Indonesia's banking sector is attracting attention this month, with Singapore's sovereign investment fund Temasek planning to sell its stake in Bank Internasional Indonesia (BII), the country's sixth-largest lender.
The sale of Temasek's 42% share of BII is a move to bring it in line with the central bank's single presence policy (SPP), which prohibits investors from holding stakes in more than one Indonesian bank. The SPP stipulates that owners holding stakes in multiple institutions must merge the banks, form a holding company or sell one of their stakes by 2010. The policy has been widely hailed as promoting a more efficient use of capital.
"Privatisation and consolidation of state banks should have a positive effect on the economy," Gita Wirjawan, senior country officer of JP Morgan Indonesia, told OBG.
The controlling shareholder of BII is Sorak Financial Holdings consortium (at 55.78%), 75% of which is owned by Temasek. Temasek also owns a controlling stake in Indonesian Bank Danamon, and said that after considering a merger of the two, it had decided to sell its stake in BII.
Industry insiders have argued that the SPP does not take into account the challenges of any banking merger, in terms of branding, tax and back office systems.
"It tends to make more sense to avoid merging two banks in Indonesia, given the time and effort it takes to combine the two," the president director of a foreign bank in Indonesia told OBG.
The BII currently has a capitalisation of $1.9bn and the sale is expected to net Temasek upwards of $800m. Shares of BII have jumped 26% since the start of the year on reports of strong loan growth, despite the 6.3% drop in the Jakarta index over the same period.
Last week, three banks - HSBC, Bank of China and Malayan Bank (Maybank) were reported as short-listed for the sale, though it is not clear if this will be the final list or when the sale will take place. The minority shareholder in Sorak Financial, Korean bank Kookmin, had also expressed its interest and has sought the advice of Merrill Lynch to study its proposal.
More changes are in the pipeline as the 2010 SPP deadline approaches. Khazanah, a Malaysian investment fund, has holdings in Lippo Bank and Bank Niaga, and announced its intention to merge the two in December. However, analysts expect most changes will take the form of sales, which should draw significant interest.
"Large banks that are very active in the consumer segment will attract much attention from potential buyers," the foreign bank president told OBG. "But in terms of encouraging consolidation, the trend seems to be towards selling assets in accordance with the SPP rather than merging."
The penetration of financial services in Indonesia is still low when compared to its neighbours, and the banking sector remains fragmented. By the end of 2006, the ratio of Indonesia's banking assets to GDP was around 46%, compared to almost 300% in Malaysia.
There remains plenty of room for expansion, and consumer and small- to medium-sized enterprises (SME) financing in particular is expected to grow substantially in the coming years. Given that much of BII's portfolio is in this sector (70% of its customers are businesses and SMEs), the institution's growth potential is widely acknowledged.
Since Temasek's acquisition in 2003, BII shares have risen four times over. The company is now trading at 3.25 times its book value, compared to 2.26 times for Maybank and 1.26 times for Kookmin, according to international media.