BUSINESS: Lippo, Indonesia
Far Eastern Economic Review
June 18, 1998

Banking on Recovery:
 Lippo Group rethinks its middle-class gambit
  * By Salil Tripathi in Jakarta
    1183 Words
06/18/98
p55    

Thousands of young men sat on the hill in the mid-afternoon sun,
watching thick billowing smoke leaping skyward. Two hours ago, that
shell of a building was a bustling mall, Lippo's Supermal. On the wall
behind the twisted furniture and broken glass, looters had scrawled an
arrogant message: "Terima Kasih Lippo-Rakyat." (Thank you, Lippo -- The
People.) Gun shots boomed in the distance.
   Since the late 1980s, Lippo Group had been betting on the buoyant
Indonesian middle class -- which was set to grow to 50 million by 2000
-- to bolster its business. The group offered them the services they
needed: a bank, an insurance firm, a brokerage, malls, and real estate
that smacked of American suburbia.
 But that game plan went up in smoke along with the economy, the coup
de grace being the mid-May riots that trashed much of Jakarta and led to
President Suharto's fall. The group is adjusting by playing to its
strength -- banking -- and looking overseas.
   At the group's helm has been 41-year-old James Riady, returned from
Arkansas where he had befriended its then governor, Bill Clinton.
   "We are going to focus on banks and financial services," Riady said
in a June 7 telephone interview. Earlier, in a wide-ranging conversation
in his offices outside Jakarta, he told the REVIEW that Lippo was
committed to investing in retailing "because that will he rebuild the
distribution system. For the rest of our businesses, it is going to be
consolidation and, in some cases, elimination."
   In many ways, Lippo may be better positioned than most Indonesian
business groups to weather the economic storm. Property and retailing --
two sectors hard-hit by recession -- account for just 20% of its
business in Indonesia; financial services make up most of the rest. Bank
Lippo is relatively well-capitalized, and although it caters to the
middle class-offering them a savings outlet -- its borrowers tend to be
small and mid-sized ethnic-Chinese businesses who tend to be more
scrupulous in repaying their loans. What's more, Lippo derives no more
than 30% of its $5 billion in global revenues from Indonesia, down from
about 50% a year ago. Most of its offshore earnings come from Hong Kong,
and the rest from China, Australia and East Asia, whose own economic
problems pale in comparison to Indonesia's.
   Lippo differs from typical Indonesian business groups in several key
ways. Of the group's 60 Indonesian companies, 14 are listed in Jakarta
and Surabaya, including most of its key businesses: Lippo Life, Lippo
Securities and Lippo Land, for example. With so many public arms, it is
more open to scrutiny. Its debt load is low. Of its offshore debt of
$150 million, only a quarter is unhedged. "All our debts are on the
balance sheets of our operating, listed companies and there is no family
inter-group borrowing," Riady stresses.
   Ironically, in the United States, Lippo is embroiled in the Donorgate
scandal that bedevils the White House. But at home, the group has not
benefited from state patronage. The Riady family has few business
dealings with the now-disgraced former first family, unlike other large
Indonesian-Chinese groups such as Salim, Barito Pacific and Mulia.
Still, as riots devoured ethnic-Chinese businesses, Lippo's Supermal in
Karavaci was not spared. Some of Lippo's bank branches and its Matahari
department stores were also wrecked.
   Most economists expect Indonesians to feel the pain from the
deep-rooted crisis for years to come. But Riady is more optimistic.
Already, he feels, the rebuilding process has begun. In two months, he
forecasts real-estate sales will pick up to 100 units a week in his
urban-development projects, Lippo Karavaci, west of Jakarta, and Lippo
Cikarang, east of the capital. That's down from pre-riot levels of 150
units a week -- and far below the 1998 projection of 10,000 units for
the year. But Monika Purwowigati, a property researcher at Colliers
Jardine in Jakarta, says Lippo is one of the few developers still
selling in the downturn.
   Riady may be optimistic, but he's cautious, too: Consolidation is the
watchword in Lippo's new strategy. Lippo Cikarang has postponed a costly
skytrain; Lippo Karavaci has scaled back infrastructure plans. "We have
stopped all new projects for five years," Riady says, giving Lippo time
to strengthen its balance sheet. It plans to reallocate resources and
close down noncore businesses such as auto-parts making. Most
importantly, it will now focus on banking.
   Despite the financial gloom which has descended upon the country,
Bank Lippo continued to post profits throughout 1997. While other banks
experienced a run, Bank Lippo has seen deposits swell. Indonesia's newly
established bank restructuring agency has given banks until the end of
1999 to develop a capital base of at least 2 trillion rupiah ($170
million); Lippo has already amassed 1.2 trillion rupiah, and is
considering mergers to meet the minimum target. When the country
recovers, Riady expects only 10 large banks to emerge -- and he counts
Lippo among them.
   A 1995 bank run had prepared Bank Lippo for the current crisis. Lin
Che Wei, research director at SocGen-Crosby in Jakarta, says: "That was
a blessing in disguise." The run, Lin notes, depleted the bank's
reserves, prompting it to seek cash injections from its powerful
overseas partners, particularly the Chinese-government-linked China
Resources; according to another bank analyst, the Bank of China also
backed Lippo at that time. So when it steered into the latest currency
crisis, it was a stronger company.
   Bank Lippo's foreign-currency loans represent only 12% of its
portfolio. (By contrast, most of its rivals have lent as much as 40% of
their portfolios in foreign currencies.) Its ratio of nonperforming
loans to total loans -- 1.2% -- is one of the smallest among large
banks, says Standard & Poor's credit-rating agency. What's more, a
recent Goldman Sachs report ranks Lippo among four banks that are
benefiting from Indonesia's current flight to quality: Deposits rose 35%
last year.
   Yet analysts fear that no Indonesian bank is safe at the moment.
Agnes Safford, president-director of ABN Amro Securities in Jakarta,
says: "Lippo is in a healthy situation compared to its rivals. However,
these are difficult times for any business dependent on banking and
property, and there are no exceptions." Warns Mark Hansen, a
vice-president at management-consultancy firm Booz Allen & Hamilton:
"One rumour is enough to start a bank run that can hurt even a
well-managed bank."
   For immediate growth Lippo will have to look beyond Indonesia, to
banking and financial services in Hong Kong. It's a tough environment,
but Riady maintains that Lippo has key strengths there, with its close
network and strategic partnerships with key international financial
players.
   "This is a setback," Riady admits, "but Indonesia will recover in two
years. There is no change in our vision. We will rebuild and strengthen
and he Indonesia regain confidence abroad. In terms of value,
Indonesia must be the best place in Asia today. Where else can you find
better opportunities? When foreign investors are convinced that
Indonesia means business, they will rush in and find that Lippo is one
bank that has survived with honour and emerged with strength."