Indonesia's most watched initial public offering is off to a good start, with foreign investors buying an estimated 25% of the 662.4 million shares of Bank Central Asia. But analysts have voiced concerns that growing political storms in Indonesia may derail the fragile IPO process for other Indonesian banks.
"BCA's IPO is important because it will set the standard for the IPOs of other Indonesian banks in the future," says Mehdee Reza, analyst at CSFB in Hong Kong. Indonesia's ravaged banking sector needs a strong IPO to set the groundwork for future capital raising by other banks, analysts say. BCA was the first choice among Indonesia's banks to be auctioned off by its regulators because of the attractiveness of its franchise. BCA is the largest retail deposit bank in Indonesia with 8 million bank deposits totalling Rp87 trillion ($10.27 billion).
BCA's share sale is also important to Indonesia's regulators. It is just the second sale by the Indonesia Bank Restructuring Agency (IBRA) in its two year history and IBRA is counting on the funds to recoup a third of the $86 billion cost of fixing the nation's banks, and also help finance the Rp44.1 trillion budget deficit.
Foreign investors bought 25% of the bank's offered shares between May 21 and May 23, according to news reports last Wednesday. BCA plans to sell 22.5% of its shares on the market. The bank's shares are priced at Rp1,400, the bottom of its price range to investors, which means the government will raise only a quarter of the $400 million originally targeted for the sale.
Still, IBRA, Indonesia's caretaker for banks and damaged national assets, described the investor response as "encouraging". In the lead-up to the IPO, IBRA played a big role in getting the bank prettied up. It cleaned up its non-performing loans, leaving the bank with just 10% in non-performing loans. It also swapped BCA's bad debts with government bonds in return for equity. As a result, IBRA ended up holding more than 90% of the bank's shares.
The only problem with IBRA's tinkering is that BCA will go to the market with a very lop-sided portfolio of assets. Government bonds make up 96% of its assets, while loans make up 4%. In this scenario, some analysts say BCA's management will absolutely have to try and grow its loan book in the future, if it wishes to be priced more attractively by investors over time.
At present, there is no reason why BCA should not be priced at the same level of Indonesian sovereign bonds and no more, analysts say. It lacks a strong loans portfolio. Usually, loans make up 60%-70% of a bank's portfolio and three-quarters of their earnings assets, helping to drive valuations substantially.
Good enough to tempt others?
For now, a show of support from foreign investors is doing enough to get other Indonesian bankers to think IPO. Privately-owned Bank Buana said it is planning an IPO to sell 100 million or 20% of its paid up capital with a nominal value of Rp500 (0.06) on Indonesia's main bourse. Buana's managing director Pardi Kendy says the funds raised would be used to fund the bank's expansion. Analysts are more pessimistic.
With a worsening political and economic climate in Indonesia, analysts say other banks will likely have a tough time raising much-needed funds in the market. The wave of ethnic-religious-separatist violence across Indonesia is worsening. And Indonesia's President Abdurrahman Wahid is having a tough time fending off corruption charges in his administration, dashing the hopes of many investors that the road to economic recovery and political stability could be in any way a smooth one. Some investors have given up. In recent days, some fund managers have openly said they have stopped putting money in Indonesia.
"A lot depends on the interest rate oulook. If interest rates rise sharply because of pressure on the currency, it is going to be very hard for the IPO to succeed," says Neil Saker, head of economic research at SG Securities in Singapore. "It will make it far more expensive for other Indonesian banks to raise capital in the future, and it all becomes a vicious circle."
BCA shares will begin trading on May 31 on the Jakarta Stock Exchange.