Borrower of the Week: Bank Mandiri

K.Keat Lee, CFO of Bank Mandiri talks about the bank''s strategy, post-IPO.

You must be very pleased with how the recent IPO went not just for Bank Mandiri but also for Indonesia as a whole?

Yes. This was the biggest IPO since the crisis so it was a landmark deal. I think it was good not just for the bank but also for the Indonesian market as a whole. In the lead up to the IPO you could sense the whole market anticipating a successful issue. After the IPO the market has risen further despite the Marriott bomb.

In many ways you were selling the whole of Indonesia not just Bank Mandiri.

Yes, by virtue of our significant market position in Indonesia. Our performance is influenced by the confidence and progress in the Indonesian economic recovery.

Also, we have got to keep on presenting investable companies to foreign investors as far as Indonesia is concerned. The whole capital market is rather shallow and we need more larger cap stocks, like Bank Mandiri.

What was your biggest challenge during the IPO process?

There were challenges on two fronts. Firstly we had to fix up some of the legal issues especially with previous recapitalisations before the IPO could proceed. This meant working closely with lots of government bodies, such as the Ministry of State Owned Enterprises, the Ministry of Finance, BAPEPAM, plus Parliament. In the end our sale did not have any of the controversy as some other sales. This is a very well accepted privatisation and it went very smoothly. Second, was one of timing. In today's market environment, the window for an IPO such as ours can change rapidly. It was an enormous challenge to get the timing right but in the end we timed it well, with lots of preparation and persistence.

How did you find the IR aspects of the process, especially dealing with international investors?

We had already started communicating with potential investors before the IPO, explaining to them the restructuring and transformation story of Bank Mandiri. We had met with quite a member of investors through one on one meetings and through conferences organized by the international investment banks. We were also fortunate in that we had done a number of international bond issues prior to the IPO that put us in the international arena. So when we went on the actual IPO roadshow to market the transaction, a good proportion of the investor base already knew us, which made the job a lot easier. They just needed to be updated on our latest issues.

What were your tactics during the book building process?

In the lead up to the IPO we knew from market research that the demand from domestic retail investors would be strong. We wanted to use the retail demand to provide some pricing tension, so we ran an intensive retail campaign domestically. When we went to the international investors, they were also aware of the strong domestic demand, which in turn created greater demand tension internationally. We ended up allocating two thirds of the offering to foreign investors, especially tier one investors. They had the capacity to absorb much more of the issue and provided greater price stability.

During the marketing of the deal you stated that you would be paying out 50% of your future profits as dividends. Are you still happy to have made that promise or could it hamper your future growth?

I would prefer not to call it a promise; it was a declared intention that we would hold to our 50% dividend payout ratio policy which we had consistently applied since 2001. We will try to maintain it subject to the continuing review of our financial position and our requirements for capital.

In our prospectus, we projected a net profit this year of Rp4 trillion or Rp200 per share. Based on our current capital ratio and growth of our business we feel comfortable with a 50% payout, so if our profit projection is achieved, shareholders should expect Rp100 per share dividends from our 2003 profits, which equates to a 14.8 % dividend yield for investors who bought at the IPO price.

Just after the IPO you announced that you would be buying the GE Credit card business that you had with them. Since the failure of the BII credit card acquisition, this must be an area you are keen to expand?

The acquisition of GE credit card receivables is part and parcel of our arrangement with GE Capital. We began that arrangement in late 2000 and started marketing it in 2001. We now have over 260,000 cards. We had an option as part of that arrangement to buy the related cards receivables, which up till now was booked by GE Capital. We have now bought these receivables totalling close to Rp800 billion, which will be reflected in our balance sheet from Q3 of this year. That is a very profitable portfolio and we are very pleased with how we have developed that business.

Will your dividend pay out policy hamper future deals such as this?

The capital requirements for this type of acquisition can be accommodated in the context of our current capital ratio of 25%-26%. Even with half our profits being retained there will be enough capital to support our growth for a number of years. If the rate of growth exceeds our retention of capital then we will have to think about various ways to supplement that capital.

Do you have any capital management exercises planned?

Right now we are still refining our capital management especially with a view of Basel II coming on stream in 2006-2007. We have already done some simulations of our capital position under the Basel II rules; we will refine our calculations as we improve our techniques.

We feel that at this stage it is prudent for us to carry higher than the minimum benchmark capital under the present rules. We will review that as time goes by. But the return on capital that we have now is still very sound. Maybe down the track as margins get squeezed and returns on that capital become more normalized then we might have to think of tighter management of capital.

Do you have any plans for future international bond deals after the Reg S deal in April?

Not at this stage no. Currently we have enough foreign currency liquidity. Our international bond issuance is driven by our maturing foreign currency liabilities as well as demand for dollar loans. At this stage there is no urgent need for more dollars funds, however, this should not preclude us from going to market if we believe the market conditions are right and subject to regulatory approvals.

Now that you are public, which way are you trying to push your ratios and how will you manage your balance sheet?

Firstly, in terms of business mix we want to grow in the consumer and commercial segments. If you look at he heritage of the four banks that merged to form Bank Mandiri they were primarily corporate focused. So when we merged the four banks we had a substantial corporate customer base. Since then, we have been working at enhancing our retail franchise. We have been investing in our IT platform, in people and our organizational structure is reflective of where we want to be in the future not where we are right now.

We are moving from a corporate heritage to a more balanced bank. We are not abandoning our corporate past as we have key strengths there and want to retain them. We have relationships with 77% of corporates and SOE's in Indonesia. On the retail side we have close to 7 million accounts, which generates one of the largest retail deposit bases in Indonesia.

However that retail base is very much on the liability side. We want to actively move into the asset side of the retail business, so we are looking to cross sell with products such as credit cards, mortgages, and multi purpose consumer loans. We have become more aggressive in mortgages, putting out the most competitive mortgage rate in the market. Even in our middle market of commercial and SME banking our strategy is to try to get synergies between corporates and suppliers and get linkages there. We know competition in SME is quite strong but nevertheless we have to make sure that we approach the whole market in a way not just driven by quantitative numbers but also by good processes and good risk management.

The other ratios we are seeking to improve are the non-performing loans, net interest margin and cost to income ratios. We hope we can maintain the higher than 20% return on equity but it could become harder as interest rates bottom and margins tighten.

What are your plans for reducing Bank Mandiri's holdings of government recap bonds?

That is another balance sheet structural issue that takes time. Over the past three years we have reduced our recap bond holdings through sales to rectify this and we have gradually increased our loan assets. However the ratio of bonds to loans currently is still roughly 2:1 i.e. two dollars of bonds to one dollar of loans. We want to turn that around and have more loans than bonds within the next three to five years. The rapid reduction of SBI rates has been very beneficial for us. We sold Rp13 trillion of bonds in the first half of 2003, realising a profit of Rp1.3 trillion.

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