Why are state-owned banks reluctant to buy Bank Mutiara?

Why are state-owned banks

reluctant to buy Bank Mutiara?

Paul Sutaryono, A BANKING OBSERVER

Sumber : JAKARTA POST, 4 Januari 2012

After Bank Century was taken over and renamed Bank Mutiara, it was the government’s intention to sell it to a state-owned bank. State banks, however, seem reluctant to buy Bank Mutiara.

Why, and what is the alternative?

The Indonesian Deposit Insurance Agency (LPS) rescued Bank Mutiara (then Bank Century) in November 2008. In line with Article 42 of Law No. 24/2004 on the LPS, the entire shares of any bank rescued by the LPS must be sold within three years of the rescue. The time of sale may be extended a maximum of two times, with each extension being one year.

With 2011 marking the third year after the rescue of Bank Mutiara, the LPS has offered the bank up for sale at Rp 6.7 trillion (US$734.2 million), which is equivalent to the temporary capital placement. Previously, five foreign and three local investors expressed interest in buying Bank Mutiara, but they did not meet the requirements set by the LPS.

So why are state-owned banks reluctant “to embrace” Bank Mutiara?

One important consideration is the fact that the birth of Bank Mutiara was laden with political concerns, and this could be a heavy burden for state-owned banks in the future.

As public institutions, state-owned banks – comprising Bank Mandiri, Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (Bank BRI) and Bank Tabungan Negara (BTN) – must respect and implement good corporate governance (GCG). GCG applies the principles transparency, accountability, responsibility, independency and fairness. In other words, every business dealing of state-owned banks must be prudent, clear and professional.

Looking at the financial performance of state-owned banks as of the third quarter of 2011, we see BRI at the top, having earned profits amounting to Rp 10.43 trillion, a big jump (a 56.69 percent increase) from the Rp 6.66 trillion it earned over the same period in 2010.

This was followed by Bank Mandiri, whose profits soared from Rp 6.45 trillion to Rp 9.48 trillion (a 46.98 percent increase), BNI from Rp 2.95 trillion to Rp 4.06 trillion (a 37.63 percent increase) and BTN from Rp 677.89 billion to Rp 707.38 billion or a 4.35 percent increase.

Obviously, the plan for state banks to purchase Bank Mutiara would not be a strategic move in helping them improve their performance. In addition to this, it could be said that the sale price is too high.

In fact, Bank Mandiri is eager to buy Bank Mutiara by exchanging recapitalization bonds (recap bonds) worth Rp 70 trillion. The problem is that if the LPS, as the owner of Bank Mutiara, has no intention to hold recap bonds, it would mean the deal could not go ahead using these means.

In this case, Bank Mandiri would have to secure permission from both the finance minister, as shareholder, and the House of Representatives (DPR). There are, however, several handicaps to Bank Mandiri’s move to sell the recap bonds. First is legal certainty. As an example, the case of Antaboga Delta Sekuritas (securities company) related to Bank Century, which has been waiting for a legal decision.

In addition, the former owners of Bank Century, Hesham Al Waraq and Rafat Ali Rizvi, have lodged a case against the Indonesian government at the International Center for Settlement of Investment Disputes (ICSID) in Washington DC, the United States. They have also threatened to sue the government through the Organization of Islamic Cooperation.

In their lawsuit, the two have questioned the Rp 6.7 trillion bailout of Bank Century at the end of 2008.

What are the alternative solutions then?

First, a bank must have strong financial performance to make it attractive to buyers. This will be one of the main pillars to ensure the successful sale of Bank Mutiara.

Over the last three years, the performance of Bank Mutiara should be strong as shown in the financial ratios. The quality of assets, credit and business plan are fundamental and important factors to be seriously considered.

Second is due diligence. By showing strong financial performance over the last three years, Bank Mutiara is expected to do well in this area of due diligence. However, due diligence examines not only financial performance but also management and future prospects.

Third is a road show. The LPS should do a road show in centers of global financial markets such as Hong Kong, Singapore, New York, Los Angeles, Tokyo, London and Frankfurt. This step would be useful in enhancing market confidence. Bank Mutiara’s corporate image would also soar once it gets a company rating by Standard & Poor’s, Moody’s or Fitch Ratings.

Fourth is investor perception. A company rating would hopefully develop and promote investor perception and would be an important aspect in global investors and financial markets examining Bank Mutiara.

Fifth is market liquidity. In principle, it would be a good opportunity to sell the entire shares of Bank Mutiara as market liquidity permits. This is because the domestic financial market is improving.

The composite index is growing higher after being hit by the impact of the US and European debt crises, and the rupiah has been appreciating against the US dollar. Short-term capital inflow continues to flood the financial market. But we should always be wary and anticipate a sudden reversal, which could occur at any time.

By considering the various alternative solutions, Bank Mutiara would be highly likely to attract attention from global investors. Moreover, the Indonesian government should move quickly to settle the Bank Century legal case. ●