Bill Guerin, Jakarta – Six years after a banking bail-out that cost some US$60 billion (Rp555 trillion), Bank Permata, Indonesia's second-largest bank and the last of the nationalized banks taken over during the 1997-98 Asian financial crisis, is up for grabs.

The government owns 97% of the bank, the investing public the rest. The sale of a 51% stake in the bank will be followed later by the sale of a 20% stake through the stock market. Proceeds from the two sales will help plug a state budget deficit estimated at Rp26.3 trillion.

Profits are rising in the crowded banking sector, bad loans are down and capital adequacy ratios are well above international norms. The sale offers a final chance for foreign investors to gain control of a major publicly listed bank through a single transaction.

Leading the pack, with the highest initial bid, is the United Kingdom's Standard Chartered Bank, which has teamed up with PT Astra International, Indonesia's largest car maker. Standard Chartered, which has had its fingers burned twice before in trying to gain control of an Indonesian bank, outbid four other contenders with an offer of $411 million, equivalent to more than twice Permata's book value.

The other short-listed bidders are United Overseas Bank, Singapore's second-largest bank; Commerce Asset-Holding and Maybank of Malaysia; and the mid-size Bank Panin, 29% owned by Australia & New Zealand Banking Group Ltd (ANZ). Maybank, Malaysia's largest Islamic bank, has teamed up with PT Jaminan Sosial Tenaga Kerja (Jamsostek), Indonesia's state social security organization. Commerce Asset-Holding is Malaysia's second-largest lender and already owns a controlling 51% stake in Bank Niaga, Indonesia's ninth-largest bank by assets; a stake that cost it only $115 million two years ago.

Bank Permata shares are under the management of the government's Asset Management Company, PPA, a new entity under the auspices of the Ministry of Finance, which was set up to manage assets previously handled by the now-defunct Indonesian Bank Restructuring Agency (IBRA).

The preferred bidder will be announced in October, but local investors and several legislators have been playing the nationalist card and pressing the PPA and the government to give priority to local banks. In August, it was reported that Bank Mandiri, the country's largest bank, was seeking a merger with Permata, with plans to acquire all the latter's shares. But the investment needed would have exceeded the allowable limit. The maximum amount a bank can invest in or lend to affiliated companies is restricted to 10% of its capital.

Standard Chartered, which reportedly makes two-thirds of its profit in Asia, failed in an earlier bid to buy a minority share in what was then Bank Bali. It also lost out in the bidding for Bank Central Asia. It now gets a third bite at the cherry, but there is a costly skeleton in the cupboard – the 1999 Bank Bali scandal. An audit of Bank Bali's books carried out in 1999 on behalf of Standard Chartered revealed a large payment, Rp456.5 billion, to a third party, PT Era Giat Prima (EGP), controlled by then-Golkar party treasurer Djoko Tjandra.

Tjandra was accused of illegally acquiring the funds from Bank Bali, but the Supreme Court acquitted him of all criminal charges and called upon IBRA to return the funds to EGP. IBRA, however, refused to return the funds for the very good reason that it would affect Permata's financial condition. Tjandra took the case to the State Administrative Court, which ruled in favor of IBRA, but the Supreme Court overturned that verdict this March. Bank Bali and its assets, including the disputed funds, were subsumed during the 1999 merger with Bank Universal, Bank Arthamedia, Bank Prima Express and Bank Patriot to establish Bank Permata.

State Enterprise Minister Laksamana Sukardi has said the government will coordinate with the central bank to prevent those involved in the dispute over these state funds from buying the stake on offer.

Standard Chartered, which opened an Indonesia office in 1863, went on to lose out in 2002 to Farallon Capital Management LLC in its attempt to buy Bank Central Asia after its bid was rejected by the government, which said Standard Chartered's terms and conditions were "too demanding". The UK lender now has 12 branches in major cities and has said it wants to double its branch network in 2004.

With its 1.2 million depositors and customers, over 300 branches and 460 automated teller machines, Bank Permata is a very attractive proposition for strategic investors such as Standard Chartered, just as the lowest interest rates in six years have boosted loan demand and cut funding costs. The bank made a sharp turnaround last year with a net profit of Rp558 billion. It posted Rp127 billion in net earnings in the first quarter of this year and booked a threefold increase in second-quarter profit. Profit in the three months ended June 30 rose to Rp159.5 billion ($17.1 million) from Rp52.3 billion a year earlier. The shares have risen 30% this year.

For the first half, Permata's profit almost doubled to Rp286.4 billion, or Rp36.29 a share, in the six months ended June 30, from Rp154.6 billion a year earlier, or Rp19.56 a share. Total loans rose to Rp12.08 trillion at the end of June from Rp8.41 trillion a year earlier. Net non-performing loans fell sharply to a mere 2.6% as of March.

Total bank lending nationwide jumped about 20% last year but is way down from 60% of national output in 1997, to 25% now. Consumer loans – for mortgages and cars and motorcycles – soared 31% last year while investment lending rose only 15%, according to the central bank.

Though banking sector analysts point out that consumer banking is still in its infancy in Indonesia, the lending market may be set to boom. Growth in small and medium enterprises (SMEs) and the consumer sector was higher than average, according to central bank figures. Central bank governor Burhanuddin last week said he was seeking to expand the involvement of foreign banks in credit and investment.

Financial reports available for nine of the 11 foreign banks operating in the country show a combined profit of Rp2.4 trillion ($256.68 million) before tax in the first half of 2004. Currently, the focus of these banks is on commercial and consumer lending, as well as credit cards, with less dependence on risky loans to corporates. The number of quality lending candidates in the corporate sector is small.

A wave of foreign takeovers in the past two years has left mid-size institutions behind, causing them to lend mainly to SMEs and rarely to larger conglomerates that are more likely to default. This particular market is largely untapped and there is huge potential for growth, a fact that has not escaped Burhanuddin who has said foreign banks should be harnessed to help support SMEs develop the national economy.

The current wave of renewed investor interest also reflects an improvement in Indonesia's economy, which offers access to a market of 235 million people. Consumer spending accounts for 70% of a $208 billion economy that is expected to grow 4.8% in 2004 and 5.4% in 2005.

Just like neighboring Malaysia, South Korea and Thailand, also badly hit by the financial crisis in 1997, Indonesia has benefited from allowing entry to major international banks with a good reputation and working to promote good governance practices to develop the domestic financial services sector. For example, Bank Danamon, the country's fifth-largest bank, has taken the lead in the small loan market since Temasek Holdings Ltd, the Singapore government's investment arm, took it over last year. Temasek increased its stake in Danamon to 61% from 51% earlier this year.

Foreign capital and management expertise help to speed up the pace of reform, and whichever foreign operator wins the last jewel in the banking sector (permata means jewel in Indonesian), the likely upside is that it will boost an already robust banking system.