Sadanand Dhume, Jakarta – If the script had unfolded as planned on June 30 officials at the Indonesian Bank Restructuring Agency, or IBRA, would have been popping champagne and posing for pictures after selling a 30% stake in Bank Central Asia, once the country's largest private bank.
But when it comes to asset sales in Indonesia, you can usually count on a twist in the tale. As the Review went to press, IBRA had yet to announce a winner for its much-awaited "strategic" sale. Persons involved with the deal say the agency is unhappy with the only two bids on the table – from vulture fund Newbridge Capital and Indonesian Recovery Company, a joint venture between Asia Debt Management, a Hong Kong-based company and Bhakti Investama, an Indonesian investment bank.
The bids are said to be lower than IBRA would have liked – starting as low as $200 million for a 30% stake in the bank. The quality of the bidders is also a concern. Analysts in Jakarta are convinced that BCA's former owners, the Salim Group, are positioning themselves to reclaim the bank taken away from them at the height of Indonesia's economic crisis in 1998. Anthony Salim, president of the Salim Group, did not respond to phone calls or faxes.
According to an industry insider, IBRA, stuck with two unappealing suitors, has left the door open for a possible belated offer from Taiwan's ambitious Fubon Group. Meanwhile, the agency is putting a brave face on the confusion by going ahead with a sale of 10% of BCA to the public, even though under the original plan this was supposed to follow the strategic sale.
IBRA's disappointment is understandable. BCA is widely regarded as Indonesia's best large bank and one of its most saleable assets. IBRA had hoped that the bank's eight million customers, vast network, profitable operations and freshly scrubbed balance sheet would make it irresistible. The agency's stated intention was to sell a substantial chunk – somewhere between 20% and 30% – to a so-called strategic investor by the end of June. Another 10%-20% was to have been subsequently offered to the public to bring the total divestment to 40%.
The stakes remain high. Three years after the government poured billions of dollars into one of the largest bank bailouts in history, Indonesia's economy is still in the doldrums. Successfully selling part of BCA will bring in a large chunk of change for the government's cash-strapped budget. It also has the potential to give IBRA some sorely needed credibility, to win Indonesia a pat on the back from the International Monetary Fund and to attract the attention of international investors for whom the country has all but fallen off the map.
IBRA's new chairman
But it won't be easy. Indonesia is in the midst of an uncertain succession drama with President Abdurrahman Wahid facing possible impeachment on August 1. The banking sector remains a shambles. To add to the confusion, on June 25 Edwin Gerungan, IBRA's fifth chairman in a little over three years, was sacked to make way for an associate of Finance Minister Rizal Ramli.
Even before that, political turmoil, the relatively small stake on offer and the ghost of an earlier attempt by foreigners to buy an Indonesian bank had scared away the best suitors – large foreign banks with deep pockets, technical expertise and high credibility. Left in the fray are investors with large appetites for risk and questionable pedigrees. But Taiwan's Fubon Group, a late but strong contender, might yet pull the rug out from under both Newbridge and IRC.
For someone willing to take a long-term bet on Indonesia's economic future, BCA is the best the bombed-out banking system has to offer. It is one of the best-known brands in Indonesia with nearly 800 branches, more than 2,000 ATMs and about eight million account holders. About a quarter of all Indonesian savings accounts – a cheap source of funds for banks – are parked with BCA. The bank processes one in three credit-card transactions in the country. In the year ended December 31 2000, profit after tax nearly tripled to 1.8 trillion rupiah ($158.5 million). Meanwhile, the percentage of non-performing loans was more than halved to just over 4%.
Jerry Ng, BCA's second-in-command, says the bank can fatten its bottom line by "mining" its customers. This means offering them everything from credit cards and mortgages to insurance products and mutual funds. He also hopes to strengthen the bank's already dominant role in the processing of credit-card transactions and bring in additional income from other services such as cash settlement.
But Ng acknowledges that this won't be enough to sustain profitability. The bank's rising earnings – driven largely by interest income from the floating-rate bonds with which it was recapitalized – are not sustainable without stepped-up lending. He estimates BCA's loan to deposit ratio at about 11% compared to a desirable range of 65%-70%.
BCA rose to prominence under the 32-year rule of former President Suharto and became the pre-eminent financial symbol of his New Order regime. The bank was founded by Liem Sioe Liong, also known as Sudono Salim, whose sprawling Salim Group dominated the country's economic landscape like no other – at one time contributing 5% of Indonesia's economic output. BCA helped power the growth of Salim Group companies in instant noodles, cement and flour milling. A cosy relationship with the first family was an essential element of the group's success. Two of the former president's children owned 30% of the bank.
When the Asian financial crisis brought down Suharto, in May 1998, it took BCA with him. Like many other Indonesian banks, BCA had violated the law by lending excessively to Salim Group companies. Customers nervous about the group's future without Suharto's protection sparked a run on the bank. Panicked depositors, at times waiting in long lines snaking down Jakarta's Jalan Sudirman, withdrew more than $1.1 billion from the bank in a matter of weeks. BCA was rescued with a capital injection from the government of 28.5 trillion rupiah. Another 61 trillion rupiah worth of government bonds was used to wipe clean the bank's loans to Salim Group companies. As a result, BCA was handed over to IBRA, which was given 93% of the bank. The remaining 7% stayed with the Salim family, but the Indonesian Finance Ministry has asked them to sell it by September 7.
Today's BCA, says Ng, is very different from the bank brought down three years ago. For one, it is now publicly listed rather than privately owned. Last year, IBRA sold 22.5% of the bank in a public offering. (The 40% now up for grabs will reduce IBRA's stake to about 30%.) The Salim-era board of directors and board of commissioners have both been replaced. The only senior manager from the Salim era kept in place was the head of operations. In short, BCA used to be a privately-owned bank that sucked in low-cost funds and funnelled them to Salim Group companies. It is now a publicly-listed company with a professional board and no proclivity toward owner-driven lending.
IBRA needs to get this right. It is behind target to raise 27 trillion rupiah this year even as the government struggles with a larger-than-expected budget deficit. Moreover, the entire asset-disposal process in Indonesia has come under a cloud thanks to a series of well-publicized snafus. The sale in March of Salim Group plantations to Malaysia's Kumpulan Guthrie is being investigated by parliament. And Canadian insurance company Manulife's attempt to buy its Indonesian partner's stake at a government auction has been tied up in knots by legal manoeuvrings and what the company says are arbitrary arrests.
According to Lin Che Wei, SG Securities' president-director in Indonesia, the best possible outcome for the country would be an investment by a major international bank. This, he says, would bring in not only cash, but also much needed credibility. That credibility will have to wait. For now, none of the top four foreign banks in Indonesia – Citibank, ABN Amro, HSBC and Standard Chartered – want a piece of BCA.
It may be the best bank in the country, but it's still in Indonesia. Political turmoil makes any acquisition here a hard sell to a board sitting in New York or London or Amsterdam. Foreign banks would like majority ownership and that isn't on the table – at least not yet. Foreign banks have also learned lessons from last year's abortive attempt by Standard Chartered to take over Bank Bali – which was rebuffed by Indonesian managers and workers angered in part by the British bank's aloof management style and high salaries for expatriate employees.
With major foreign banks staying away, the field is clear for so-called vulture funds, whose strategy is to buy cheap, boost earnings and sell at a profit after a few years. Last year Newbridge Capital took over Korea First Bank and installed an American CEO. Newbridge has made a bid for BCA but is holding out for an assurance of management control. Company officials refused to comment for this story.
Indonesian Recovery Company has a no-strings-attached bid on the table. One of IRC's parents, Bhakti Investama, was part of a consortium that beat Newbridge for a stake in automaker Astra International. Local press reports have said that Bhakti is a front for Anthony Salim, BCA's former owner and Liem Sioe Liong's son. Hary Tanoesoedibjo, Bhakti's CEO, failed to show up for a scheduled interview with the Review. In the past he has denied fronting for Salim.
Simon Case, the head of IRC, refused to comment. But a Hong Kong-based director of Asia Debt Management, Anthony Wood, denies that the company has any ties with Salim or investment from any Indonesian investor. "Asia Debt Management is entirely independent," says Wood. But questions about the company remain. Its Web site shows that the board and executive management report to a company in the Bahamas. And its debt-recovery fund appears to be based in Maurtius.
The preponderance of financial rather than strategic investors has the potential to raise further difficulties with Indonesia's parliament. Some analysts speculate that strategic investors are only interested in BCA because they have already found a buyer – Salim. In Indonesia selling back assets to businessmen close to Suharto is an explosive issue, and parliament has said that this should not be allowed. But in practice, says a Western analyst, the absence of a major foreign investor means there's little that IBRA can do to prevent the bank from ultimately being sold back to Salim.
A surprise beneficiary of IBRA's dilemma may be Taiwan's Fubon Group. According to a person close to the negotiations, Fubon executives contacted IBRA after final bids were in on June 25, and expressed interest in BCA. But they have asked for more time. The group has deep pockets and a proven record in the financial sector in Taiwan. Last year, Citibank bought a 15% stake in five Fubon businesses for $800 million and the group's ambitions include selling insurance products across Asia. BCA, with its large customer base would be a natural fit. Fubon officials were unavailable for comment.
Whoever ends up getting the nod from IBRA will have to run the gauntlet of parliament. Benny Pasaribu, a legislator from the Indonesian Democratic Party for Struggle who heads parliament's powerful commission on banking and finance, says IBRA's decision won't be final. "If we hear that there is discrimination against a bidder and malpractice and they choose whoever they like or dislike, then we may ask the government to stop the deal," he says.