Cathay Financial Holding has agreed to buy a 40% stake in Indonesia's Bank Mayapada for IDR3.52 trillion ($278 million), the Taiwanese banking group said on Monday, furthering its expansion across the Asean bloc.
The deal is part of a growing trend as Taiwanese banks spread their wings to China, Japan, Southeast Asia and even Australia after a long period of steady but paltry domestic growth.
It also dovetails with a growing reform effort in Indonesia, where regulators are pressuring bank-owning families to pare their holdings, to make the country's banking system more resilient in times of stress and to improve corporate governance.
Bank Mayapada was founded in 1989 by Dato Sri Tahir, chairman of Mayapada Group. It is a mid-sized commercial bank in Indonesia with total assets of $2.5 billion as of September. Like many of Indonesia's family-run banks it is grappling with the increasing complexity of banking and a plethora of international and domestic red tape.
According to people familiar with the matter, negotiations with Cathay Financial kicked off in early 2014 driven by the next generation of the Tahirs and Tsais — Bank Mayapada and Cathay Financial's respective controlling, ethnically Chinese families. They saw potential for greater cross-border cooperation in areas such as trade finance, foreign exchange, treasury, retail banking, cross-selling, insurance and asset management.
Credit Suisse helped introduce the two parties, one of the people familiar with the matter told FinanceAsia.
On completion Cathay Financial will own a slightly greater percentage of Bank Mayapada than the Tahirs, according to another one of the sources.
Taiwanese spread their wings
At least 29 Taiwanese banks — or 74% of the island’s banks — have in recent years sought approval from the country’s Financial Supervisory Commission to open branches elsewhere in the Asia-Pacific region.
Taiwan appears overbanked relative to the size of its economy. Competition is fierce and many banks have a domestic market share of less than 1% which is weighing on profits (see chart).
Having decided to join the Trans-Pacific Partnership Agreement and Regional Comprehensive Economic Partnership — two ambitious trade deals covering the Asia-Pacific and Pacific Rim regions — the Taiwanese government is trying to encourage greater consolidation within its banking industry as well as expansion overseas. In one of a series of measures, the Financial Supervisory Commission, Taiwan’s securities watchdog, started allowing in June local insurers to exclude international bonds from their overseas investment quota, freeing insurers to deploy more capital overseas.
While many Taiwanese banks are expanding in mainland China, Cathay Financial is also branching out in Asean. Its wholly owned unit Cathay Life said it was acquiring a 20% stake in Philippines' Rizal Commercial Banking on December 17 for $402 million.
“Cathay FHC continues to remain positive on the overall economic growth momentum in the Asean market and continues to seek opportunities to expand its presence in Southeast Asia,” the group said in a statement on Monday.
Cathay United Bank recently established subsidiaries, branches and representative offices in emerging Asean markets such as Cambodia, Laos, and Myanmar.
For growth-starved Taiwanese financial institutions, Indonesia is looking increasingly attractive. The Organisation for Economic Co-operation and Development expects annual GDP growth in Indonesia to average of 6% from 2014 to 2018, outperforming the average of 5.4% among other Asean countries.
The Indonesian banking sector's total assets on average grew by 16% from 2011 to 2013, during which its non-performing loan ratio fell from 2.2% to 1.8%.
As a result, in the rare instances Indonesian banks have been sold they have tended to go for eye-popping valuations.
Cathay Financial, Taiwan’s largest publicly listed financial holding company, is paying a price-to-book multiple of 3.15 times at a time when Chinese banks are generally trading below book. Previously, Japan’s Sumitomo Financial Group paid $1.56 billion, or 4.5 times book value, for a 40% stake in the more profitable Bank Tabungan Pensiunan Nasional (BTPN).
Banks in Indonesia are also looking to make the most of the formation next year of the Asean Economic Community and the promise of more harmonised banking rules. The Asean Banking Integration Framework is meant to liberalise capital accounts, harmonise regulation and strengthen policy coordination among member states. However, it is still being worked on and is not set to come into effect until 2020.
Japan’s J Trust completed in November its purchase of 99% of smaller Indonesian lender Bank Mutiara for $350 million, a rare case of a foreigner securing control.
Cathay Financial’s unit Cathay Life will purchase Bank Mayapada stake in two stages – in line with precedents. Cathay Life will first complete the purchase of a 24.9% stake in the first quarter. Then it will buy an additional 15.1% subject to the approval of the Indonesia Financial Services Authority (OJK).
Japan’s SMFG adopted a similar two-stage structure when it acquired its stake in BTPN.
Indonesian regulations require individual financial institutions to seek formal approval when acquiring more than 25% and cap ownership at 40%. The upper limit of 40% was introduced in 2012.
Cathay Life and Bank Mayapada said they will seek approval from the relevant regulatory authorities in Taiwan and Indonesia as soon as possible.
Credit Suisse is the exclusive financial advisor to Cathay Life in the transaction while Morgan Stanley advised Bank Mayapada.
Bank Mayapada focuses on corporate lending. It has 175 branches and offices across Indonesia and approximately 80% are located in major cities in Java.
From 2011 to 2013, Bank Mayapada had a return on average equity of approximately 14.7% and a non-performing loan ratio of 0.83% as of the end of the third quarter of 2014.
Bank Mayapada is part of the conglomerate Mayapada Group owned by the Tahir family with businesses in a broad range of sectors, including retail, financial, healthcare, real estate and media.
Additional reporting by Jing Song