UOB to buy stake in Bank Buana

The second of Singapore''s big three banks looks to invest in the Indonesian banking sector.

UOB yesterday announced that it had entered into an exclusive arrangement "to conduct due diligence with a view to acquiring a 23% stake" in Bank Buana Indonesia. The curious announcement makes no mention of any price agreed and has caused analysts to wonder what is going on. Officials at UOB would not comment further.

The 23% stake is worth some Rp804 billion ($94 million) at the current market price of Rp700 a share for Bank Buana. However, shares in Bank Buana have gone up 40% since Friday as the market got wind of this transaction.

Importantly, if the deal were struck at today's price it would represent a valuation of about 1.1 times the September 2003 book value of Bank Buana. However, last month Singapore's other family bank OCBC announced that it would buy into Bank NISP at a valuation of 2.5 times book. This suggests that if UOB were to pay the same as OCBC paid for Bank NISP, then Bank Buana shares would have to rocket.

For UOB the deal is probably more symbolic than anything. The bank is sitting on assets of $66.7 billion and shareholders funds of $7.8 billion. In 2003 it made a profit of $707 million. It has stated that the reason it is not returning more cash to shareholders is that it is on the lookout for acquisitions. It is one of the three bidders for Bank of Asia in Thailand. While in Indonesia it was an unsuccessful bidder last year for the acquisition of IBRA's stake in Bank Internasional Indonesia which was eventally won by its government rival Temasek.

The stake that UOB is looking to buy in Bank Buana is being sold by PT Sari Dasa Karsa, the family company that runs Bank Buana. Once the 23% stake has been sold, Sari Dasa Karsa will still own roughly 38% of Bank Buana, according to figures in Bloomberg, thus retaining majority control.

Bank Buana is known as one of the best banks in Indonesia focusing on the SME sector. It was established in 1956 and has 171 offices and 92 ATMs. It is one of the few major banks in the country to have survived the financial crisis without a government bailout.

However there is a new mood in Indonesian banking circles after the publication last month of a new banking architecture plan by the central bank, Bank Indonesia. This gives a time frame of five to 10 years for there to be massive consolidation in the market as it seeks to reduce the number of banks down from 138.

Moreover Bank Indonesia wants those banks that remain to be better capitalized and better able to compete with the foreigners. Since the IBRA asset sale started in earnest in 2000, foreign interests now control some 30% of Indonesia's banking assets. With this has come much increased competition for the smaller and medium sized players.

In this light, the decision by the controlling family to sell a relatively small stake looks like they are monetizing some value now before they see how the consolidation game plays out. "There is increasing competitive pressure on smaller banks in Indonesia especially as the larger banks are so willing to lend right now," says Merrill Lynch's banks analyst Alistair Scarff in Hong Kong. "It is not surprising that the smaller banks are considering their options."

Taken together with OCBC's acquisition of a stake in Bank NISP, these are the first two bank deals that are not being done from a distressed basis in the country. The two deals are based on foreign banks paying a premium for significant stakes in small, but well run and profitable family banks. Given the new architecture, it is noteworthy that the Indonesian families are willing to sell now and the Singapore buyers are willing to invest.

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