Banking on its future

Published in Van Zorge Report VOL.X N.5-6 — April 1, 2008

Malayan Banking Bhd (Maybank) is gambling on the future of the Indonesian banking but some analysts believe they are paying too high a price. Maybank’s larger than expected bid of US$2.7 billion for PT Bank Internasional Indonesia (BII) saw shares in Malaysia’s biggest bank drop 7.3 percent in one day, its largest tumble in six years.
Analysts agreed.
The reaction of Julian Chua from Citigroup Inc. in Kuala Lumpur was typical. “The price is higher than we assumed for a mediocre franchise [BII],” Chua said late last week, adding he had cut his rating on Maybank stock to “sell” from “buy”.

However, Maybank believes it is backing a winner, at least in the longer term. Last year’s PricewaterhouseCoopers’ report said that by 2050, Indonesia’s banking industry could rival that of France or Italy but with considerably higher returns.

The industry has experienced good growth, in line with the country’s strong economic expansion and surging stock market. The economy grew 6.3 percent in 2007, its biggest increase in more than a decade, while the benchmark stock index increased seven fold in the past six years.

A number of success stories have emerged from the national banking industry, which provides relatively high return-on-equity. Banking credit disbursement was up 25 percent in 2007, compared to 14 percent growth in 2006, while the net profit grew 27.7 percent in 2007 to Rp30 trillion (US$3.27 billion). The profits have been attributed to savings’ interest rate cuts and the growth of small and medium enterprises and consumer credit, which give high margins.

Indonesia’s central bank, meanwhile, is aiming to consolidate the country’s 130 banks, which have total assets of around $200 billion, by promoting mergers and acquisitions.
Maybank agreed to pay $1.5 billion for a 56 percent stake in BII, Indonesia’s sixth-largest bank, and offered $1.2 billion for the remaining stock—4.7 times the book value and almost double the average for Indonesian banks.

Maybank forecast the deal would not boost earnings until the third year, diminishing prospects that the bank would return some of its $11 billion cash on hand to shareholders. The Malaysian lender beat off rivals that included Bank of China Ltd to buy the controlling stake in BII from a group led by Singapore sovereign wealth
fund Temasek Holdings Pte. Temasek, which controls stakes in BII and Bank Danamon, is selling its BII stake to comply with the central bank’s new “single presence policy” that prevents foreign investors from owning more than one bank in Indonesia.

BII’s profit has fallen for the past three years and Temasek has also been accused of not completing knowledge transfer as expected. However, shares in BII have increased four-fold since Temasek bought in in 2003. Maybank’s purchase of BII and its 230 branches will make the Malaysian lender the largest foreign services company in Indonesia. Though streamlining the bank in likely to be a painful process, there is a need for Maybank to acquire growth for the longer term. BII provides such an opportunity.

Analysts believe that the Indonesian banking industry will continue to attract foreign investment. This is good news for Indonesia. The aggressive new players will make the banking industry more professional and competitive. It has also been forecast that it will be more difficult for banks to be able to attract third-party funds. Growing public awareness of stocks, mutual funds or state bonds that give high returns will encourage more people to seek these alternative investment products.

Nevertheless, the outlook for the local banking sector and credit market remains positive, although oil and food price hikes and a stock market slowdown may provide some limited hindrances.

Labels: Business

Posted by hera at Tuesday, April 1, 2008 1:38 AM | Permalinks