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To Sell Or Not To Sell
After BCA, Indonesia must move faster to unload other banks

It's no dotcom, but analysts and investors in Jakarta are closely watching Bank Central Asia's initial public share offering, ended May 23, and its stock market listing eight days later. "It's a cleaned-up bank," says Jerry Ng, deputy chairman of the Indonesian Bank Restructuring Agency. IBRA took over BCA in August 1998 and resuscitated it by absorbing $8.8 billion in bad loans and injecting at least $7.3 billion in capital. Now the agency aims to recover some of the bailout money (actually, a fraction of it) and get what was once the country's largest private-sector bank, with 795 branches and 13% of all bank deposits nationwide, up and lending again.

What Jakarta Has Spent to Recapitalize Banks
  Amount billion rupiah State ownership (%)
Danamon 56,527 99
BCA 28,480 92.8
Niaga 8,855 99
Bali* 4,300 99.0*
BII 6,628 59.6
Lippo 4,787 53.7
Universal 4,098 78.9
Arta Media 130 76.9
Prima Express 531 78
Bukopin 370 75.9
Patriot 51 78
State Banks: Mandiri, BNI, BRI, BTN 267,000 100
* Bali not yet recapitalized; est. ownership Source: Bahana Securities

In its second major asset disposal this year, after the Astra Group in March, IBRA has sold 22.5% of BCA to locals and foreigners. Target take for the IPO handled by two state-owned securities houses: 927 billion rupiah (about $106 million). The day after the share offer closed, Marciano, associate director for investment banking at lead underwriter Danareksa Securities, said indications were the offering was oversubscribed. State banks and other government financial institutions were tipped to be heavy buyers. "They [authorities] want this to succeed," says one investor.

Despite an overseas roadshow promoting the IPO, however, foreign interest was "minimal," recounts a Jakarta banker. Ng, however, contends that about a third of the interest came from abroad, and Chris Bendl, managing director of Manulife Asset Management Indonesia, thinks international investment funds may buy, if only to correct an underweighting in Indonesian equities. But there were no queues of city folk jostling for subscription forms at BCA branches, despite the low price of 1,400 rupiah (about 16 cents) a share, or 1.2 times net assets. That values the bank's entire equity at a mere $500 million.

"The timing is not very favorable in this mess of the rupiah's depreciation," Emil Salim, chairman of the National Economic Council, told Asiaweek (see interview page 57). Still, he stresses, the IPO is "very important," How important? Enough to be mentioned in the agreement between Indonesia and the International Monetary Fund for a $400-million tranche held up in April due to Jakarta's foot-dragging on agreed policy commitments. The IMF wants the government to raise mountains of rupiah to help cover its looming budget deficit, through IBRA asset sales. "Indonesia cannot afford to borrow, nor can it print more money," says John Dodsworth, the Fund's top man in the country.

Besides pleasing the IMF and raising cash for the budget, the IPO is crucial in other respects. Ng hopes "BCA will stimulate the capital market, especially the banking sector," and lift overall investor confidence at a time of continuing political and economic woes. The share sale would also demonstrate that IBRA is getting serious about disposing of its mountain of rescued lenders and dud assets, estimated at $64 billion worth. "It's a litmus test for Indonesia," says Manulife's Bendl. "They're looking to build some momentum."

Perhaps most significant of all, getting banks like BCA back on their feet is needed to boost loans for the credit-short economy. The bulk of Indonesia's lenders, with a mammoth share of bank assets, are either state-owned or under IBRA's care (see table left). Most cannot lend much in their cash-strapped state. Thus, says Salim, many companies are "working below capacity -- good enterprises that need working capital . . . in which marginal investment can push up production." Among the strong sectors, reports the economics czar, are cars, pharmaceuticals, plastics, clothing, footwear and export agriculture.

At present, low-interest government bonds make up 63% of BCA assets. D.E. Setiyoso, who was named bank president by IBRA when it took over two years ago, aims to double the loan portfolio this year, to keep BCA on a profit trajectory. That would give other failed institutions an encouraging and instructive example. Last year the bank booked a profit of $77 million after a whopping $3.4-billion loss in 1998. The bottom-line boost, however, came from a one-time foreign-exchange accounting gain of $670 million. It did get better in the first quarter of 2000 with an unaudited profit of $44 million as loans and interest income picked up.

This time BCA aims to avoid the imprudent lending practices that got it into trouble. It has teamed up with PricewaterhouseCoopers to set credit-risk standards and Bank of America to develop consumer lending. It aims to leverage its position as one of the largest credit-card issuers in Indonesia, as well as a provider of debit cards. With its advanced technology and its large, some say oversized, branch network, it is also dominant as Indonesia's unofficial check-clearing bank. "Our core business is to act as the de facto payment system," says Setiyoso, previously managing director at state-owned Bank Rakyat Indonesia. On a busy day, BCA can process as many as 2 million transactions.

Ibra's Top Debtors
Company name, major shareholder and amount owed in billion rupiah
1 Barito Prajogo Pangestu 9,313
2 Texmaco Marimuthu Sinivasan 6,618
3 M. Hasan Mohamad "Bob" Hasan 5,779
4 Bakrie Aburizal Bakrie 5,686
5 Humpuss Hutomo Mandala Putra (Suharto's son) 5,464
6 PSP Group Gondokusumo family 5,405
7 Tirtamas Hashim Djojohadikusumo (brother of Suharto's son-in-law) 4,347
8 Bimantara Bambang Trihatmodjo (Suharto son) 3,896
9 Napan Henry Pribadi 3,545
10 Dharmala Gondokusumo family 2,975
11 Tirtobumi 2,902
12 Djajanti Burhan Uray 2,853
13 Bahana Pembinaan Usaha 2,722
14 Ongko Ongko family 2,594
15 Gunung Sewu Group 2,502
16 Danamon 2,925
17 Rajawati Group 2,120
18 Nugra Santana Group Ponco Sutowo 2,001
19 Kodel Group 1,939
20 Argo Pantes The Ning King 1,836
21 Sekar Group 1,626
  TOTAL 89,048
Data from IBRA and other sources

Key to better management is creating a new corporate ethic that makes employees loyal to the bank. "Before, it was to the Salims [the controlling family] or their superior," says Setiyoso. To prevent collusion, he has begun rotating managers, itself a sea change for BCA. At the same time, IBRA chairman Cacuk Sudarijanto said BCA's former majority stockholder, the Salim family of one-time Suharto crony Liem Sioe Liong, has promised not to buy shares in the IPO and increase its current 7% stake. (This is difficult to verify, though, since purchases could be made through nominee accounts.)

The huge difference between the cost of saving BCA and what it is now worth illustrates the dilemma that has delayed asset sales. Many in the government want to wait until better economic prospects raise the prices at which loans and banks can be sold. Besides financial gain, there is a feeling that selling loans at a discount could enable well-connected borrowers to avoid paying up in full. But with the cost of funding the deficit and the obligations to depositors of failed banks, Salim warns: "The longer we wait, the heavier becomes the burden." Dodsworth also argues against waiting: "If it is not a fire sale, you should sell to get value today."

IBRA recently sold off its smaller loans, and Ng says the agency will now focus on collecting from its 21 biggest debtors, which include enterprises of Suharto relatives or cronies (see table left). "We should do it on a more concerted basis," he told Asiaweek. The IMF wants the sales going by July. But one banker says IBRA "hasn't shown interest in selling the loans." Part of the problem is the difficulty of getting court orders to foreclose on borrowers or force them into bankruptcy. The onerous situation is also bedeviling the granting of new loans. "The challenge in this environment is, who is going to pay you back?" the banker says.

If the IPO has gone well, Ng says IBRA plans to divest the rest of its BCA stake, without giving a timetable. "If the climate allows, there is no reason to hold it back" was all he would say. As for other banks, the next disposal is scheduled for next year, when the agency plans to sell its 99% stake in Bank Danamon, the country's No. 3 bank. Merged with eight smaller ones, the group has received the largest amount of IBRA capital. Ng would not say whether Danamon would be sold in one go or tranches. Salim preferred to sell the bank promptly rather than merge it with eight others, but Ng reasons: "It's a lot easier to dispose of one bank than eight or nine."

The government is also considering whether to sell giant Bank Mandiri, which is not under IBRA. It was formed last year from the merger of four state banks that cost $18 billion to clean up. Earlier this year, then-Mandiri president Robby Djohan said a $1.5-billion stake could be sold in 2001. But the plan was never approved, and last week Robby was replaced.

In the rush to sell, sell, sell assets, will honesty be the loser? Salim has no illusions that any mammoth asset disposal would be squeaky clean. With 40% of state assets, he explains, IBRA is "sugar attracting ants." Along with funding needs, Jakarta must advance the goal of cleaning up business. Otherwise, it may well find itself mopping up another banking mess in no time.

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