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JULY 14, 2000 VOL. 26 NO. 27 | SEARCH ASIAWEEK

Kemal Jufri/Corbis Sygma for Asiaweek.
Shuster wants integrity and professionalism.

A Tale of Two Banks
In a race between the tortoise and the hare, the hare wins

Once upon a time, in the years before Asia's financial crisis, there were two banks: the Philippine National Bank (PNB) and Bank Danamon of Indonesia. They were like many other financial institutions around the region. Which is to say, they weren't particularly concerned with dotting the i's and crossing the t's in their dealings. Loans were not always backed by properly secured collateral. The corporate culture seemed to result in cushy loan deals to well-connected people and other misuse of capital. The boom times fuelled indiscriminate borrowings of U.S. dollar funds.

Then the Crisis hit. As borrowers defaulted, the banks found themselves with a lot of worthless loan portfolios. As local currencies plummeted against the dollar, their foreign-debt burden ballooned. The PNB and Danamon, major financial players in their respective countries, suddenly faced the prospect of being major disasters.

And here the paths of the two banks diverge. Danamon, being at ground zero of the Crisis, was arguably the worse off of the two, ultimately requiring the government to pump in 32.3 trillion rupiah ($3.7 billion) to recapitalize the bank. But the steps taken to resuscitate the bank were swift and unflinching. The Indonesian Bank Restructuring Agency took over and brought in professional help in the form of Milan Shuster. "The bank was so damaged," says the 59-year-old Canadian banker. "This was a bank that was ready for collapse."

Shuster proceeded to undertake a complete and wrenching overhaul of the bank. "We're gutting the thing and rebuilding it from top to bottom," he says. An entirely new lending system was set up, stressing loan quality and proper risk management. The bloated staff roster was cut by 60%; 200 of the 250 top managers were replaced and those thought to have engaged in improper practices dismissed. Every contract, from toilet paper to data-processing systems, was reviewed to ensure probity.

Shuster's revolution is having an effect. Last year, Danamon bled 7 trillion rupiah ($806 million) — not trifling but still a significant improvement over the 25 trillion it lost in 1998. Shuster's ultimate goal is to make Danamon the equal of any bank in Europe or North America by instilling the values of integrity, transparency and professionalism.

The PNB, in the meantime, has no knight in shining armor, just Lucio Tan. The beer, tobacco and airline tycoon mysteriously acquired a controlling stake in the bank, which meant that the Manila government, previously the PNB's largest shareholder, could not overhaul or dispose of the bank. So the PNB continued to burn while the two sides fiddled and wrangled over its future. A joint auction in June turned into farce when the shares were priced much too high — almost three times the real value — and only one bidder was qualified.

Tan promises to bring much-needed — and much-delayed — action. He has cobbled an eight-point rehabilitation program that includes cost reduction, continuous personnel training, aggressive deposit generation, sale of non-performing assets and a ban on political loans. Will it work? International brokerage Salomon Smith Barney is not impressed, terming the PNB "high risk" in its June report. By contrast, Danamon is projected to return to profitability in two years (Shuster thinks it might break even by the end of this year).

The moral of the story: Slowly but surely is good. Swiftly and effectively is even better. Avoid slowly and cluelessly.

— Reported by Warren Caragata/Jakarta and Antonio Lopez/Manila

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