Banking Sector Indonesia: Foreign Ownership & Sustainable Financing
After having been limited to 40 percent for the last three years, foreign investors are now allowed to control a more-than-40 percent stake in Indonesian banks, provided that they buy two local banks and merge them into one. Indonesia's financial authorities gave the green light to two foreign banks (China Construction Bank Corporation and the South Korea-based Shinhan Bank) that seek to tap Indonesia's lucrative banking sector.
The Indonesian government regards such deals as a win-win situation. The foreign investor obtains management control in a lucrative sector, while the government sees consolidation, making the sector more stable, as smaller (and weaker) players are merged into a larger entity. Although it makes the investment more expensive and complex for the foreign buyer, it is an attractive deal for those with long-term ambitions (the economic slowdown and Basel's mandatory liquidity buffers for banks, imply that such deals are not attractive for short- term profit-seekers). On the other hand, Indonesia is known for its policy flip-flops. As such, there always looms the risk of seeing foreign ownership cut again in the future.
Although local banks' profit figures have slowed in recent years amid the country's economic slowdown, Indonesia's banking sector remains among the world's most profitable banking industries with an average net interest margin of 5 percent (double that of Singapore and Malaysia). Moreover, there is plenty of room for further growth considering that banking penetration in the largest economy of Southeast Asia is still low. There are currently 118 banks active in Indonesia. However, the top ten largest banks control about 60 percent of the country's total banking assets.
News agency Bloomberg notes that shares of the ten smallest financial institutions listed on the Indonesia Stock Exchange (IDX) have surged 38 percent over the past 12 months compared to a 29 percent drop in value of shares of the ten largest listed financial institutions as investors bet on such merger deals.
Earlier this year, the China Construction Bank announced it bought Jakarta-based Bank Windu Kentjana International and Bank Antardaerah. Meanwhile, South Korea-based Shinhan Bank said it received approval to purchase a more than 40 percent stake in Jakarta-based Bank Metro Express and Surabaya-based Centratama Nasional Bank.
Last year, Japan-based J Trust Co. was allowed to purchase a 99 percent stake in Bank Mutiara. However, this was a special case. Indonesian authorities made an exception for this acquisition as Bank Mutiara was regarded a distressed bank. Bank Mutiara is formerly known as Bank Century, a bank that was part of a well-known and controversial government bailout program in 2008. The bank became center of a major corruption scandal several years later.
Singapore-based DBS Group Holdings Ltd was denied a majority stake in Bank Danamon Indonesia in 2013.
Indonesia's Financial Services Authority (OJK) said it has received no information yet of other foreign investors interested to purchase a more-than-40 percent stake by merging two local banks.
Sustainable Financing: Indonesia to Limit Lending for Environmentally Unfriendly Projects
Meanwhile, the OJK is set to draft new regulation that limits local banks' lending to agriculture, energy, fishery and micro-finance for environmentally-damaging projects in a bid to prevent recent scandals such as the forest fires-inflicted toxic haze that spread across Southeast Asia. Reportedly, Indonesia's eight largest banks will start implementing these new guidelines in January 2016 as a trial run.