BANKING: A tale of two Indonesian banks
Far Eastern Economic Review
March 26, 1998

Tale of Two Banks
 Indonesia's push for big banks may sideline the fittest
  * By Salil Tripathi and John McBeth in Jakarta
    1609 Words

The executive elevator at the headquarters of Bank Nisp in Jakarta
displays a framed poster. It shows a relaxed hare sitting under a large
tree munching carrots while a determined tortoise creeps by.
   Aesop's fable of the slow but steady tortoise winning a race with the
nimble hare could well be a morality tale about Bank Nisp and its
competitor Bank Danamon.
 Danamon, Indonesia's third most highly capitalized nonstate bank, is
the hare. It's known for its aggressive outlook and quick responses.
When Indonesia was booming, so was Danamon's loan growth; it had a hand
in some of the nation's largest projects and lent heavily to property
ventures. But today, as national projects, property developments and
other businesses stall for want of working capital, Danamon's balance
sheet is splattered with nonperforming loans.
   Nisp, the tortoise, is by contrast small and conservative. Most of
its loans have been to small industrial or export-driven businesses that
have grown with it over a generation. It has less than half the exposure
to the spiralling property market that the rest of the banking industry
has and proportionately few nonperforming loans. Unlike Danamon, which
is based in Jakarta, Nisp is headquartered in Bandung and is not well
known outside Indonesian financial circles. All the same, a Western
banker in Jakarta says: "Don't be fooled by their low profile. Nisp is
one of the five local banks still liquid." Many of the other 212
Indonesian banks have been living for months off liquidity provided by
their parent companies or the central bank.
   So will Nisp win the fitness battle while Danamon falls by the
wayside? Not necessarily. Instead of holding up Nisp as a role model for
other banks, Bank Indonesia, the central bank, is threatening its very
existence. At the same time, it seems to be rewarding large banks, which
may have contributed to the country's debt overhang. Guidelines issued
by Bank Indonesia on January 28 require all banks to be capitalized at 1
trillion rupiah by the end of December. As it stands, Nisp's capital is
projected to reach only 200 billion rupiah by then.
   Failing to meet the new capital requirement would leave Nisp and a
handful of other small but financially strong banks subject to possible
takeovers or mergers that would change their managements. Indeed, Nisp's
best-case scenario might be to find a passive investor --  a fund
manager, for instance -- able to put up big money but content to keep
Nisp's management at the helm. Such a saviour, however, would have to
take a leap of faith; closing its eyes to Indonesia's systemic problems.
   The central bank's logic for its emphasis on size is that
well-capitalized big banks tend to be sounder than under-capitalized
small ones. Under the terms of its International Monetary Fund bailout,
Indonesia must establish international auditing standards, require
accounts to be published regularly, set up an agency to settle bad
loans, and create a freer environment for mergers and acquisitions and
for foreign banks. Some analysts suggest there should also be a watchdog
agency to detect early signs that a bank is in trouble and act swiftly.
   Now the tortoise finds itself in the unusual spot of having to
scramble. "We knew we had to expand, but we didn't know that would be so
soon," Pramukti Surjaudaja, Nisp's president, says. "In normal times,
there is room for small and medium banks, but now it seems Indonesia
only wants big banks." Nisp says it's talking to a wide range of
potential investors, including American, European, Japanese and
Singaporean institutions.
   Meanwhile, the country's banks are weighed down by a growing mountain
of debt made uncollectable by high interest rates and a severely
weakened rupiah. Local banks are so frail that international banks don't
recognize their letters of credit. This has brought commerce to a
standstill, further delaying recovery.
   Amid this, though, Nisp continues to move on. It reported 1997 net
income of 24 billion rupiah ($2.2 million at current exchange rates), a
29% increase from 1996, and is bargaining with suitors from a position
of strength. It is one of the few Indonesian banks with ISO 9002
certification -- an international seal of approval -- and has joint
ventures with Daiwa Bank of Japan and Singapore's OCBC Bank. Daiwa
Perdania is the Japanese company's most profitable overseas unit.
   "Nisp is one of the very few banks in Indonesia ranked above
investment grade," says Philippe Delhaise, Hong Kong-based editor of
Thomson Bankwatch, a bank rating agency. "It has excellent management,
which has always been conservative. It is way above others."
   As of February 28, Nisp had foreign-currency deposits equivalent to
616 billion rupiah, substantially more than its foreign-currency loan
portfolio of 490 billion rupiah -- something rare among Indonesian banks
these days. And at a time when people are pulling their money out of
most banks, the amount Nisp receives in time deposits of all sorts is
rising. At 1.3%, analysts say Nisp's proportion of nonperforming loans
is among the lowest in the industry.
   Perhaps most impressive of all, while most banks are seeking to
borrow on the interbank market, Nisp remains a net lender. It bought
hard currency at a preferential rate before the crisis and made a
successful precrisis offering of rupiah-denominated bonds at 15.5%.
That's put it in a strong lending position. On the retail front, Nisp's
lending rate to reliable customers is 29% in a market where others
charge 45%-50%.
   In Danamon's case, meeting the new capital requirement is not an
issue; its capitalization stands well above the 1-trillion-rupiah level.
But it still needs new capital to strengthen its balance sheet. "The
rupiah depreciation and high interest rates will have significant impact
on our loan portfolio," Danamon Chairman Usman Atmadjaja says. "We want
to create a strong structure to enable us to eliminate redundancies,
rationalize costs, strengthen our capital base and diversify our
ownership structure."
   In November, Indonesia agreed to close 16 troubled banks identified
in consultation with the IMF. Although Danamon wasn't among them, its
investors and depositors panicked just the same. The bank was among
several to suffer a debilitating run. Brokerage SocGen-Crosby estimates
that depositors may have withdrawn as much as 3 trillion rupiah from
Danamon alone.
   As a result of the crisis, Danamon has had trouble meeting a 9%
capital-adequacy ratio required by Bank Indonesia. According to a study
by SocGen-Crosby, its ratio fell below 9% the moment the rupiah crossed
3,400 to the U.S. dollar on October 14. Adjusted for nonperforming loans
and rupiah depreciation, the ratio may have fallen as low as 2.8%,
SocGen says. Brokerage HSBC James Capel estimates the bank will need a
2.2-trillion-rupiah capital injection to meet the ratio after factoring
in bad loans and currency losses.
   Danamon's lending policy seems almost the opposite of Nisp's. In the
second half of 1997, when Indonesia decided to seek financing for Timor,
the national car, Danamon signed on with a 45-billion-rupiah loan. Among
nonstate banks, it was the second-biggest lender to the project -- now
set to be scrapped under the IMF austerity plan. Such aggressive lending
swelled Danamon's loan book, but didn't improve its cash flow or
liquidity. Despite 42% annual loan growth in the last three years, its
annual profit grew only 13% in an environment of increasing interest
rates. One brokerage house believes Danamon's nonperforming loans may be
as high as 20% -- a figure Danamon disputes.
   The bank's second problem was making an excessive amount of
foreign-currency loans -- 35% of its total loan portfolio. Of 32 listed
banks in Indonesia, only one large bank -- Lippo -- has kept
foreign-currency loans equal to less than 15% of its assets. Banks that
have made loans in foreign currency to local clients are particularly
vulnerable, as the weak rupiah means they can't service their debt.
   Then there are property loans: Danamon officials say the bank's
exposure to property is only 15% of total loans, but some market
analysts, who count home mortgages and construction-industry loans as
part of the property total, place the figure at 22%. Analysts forecast a
severe oversupply of office space and a continued decline in apartment
occupancy that could hurt lenders' chances of recouping such loans.
   For all Danamon's problems, though, it does have vast resources in
its branch network, a recognizable brand name and good relations with
foreign banks -- something that, to their great detriment, smaller banks
often cannot offer. As a result, fresh money is due to flow into
Danamon. In December, the Atmadjaja family said it will reduce its stake
from 48% to 19% to allow Indonesia's largest conglomerate, Salim Group,
to pick up 19%. International banking group CS First Boston will also
take a 10% stake. The three have signed a memorandum of understanding,
due-diligence is under way and eventually a rights issue is likely to
   "We needed to restore the market's confidence in our bank," says one
Danamon official. "What better ally than Salim? Now the bank is safe."
   Although not a merger, this pairing has marked Indonesia's first
round of widespread banking partnerships. For Danamon it looks like a
good one, but others may not be so lucky. In the haste to put together
bailouts, mergers and sell-offs to come may not always make the best
   "When you cross a horse with a donkey, you get a mule, not a
stallion," says V. Shankar, managing director of Bank of America's
investment banking group in Hong Kong. "Indonesian banking mergers are
expedient, not strategic."
   Bank Nisp has to hope that Indonesia's new emphasis on size over form
won't mean that a cautious tortoise has to become a hare to win the race.