings in 1999. Potential investors say that when they challenged these entries at the Singapore road show, bank officials didn't offer satisfactory explanations.
There also are doubts over BCA's ability to resume lending at a time when creditworthy borrowers are rare, and the bankruptcy courts are a farce. According to the IPO prospectus, BCA plans to build up its loan portfolio by offering its depositors mortgages and car loans. But analysts say the bank has had trouble doing that so far. Neither Anthony Salim nor the bank's managers would comment for this article.
Default fears
Investors also worry about the quality of BCA's management. Mark Mobius, director of Templeton Asset Management in Singapore, says his firm would consider investing in a rehabilitated Indonesian bank if it were sold to a strategic investor that could actually run the institution. "But we frankly don't trust the local managers," he says.
Finally, there's the issue of pricing. Sudarijanto says that if BCA's stock were sold at book value, it would be a good deal. But fund managers say it is hard to judge the value of the government bonds that make up 60% of BCA's $12 billion in assets, because they've never been on the market before.
Mobius estimates the bonds would trade at a 25% discount. So the actual book value may be less than IBRA says it is, which increases the risk of the stock being overpriced at the offering. What's more, Standard & Poor's recently downgraded Indonesia's sovereign debt rating to "selective default" status. Says a foreign broker: "If you take the view that the government is going to default, then this bank is insolvent."
Sudarijanto's best chance of improving the IPO's prospects is to find a strategic investor. He has already shown an ability to do just that with the $506 million sale of car assembler Astra, which was seized from Salim and other shareholders in 1998. And Sudarijanto has said that he doesn't want IBRA to hold on to the remaining shares for long.
But right now, Indonesia can only hope that the underwriters can do a better job selling investors on BCA. "If they pull this offer, investors won't look at the next one," says Aberdeen's Cheong. And if Sudarijanto can't raise the money he's supposed to, Indonesia can forget about receiving more IMF aid this year. The Bank of Central Asia is worth a lot more to Indonesia than just what it will go for on May 31.