Dion Bisara, Jakarta – Foreign lenders have acquired Indonesian banks at a record pace in the past 18 months, accelerating long-needed consolidation in the industry that would push it toward an efficiency level comparable to their peers in the Asia Pacific region, a report from global investment bank Morgan Stanley showed.
The study revealed that foreign investors have been buying close to $7 billion worth of shares in Indonesian banks since last year, almost double the entire acquisition value in the 2013-2018 period of $3.6 billion.
Since last year, controls in nine banks have changed hands to investors from Such Koreans, Japan, and Thailand.
The latest of such acquisition was KB Kookmin Bank taking control of Bank Bukopin. The Financial Services Authority (OJK) approved the take over last Wednesday, which make one of the largest South Korean lenders a controlling shareholder in Bukopin alongside the politically connected local conglomerate, Bosowa Group.
In its announcement, OJK said it hoped Kookmin's new role as the controlling shareholder "provided support for the development of Bank Bukopin and the national banking industry."
But, Morgan Stanley viewed acquisitions like Kookmin's had cast the dice for a much more fundamental transformation in the industry. Apart from bringing better risk management as well as stronger capital and liquidity, foreign lenders would forced local banks to up their game.
"We expect higher foreign bank participation to drive efficiency in the system, via increased domestic competition and an improving cost culture [including the use of digital technology] to be infused in their Indonesian subsidiaries," Morgan Stanley said.
The local banks posted a cost to asset ratio of 3.3 percent last year, Morgan Stanley noted. That was far higher than the 0.7 percent ratio in Japan, or a 1.1 percent ratio in South Korea. Malaysia and Singapore banks both recorded cost to asset ratio below 1.5 percent.
For incumbent banks, the increased competition could seem challenging in the near term, but it would encourage them to be more adaptive to the global banking system. "This can also filter less-adaptive players from the system, which reduces the system's vulnerability," Morgan Stanley said.
Relaxed rules, higher growth
The growing number of foreign acquisitions was a result of a shift in the banking authorities' stance to be more accommodative to foreigners.
OJK had relaxed its 40 percent stake cap – first implemented in 2012 – as long as new investors were willing to do additional mergers after the acquisitions.
Successful acquisitions and subsequent mergers of Bank Ekonomi and Bank HSBC Indonesia by HSBC, as well as Bank Danamon Indonesia by Sumitomo Mitsui Banking Corporation, also provided the blueprint for other foreign lenders seeking to make an inroad to the Indonesian market.
"Growth and regional diversification appear to be the main motivations for foreign banks to acquire Indonesian banks, particularly for Japanese and Korean banks," Morgan Stanley said.
Banks' loan grew by 16 percent in 2019 compared to 2 percent in Japan and 7 percent in South Korea. Indonesian banks' net interest margin was 5.9 percent, among the highest in the region. In Japan, the margin was 1 percent, while in South Korea, 1.9 percent.
Less burden to SOE banks
Morgan Stanley expected the trend would continue, identifying small and medium-sized banks, with core capital of between Rp 1 trillion to Rp 30 trillion ($68 million to $2 billion), as the most likely target for foreign acquisition.
That would also lift a perceived burden on state-owned lenders like Bank Mandiri, Bank Rakyat Indonesia (BRI), and Bank Negara Indonesia (BNI) as they were now less likely to be subjected to an obligation to support smaller banks.
"In the near terms, the direction of how regulators overcome headwinds for smaller banks is becoming clearer by involving foreign investors, and it should mean that the likelihood of big SOE banks being involved in supporting unrelated smaller Indonesian banks – which has been a key market concern – will subside," Morgan Stanley said.
In the long run, the SOE banks would become more efficient, "thanks to the increased competition and digital initiative adoption" that was brought by their foreign competitors, Morgan Stanley said.
As a result, the investment bank raised its price target for SOE banks shares by 10 to 20 percent from its previous target. Morgan Stanley set Bank Mandiri's stock price target at Rp 6,199 per share, BRI at Rp 3,735, BNI at Rp 4,773, and Bank Tabungan Negara (BTN) at Rp 1,282.