Indonesia is the only emerging market in Asia with almost no ownership limits on banks and last month’s surprise announcement by the central bank that it is considering them has thrown a spanner in the works of many foreign banks and private equity funds who are eager to ride the nation’s economic boom.Banks, including HSBC, Standard Chartered, Barclays and Bank of Tokyo Mitsubishi have grown in Indonesia through acquisitions. Some buyers have paid more than 4 times price-to-book value (P/B), with an eye on long-term returns. The buys look to be slowly paying off, as the banks have been reporting robust financial results and share price gains, pushing up their valuations. Indonesia’s top eight banks on average trade at a price-to-earnings ratio of 11 for 2012, compared with the Asian average of 9.7 times, according to CLSA. “This is the No. 1 talking point among our clients,” said one Hong Kong-based investment banker, who advises banks on M&A, referring to the proposal. “This will nearly bring all dealmaking to a grinding halt,” the banker added. There are 122 commercial banks, and the top 10 control about 66 per cent of bank assets, CLSA estimates, making it one of Asia’s most fragmented markets.The government is yet to decide the limits, but the expectation is that no single entity will be allowed to hold more than 50 per cent. It is widely believed that the government banks will be exempt from the new restrictions. Some foreign investors may not be forced into immediate divestitures by the implementation of the new rules, since they own less than 50 per cent stakes. StanChart, for instance, owns 44.5 per cent of Bank Permata, and Australia and New Zealand Banking owns 39.2 per cent of Bank Panin. But the rules would signal the end of any ambitions the two banks had to get controlling stakes in the Indonesian lenders. Indonesia’s planned ownership limits on lenders will stall much-needed consolidation in one of Asia’s most fragmented banking markets and may slow foreign direct investment into Southeast Asia’s biggest economy. As HSBC Plc and other foreign investors face the prospect of cutting their Indonesian bank stakes to comply with the new rules, government-run lenders, which are likely to be exempt from them, are bracing themselves for windfall buys. “If you get to a situation where Indonesia decides that all foreign investors need to dilute down to sub-50 per cent, obviously that will be a blow,” said Piyush Gupta, chief executive of DBS Group , Singapore’s biggest bank. Eight of Indonesia’s top 11 banks by market value are either controlled by foreign banks, business families, private equity or wealth funds. Already, the planned sale of a controlling stake in unlisted PT Bank Muamalat was pulled, with bankers blaming it on the uncertainty surrounding ownership limits. “This would have impact on Indonesia’s FDI aspirations. They will be very thoughtful before they go down that path,” DBS’s Gupta said. Indonesia, with a population of 240 million, is on track to attract its highest ever FDI in 2011, thanks largely to investor-friendly policies and political stability. The country needs more foreign capital to improve its creaky infrastructure. Foreign lenders control about 27 per cent of Indonesia’s outstanding loans and they are keen to expand their presence as the returns are juicy. On average, the Indonesian banks offer 19.9 per cent return on equity and earn net interest margin of 7.15 per cent, both highest in Asia, according to CLSA estimates. In return, foreign banks have improved the overall risk management and launched the latest technology, enhancing the overall banking experience for customers, analysts say. “Lack of control will reduce foreign banks’ incentive and capacity to get actively involved in driving strategic decisions, transferring risk management know-how or provide extraordinary support,” said S&P credit analyst Geeta Chugh.
From / Gulf today