[Kabar-indonesia] AFR: Indonesia's banks are back in favour

[Joyo at aol.com]

Australian Financial Review
Wednesday, November 15, 2006

Indonesia's banks are back in favour

Morgan Mellish, Jakarta

After years of turmoil sparked by the Asian financial crisis
in the late 1990s, the investment spotlight is once again
beginning to fall on Indonesia's banks.

Some stockbrokers and economists are now optimistic about
the long-troubled sector, citing increased professionalism,
better regulation and falling domestic interest rates.

"The key is that 50 per cent of the banking system is now
foreign-owned," says Michael Chambers, the Jakarta-based
head of sales at stockbroker CLSA.

"Standard Chartered, [Singapore's] Temasek and OCBC all have
banks here and that's changed things a lot. They feel like
real banks these days."

The newfound interest is partly being fuelled by hopes the
country's inflation has been brought under control. Bank
Indonesia lowered its official rate last week for the sixth
time this year, pushing Jakarta's stockmarket to its highest
ever level.

The official rate has dropped from 12.75 per cent in April
to 10.25 per cent and further cuts are expected in the
months ahead.

Bank Indonesia deputy governor Aslim Tadjuddin said recently
that the benchmark rate could decline as low as 9 per cent
by year's end.

Chatib Basri, a leading economist and adviser to Finance
Minister Sri Mulyani Indrawati, says: "Over the short term,
the rate cuts will increase the consumption of credit like
automotive, property, and leasing.

"Bank Indonesia's rate can be lowered below 10 per cent in
the next three months if inflation is well maintained. I
believe the inflation rate can be below 7 per cent this
year."

One of those now bullish on the sector is Macquarie Bank. It
predicts Indonesia's economy will outgrow its regional
rivals and that the official rate could fall to 8 per cent
by mid-2007, fuelling lending activity.

The Australian investment bank, which is expanding its
presence in Jakarta, says its picks for the sector are Bank
Mandiri and Bank Danamon.

"Our investment approach to Indonesian banks is dictated by
a top-down call," Macquarie said in a recent note to
clients. "Over the next several quarters, Indonesia will be
one of Asia's best-performing economies.

"In our view, the best way to play this is through the
banks. We therefore retain our overweight call on Indonesian
banks."

The sector, long riddled with corrupt lending practices, was
hit particularly hard by the Asian financial crisis and many
banks had to be bailed out by the government. Since then,
there's been a wave of mergers, yet many players are still
feeling the effects of the crisis and have problems with
non-performing loans.

At the moment, the country has about 115 banks, and
regulators hope to reduce that number substantially through
consolidation.

The Yudhoyono government has released several reform
packages and the central bank has issued new regulations
including a so-called "single presence policy" that
prohibits shareholders from having controlling stakes in
more than one bank.

In order to adjust to the new regulatory environment, the
central bank has asked the industry to consolidate by 2010,
either through merging, setting up holding companies or
divesting stakes in other banks.

The regulator will provide certain incentives and exemptions
for banks willing to merge. Foreign lenders and joint-
venture banks will be exempt from the policy, but state
lenders and private national banks will not.

"They were spectacularly unsuccessful at regulating the
banks before the crisis but they've been somewhat more
successful since then," CLSA's Chambers says.

"The top 20 banks are completely dominant here. The rest are
not really relevant. What will happen is they will be forced
into mergers or closed down."

The government controls the country's two biggest, Bank
Mandiri and Bank Negara Indonesia. It also has a controlling
stake in Bank Rakyat Indonesia, which lends mainly to small
businesses, and Bank Tabungan Negara, which specialises in
low-cost mortgages.

Among the foreign players, Standard Chartered controls Bank
Permata, Temasek controls Bank International Indonesia and
others, Malaysia's Khazanah controls Lippo and Bank Niaga,
while Melbourne-based Australia and New Zealand Banking
Group has a joint venture with Panin Bank.

The loosening of monetary policy has helped the Jakarta
Stock Exchange, which as of last week was up 42 per cent
this year, making it one of the best performers in Asia.

In early evening trading yesterday, the exchange's benchmark
JCI Index was 26.42 points higher at 1665.71.

The government officially predicts the economy will expand
by 5.8 per cent in 2006, although some senior government
figures have already expressed doubts about that forecast.
Macquarie says: "Lower rates and higher economic growth
should bolster resurgence in credit demand.

"The consumer confidence index is on the solid uptrend,
which in turn should lead to increased consumer loan
demand."

------------------------------------------
Joyo Indonesia News Service
------------------------------------------