Economic Update

Single Presence Policy

Indonesia | 5 Aug 2008

Indonesia's banking sector has seen a wave of merger and acquisition activity in the past month as companies scramble to meet a new ownership regulation.

The regulation, known as the "Single Presence Policy" (SPP), was imposed by the Central Bank in mid-2006 and banks have until 2010 to meet the ownership requirements. Under the new policy, a single owner cannot own more than 25% in more than one bank in Indonesia. Any shareholder who maintains a controlling interest in more than one bank will be required to consolidate their ownership. It follows a trend successfully implemented in other Asian countries that sought to encourage consolidation in often-fragmented markets. In 2000, Malaysia used a similar strategy to reduce its number of banks from 54 to just 10.

The country is currently home to 130 banks with total assets of around $200bn. The fact that the top 10 banks are estimated to control nearly 70% of this figure, is indicative of a proportionately high number of smaller players. Following the Asian Financial Crisis in 1997, many of the smaller lenders are still struggling to increase their capital. The Central Bank has said that it would ultimately like to see the emergence of five banks with a capital above $5bn, and as many as 50 banks with a capital of up to $1bn.

Last week, shareholders of Bank Niaga and Bank Lippo approved merging the two institutions into what will become the country's sixth largest bank. The new entity will have $8.9bn in assets and more than 600 branches. Khazanah Nasional, the Malaysian government's investment arm, controls 64% of Niaga directly, and 93% of Lippo indirectly through Bumiputra Commerce (CIMB). To meet the SPP requirements, Khazanah either had to divest its holding in one of the banks or merge them. It opted for merging the two businesses, which are expected to be fully integrated by the end of 2009. Once merged, the new entity will be called CIMB Niaga.

The CIMB deal is not the only merger and acquisition story making headlines in the country. On July 30, Malaysia's Central Bank reversed its decision to approve a bid from Malaysia's Maybank for a stake in Indonesia's sixth largest lender, Bank Internasional Indonesia (BII). The stake in BII became available when Temasek Holdings, the state investment arm of the Singapore government, chose to sell its holding to meet SPP regulation as it also owned a controlling share of Bank Danoman Indonesia. Maybank, which originally bid $2.7bn for a 55% share, had also planned to spend an additional $1.2bn for the remaining stake.

Malaysia's central bank has said that the decision to revoke the approval stems from concerns over an Indonesian central bank regulation requiring Maybank to reduce its stake by 20% within two years, citing that this could result in the bank incurring "material losses".

The purchase price offered by Maybank represents a 23% premium on the company's value, and would have been the largest premium ever for the purchase of an Indonesian bank. With Malaysia's banking sector facing saturation, Indonesia is considered a market with substantial room for expansion, hence the hefty premium paid. The move reflects the country's appeal to large foreign banks wanting to establish a national or regional presence. In addition, the move would have been strategically important in terms of consolidating Maybank's position as Asia-Pacific's largest Islamic banking services provider - given Indonesia's large Muslim population - according to analyst firm The Asian Banker.

Furthermore, concerns were also raised that Maybank might not gain approval for the purchase because of ambiguity over who exactly is subject to SPP. Maybank is linked to the Malaysian government through investment fund Permodalan Nasional Berhad (PNB). This raised questions about the Malaysian government's impartiality as it risked being perceived as a single entity controlling several Indonesian banks at the same time, due to ties with both Khazanah and PNB.

Other SPP-driven mergers making the headlines recently include Dutch-based Rabobank Group, which integrated two smaller banks into its subsidiary Rabobank International Indonesia, and Singapore's United Overseas Bank's establishment of a single holding company comprising Bank Buana Indonesia and Bank UOB Indonesia, in which it currently holds a 61% and 99% stake respectively.

Armand B Arief, president and director of UOB Buana, told OBG that it makes sense for the banks to merge as it increases their competitiveness through economies of scale, but he feels more needs to be done to encourage the independently-owned banks. He said, "I support the single presence policy, but we also need better coordination on regulations to ensure its smooth implementation and create win-win solution."

Most analysts agree that SPP is good for the country and should not be interpreted as a move aimed at limiting foreign participation in the sector. The Indonesian government itself stands to be most-affected by SPP as it currently owns four commercial banks, three of which - Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia (BNI) - are ranked in the top four in terms of assets.

While a single government holding company could eventually be formed, there is some scepticism regarding whether smooth integration of such a body is possible, and whether the 2010 deadline can be met. Farid Rahman, secretary of the Indonesia Banks Association, (Perbanas) told OBG, "The Central Bank has implemented a good policy, but the issue is whether the ministry of finance will be on board."

Chapter Summary