ABN AMRO Rothschild, Credit Suisse First Boston and joint global co-ordinator Danareksa Sekuritas begin pre-marketing today for an all secondary share sale in Indonesia's largest financial institution, Bank Mandiri.
Initially, a 30% sale combining both primary and secondary shares had been planned. However, this has now been scaled back in recognition that the Indonesian market would find it very hard to absorb about $300 million of new paper when the exchange still averages only $40 million to $50 million a day.
Instead, a roughly 10% divestment is planned, with co-leads CLSA, Fox Pitt Kelton and UBS Warburg filling out the syndicate as co-leads. Formal roadshows are scheduled to run from June 9 to 23, with the deal following a sequential offering structure. As a result, the international book will close on June 23 and the retail offering on June 30, with listing expected to take place the week beginning July 14.
For the Indonesian government, one of the key aims is to secure pricing above book value and observers say this has been aided in recent weeks by the trading pattern of Mandiri's best listed comparable, Bank Central Asia (BCA). Closing Wednesday at Rp2,500 per share, BCA is currently trading at roughly 1.3 times 2002 book value and 1.16 times 2003.
This ranks towards the top end of the Indonesian banking spectrum, which spans Lippo Bank on 0.6 times 2002 book, Panin Bank 1 times, Danamon 1.4 times and BNI 3.1 times.
Aside from the need for an IPO discount, most observers believe Mandiri should naturally price at a slim discount to BCA, which has established a loyal international following since its IPO in May 2000. But most also expect that Mandiri will gradually trade through BCA over time. Syndicate banks have assigned Mandiri a fair value of 1.2 to 1.4 times book.
Analysts argue that the top Indonesian banks hold up well against most of their emerging markets peers. Unlike the Thai banks, for example, the top players pay dividends. BCA ran a net dividend yield of 5.7% during 2002 and having indicated that it will pay a Rp250 dividend on 2002 earnings, analysts say this equates to a 10% yield at the current share price.
Likewise, observers say that Mandiri will also pay a dividend, although the pay-out ratio has not yet been finalised.
Where the Indonesian banks do differ from their peers is the disproportionately high number of zero risk weighted assets they carry on their books, which makes them look more like bond funds than commercial banks. Loan to deposit ratios are consequently very low and of Mandiri's roughly $30 billion asset base, 59% is said to consist of government re-capitalization bonds, injected into the bank after the financial crisis.
Therefore, one of Mandiri's key earnings drivers is the three-month SBI rate, which has declined from 12.93% in December to 10.8% in May. However, analysts say that rates should stabilize during the second half of the year and strong loan growth should mean the balance will shift in favour of commercial loans within the next three years. Syndicate research indicates that commercial loans will grow by a CAGR of 21% over the next five years.
Indonesian banks also maintain higher coverage ratios than many of their peers and Mandiri, for example, had 1.2 times cover through 2002, with NPLs standing at 9.2%.
For investors, one of the major concerns is likely to be the overhang of future government divestments on share price performance. The Indonesian government has made it clear that it wants to divest majority ownership of Mandiri and if it follows BCA's precedent, will complete a secondary sale about a year after the IPO and a strategic sale shortly after that. BCA, for example, now has 32.5% of its shares in freefloat and is majority owned by Farallon Capital of the US.
But underlying this, the Indonesian market ranks as one of Asia's best performers so far this year and many houses predict it will stay this way despite the recent flare up in Aceh. Closing Wednesday at 424.945, the index is up 9.456%, or 18% in US dollar terms.