The Indonesian government has taken the first steps in the privatization of the developing world's largest and some would say most successful microfinance institution, Bank Rakyat Indonesia (BRI). A state bank since its foundation just over a century ago, BRI is known as the people's bank, with 78% of its deposit and lending base either retail or microcredit customers (those with loans under $500).
Having never historically lent to large corporates, BRI did not suffer from the Asian financial crisis to the same extent as the rest of the Indonesian banking sector and as such, is likely to be regarded as one of the most enticing IPO prospects in the government's privatization pipeline.
In the RFP, which went out on Wednesday, the government did not specify how much it is preparing to sell, but most bankers are anticipating a 30% stake. Preliminary valuations suggest that BRI has a book value of about $750 million to $1.2 billion, implying IPO proceeds around the $225 million to $360 million mark.
The key question, will obviously be what price investors are willing to pay and analysts say the main sticking point with a prospective IPO of Bank Mandiri has been the government's unwillingness to accept pricing at a discount to book value. ABN AMRO and Credit Suisse First Boston have held the mandate for a 30% sale of combined primary and secondary shares in Indonesia's largest bank by assets for over a year. The IPO is scheduled to raise $150 million to $300 million similar to BRI.
However, it is now thought the government will fast track BRI over Mandiri, because the sale is viewed as being less politically sensitive and investors may be more prepared to accept pricing around book value.
The main comparable is Bank Central Asia (BCA), the country's second largest bank by assets and one of the few successful government IPO divestments since the financial crisis. Having listed in May 2000 raising proceeds of only $28 million, the government last held a public offering back in July 2001 when it raised $47 million for a 10% stake at Rp1,400 per share. It later sold a 51% stake to Farallon Capital of the US. Currently, BCA is trading around Rp2,425, representing a multiple of 1.2 times book.
However, industry experts say that while international investors own about 20% of the 32.5% shares in freefloat, this only amounts to a dollar amount of roughly $100 million. And the only other bank in which foreign investors hold any kind of meaningful stake is Panin Bank and here the amount is only $15 million to $20 million.
Trying to execute a $300 million IPO in a market where average trading volumes total roughly $17 million per day is, therefore, likely to be regarded as very challenging. In 2002, for example, there were also only three equity offerings with an international component: PT Indosat, which raised $112 million in May via CSFB and Danareksa, PT Surya Citra Media, which raised $55 million in July via CLSA and PT Telkom, which also raised $125 million in July via UBS Warburg and Bahana Securities.
This was also a huge increase on previous years, where less than $100 million was typically raised in total each year and indeed, there has only been one equity offering of a comparable size to BRI since the financial crisis, a $300 million block trade for PT Telkom in December 2001.
But the government is likely to hope that BRI's "healthy" balance sheet will re-ignite investor interest in the Indonesian stock market and more importantly help bridge its Rp34,346 trillion budget deficit. Most banking analysts also have a positive view of the Indonesian banking sector.
BRI and BCA are fairly similar in size, with respective asset bases of $8.5 billion and $9.9 billion at the end of 2001, while Mandiri is much larger at $30 billion. However, the key difference between the three is that BRI has a much higher proportion of third party loans rather than government re-capitalization bonds. The latter account for nearly 60% of Mandiri's and BCA's asset base at the end of 2001 compared to 37% for BRI. This also means that BRI looks much more like a normal bank with a loan to deposit ratio of 60.32% compared to 16.06% for BCA and roughly 30% for Mandiri.
On virtually any valuation metric, BRI reported higher ratios at the end of 2001 when it last released full financial results. It had NPLs of only 4.9% compared to 9.8% for Mandiri and 4.2% for BCA. In terms of Net Interest Margins, it recorded 7.64% compared to 5.38% for BCA and roughly 2.98% for Mandiri.
Analysts say that while a couple of institutions on the African continent have discredited microfinance, the sector is still well perceived because NPL's tend to be low.
BRI is well known globally for its unit desa system of 4,000 rural units which each operate as profit or loss centres. Far from providing subsidized rural credit, BRI uses market-oriented interest rates and has a number of savings plans. It currently has over 24 million deposit accounts, with deposits averaging roughly $100 and over 2.5 million borrowers, with an average loan size of $300 to $350.
Deutsche Bank analyst Thomas Quarmby says he is very optimistic on the banking sector and has a target price of 1.5 to 1.7 times book for BCA.
"IBRA has done a fantastic job cleaning up the Indonesian banking sector," he comments, "NPLs are low, banks are well capitalized and the old managements have been removed.
"Loan demand may be coming off a low base," he adds, "but just like the rest of Asia, it is going particularly well in the consumer sector. We're predicting loan growth of 15% to 20% this year, similar to 2002."