Global Business Guide Indonesia

Indonesia
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Business Updates | Consolidation in Indonesia’s Banking Sector: A Boon for Business?

In what is a move poised to substantially alter the landscape of the country’s banking sector, the Indonesian government in April 2014 first made public its plans to carry out a merger between two of its state owned enterprises: Bank Mandiri and Bank Tabungan Negara. This decision – still pending formal approval – is expected to bolster the former’s competitiveness on a regional level as it prepares for ASEAN financial integration as well as provide it with a greater capacity to provide funding to large scale infrastructure projects.

The announcement of Bank Mandiri’s acquisition of BTN is in keeping with Indonesia’s current trend towards banking consolidation. Balancing a playing field in which the top ten banks control 85% of the market leaving the other 110 to compete for the remaining 15% has in recent years become a priority. Early in 2014 Bank Woori of South Korea finalised its acquisition of a 33% stake in Bank Himpunan Saudara, having first initiated a plan to merge its Indonesia based operations with the local company in 2012. Similarly, Japan’s Sumitomo Mitsui Financial Group in 2013 invested $1.52 billion USD for a 40% stake in Indonesian lender Bank Tabungan Pensiunan Nasional to build upon the capacity of its subsidiary Bank Sumitomo Mitsui Indonesia.

The motivation behind consolidation

Spurring these acquisitions are government agencies actively advocating for banks to pursue mergers in anticipation of the tough realities of a less favourable macroeconomic environment (See Indonesian Banking Sector Outlook: In Need of a New Growth Strategy). In the words of Financial Services Authority (OJK) Chairman Mr Muliaman D. Hadad, “2014 is the right time for consolidation given what will happen in the world economy during this year” (Hukum Online, 6th February 2014).

Also influencing the state’s approach to the industry is the present lack of an Indonesian financial institution capable of funding sorely needed infrastructural development. Without a local bank equipped with sufficient capital to fund efforts to upgrade roads, ports, power plants and water facilities, the market has instead seen the entry of enterprises such as PT Indonesia Infrastructure Financing, formed by the government in collaboration with the Asian Development Bank (ADB) and other international partners. Though this type of organisation is able to ease some of the burden in providing local currency financing to privately funded infrastructure projects, greater support from the domestic banking sector will undoubtedly be required to expedite infrastructural development and prevent a back log of projects. Investors should thus view Indonesia’s decision to facilitate consolidation among its major financial institutions as a strengthening of the country’s foundation and a major step in the creation of local banks ready to lend to investment intensive ventures.

In addition to widening the breadth of funding sources for companies in infrastructure, better capitalized banks will be more equipped to compete in the ASEAN One Market in 2015. Such is the fragmentation of the country’s banking sector that despite being able to tap into the largest economy in South East Asia, only one Indonesian bank ranks within ASEAN’s top ten in terms of Tier 1 capital and profitability. The potential boon that the absorption of assets from smaller banks into larger ones (or the merger of two medium sized entities) stands to have in this regard is clear to see in Bank Mandiri’s projected rise from the lower rungs of ASEAN’s top ten up to third in the event that it proceeds with its acquisition of a majority stake in BTN.

Foreign investment with a part to play

As evidenced by the aforementioned involvement of financial institutions from Japan and Korea in recent acquisitions of local banks, consolidation in the Indonesian banking sector presents opportunities to foreign investors. The central bank’s introduction of a 40% ownership cap of shares in Indonesian lenders has necessitated divestment among non-government stakeholders, thereby opening the door for international players to buy in. While there is reason to be wary of the OJK and central bank’s discretionary power in granting exceptions to this rule, foreign entities should take note of the regulator’s reported prioritization of favouring investors able to offer advanced technology and know-how in the financial industry. Expertise in implementing and socialising e-banking systems in particular are to be sought after by local banks now adjusting to the rise of e-commerce and online transactions in Indonesia (See E-commerce Incoming; An Industry on the Rise).

More specifically, international investors are currently presented with the opportunity to buy into the market and participate in the consolidation process by obtaining stakes in local banks with the ultimate goal of preparing it to merge with or be acquired by another bank. Improving upon corporate governance and refocusing the bank’s operations on niche areas of expertise are but two ways of drawing the attention of other players that will be looking to further market presence as competition to survive heats up. Local banks currently making shares availabe include Bank Mutiara, while stakeholders in both Bank Panin (ANZ) and Bank Ekonomi (HSBC) have over the last year suggested that shares amounting to a 39% and 98.94% stake, respectively, would be put on offer.

Where the sector stands now

The consolidation of Indonesia’s banking sector is very much in its early phases. Over the last six years the number of lenders in the country has only fallen from 130 to 120 and much still depends on the introduction of additional regulations to incentivise mergers and acquisitions. Stricter CAR requirements as laid out in the Basel III Accord could go a long way to motivate smaller banks to merge or else run the risk of failing to meet the raised minimum of 10.5%. In the same vein, the industry will see an acceleration in consolidation should the OJK go ahead with its plans to tighten maximum non-performing loan levels below the current 5%.

It is also important to keep in mind that potential hurdles to consolidation exist in the tendency for planned acquisitions to become highly politicised. The collapse of Singapore based DBS’ takeover of Bank Danamon is perhaps the best example of this. This challenge is not confined to takeovers involving foreign investors; concerns are already mounting in regards to the future of Bank Mandiri’s acquisition of BTN following a vocal public demonstration by BTN employees. On 24th April 2014, it was announced that any major decisions on this proposed acquisition would be postponed until after the presidential election on 9th July, despite the fact that a vote among shareholders was initially scheduled for May. As such, it remains to be seen whether the government will be able to resist succumbing to political influences as it sets in motion a phase of banking sector consolidation crucial to Indonesia’s future ability to fund high profile projects and thrive as an attractive destination for business.

Global Business Guide Indonesia - 28th April 2014

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Indonesia Finance Snapshot - Banking

Contribution to GDP: 2.55% (Q3 2015)
Return on Assets: 2.31% (Q3 2015)
Number of Commercial Banks: 118; 4 State/Partially State Owned, 10 Foreign, 11 Joint Ventures, 28 Non Foreign Exchange, 39 Foreign Exchange, 26 Regional Development Banks (August 2015).
Number of Islamic Banks & Units: 12 Banks, 22 Units (2015)
Total Assets: 6,244 trillion IDR (Q3 2015)
Government Bodies: Bank Indonesia, Ministry of Finance, Financial Services Authority (OJK).
Relevant Law: Bank Indonesia Regulation No. 14/8/PBI/2012 on Share
Ownership in Commercial Banks limits ownership by a single local/foreign financial institution to 40%, by a non financial institution to 30%, and by an individual to 20%. Larger stake is possible with the approval of Bank Indonesia.