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JAKARTA - Budi Sadikin, a clean-cut, affable young executive, is smiling broadly. And for good reason. As head of consumer banking in Indonesia for ABN AMRO Bank, the 37-year-old has watched deposits at the Dutch bank's 15 branches triple in value in just three years — to $800 million at the end of 2000. Until 1998, ABN AMRO, which has been doing business in Indonesia for 175 years, did not even have a consumer-banking unit. Now Sadikin oversees a 200-strong team whose job it is to coax more affluent Indonesians to deposit their money in a foreign bank.
It's not a hard sell when you look at the battered remains of the local banking sector, which almost collapsed during the financial crisis under a tide of bad debts. At that time, foreign banks were only too happy to oblige panicked depositors seeking a safe haven for their money; customers kept lining up even when the banks tried to dampen demand by charging fees for new accounts. "It was a flight to quality and security," says Sadikin.
The panic may be over for now. But the growth of foreign banks in Indonesia shows no sign of letting up. Even though they typically offer lower interest rates for savings than their local counterparts, overseas institutions have been able to lure upper middle-class Indonesians seeking to open foreign-currency accounts. ABN AMRO, Citibank and HSBC are now among the country's top 15 banks in assets. Sadikin says ABN AMRO has added 11,000 new customers since the start of the year to bring the total to 50,000 — a 28% jump. After opening five new branches in Indonesia in 2000, HSBC plans to unveil four more this year. "Our consumer business hasn't slowed since last year," says Lily Budiono, head of personal financial services at HSBC.
It's not only the lower risk of failure that makes foreign banks attractive. Service plays an important role. HSBC now opens seven days a week at three branches located in Jakarta's shopping malls, allowing customers to bank on the weekend. Citibank, the largest foreign bank by asset size, has invested in bilingual call centers to provide 24-hour banking by phone. These days, wealthier Indonesians typically have at least two accounts. They are happy to stash some dollars at HSBC while taking a car loan from a local bank. "There's no loyalty in banking," says Budiono.
Which is bad news for local players. The flight of depositors' cash to foreign banks can only serve to spur a further shake-out of an industry that is already reeling from the effects of the financial crisis. The likes of Citibank can't hope to match the consumer network of local behemoths like state-owned Bank Mandiri, the country's largest, and Bank Central Asia, which has 794 branches and 8 million customers. But then, who would want that many branches in a country whose banking system is so bloated that the government is trying to force struggling local banks to shut down loss-making outlets? The number of Indonesian banks has plunged from over 230 in pre-crisis days to fewer than 150 today, but more consolidation is inevitable.
Despite gorging on $37 billion in government recapitalization bonds since 1999, the financial institutions that have survived so far remain in frail health. The country's weak currency, poor investment climate and sky-high interest rates have eroded bank earnings and threaten to turn even healthy corporate loans bad. "Some of the debt restructurings [agreed upon previously] will have to be revisited," says Ian Clyne, CEO of Lippo Bank, one of the stronger Indonesian banks. With non-performing loans as a percentage of total capital already hovering in the high teens, that could spell disaster for weaker banks.
Amid the turmoil in the banking system, Jakarta has been hesitant to impose a solution. All banks face tougher capital requirements at the end of the year. But there are doubts as to whether the government will enforce the rules (if it does, about 20 banks are expected to fail). There is also talk in Jakarta of the need for a second round of government recapitalization for weak state-owned banks. Bank Internasional Indonesia is seen as vulnerable, despite a government pledge to cover its losses. The bank carries $1.3 billion in dubious loans to former owner Sinar Mas Group and its debt-ridden Asia Pulp & Paper subsidiary. Propping up ailing banks is likely to renew charges that Jakarta is dragging its feet on bringing about a much-needed overhaul of the banking system.
Meanwhile, the foreign players are going from strength to strength. Analysts say overseas banks, which have already written off a big chunk of bad debt and have made provision against most of their remaining loans of dubious quality, should easily ride out any fresh jitters in the banking system. In fact, more cracks in the local system will send even more customers their way. "They are more conservative and they've got more capital," says Mirza Adityaswara, banking analyst at W.I. Carr Securities.
Having taken care of their bad loans also means that the foreigners are more profitable than much larger local banks. Citibank, for instance, booked $21 million in pretax profit from an asset base of $2.2 billion in the first quarter of 2001. State-owned Danamon, which is more than twice Citibank's size with $5 billion in assets, only managed to make $15 million.
Danamon's hang-up is familiar to all banks in Indonesia: It can't build up its loan portfolio because it can't find creditworthy borrowers. Many large companies have yet to restructure the debt left over from their last credit binge and are in no position to seek new loans. "It's not easy to lend," says Lippo's Clyne. It certainly doesn't help that Bank Indonesia is raising interest rates at a time when most central banks around the world are easing monetary policy.
Although foreign banks are also hamstrung by the lack of lending opportunities, their international network plays well with Indonesian exporters, who are leading the country's stop-start economic recovery. Foreign banks can earn good margins by financing foreign trade and providing working capital to dollar-earning companies. "Foreign banks do well in this area; it's their natural market," says Francis O'Shea, director of corporate finance at Arthur Andersen. It is a market that is closed to many local banks, because they cannot open letters of credit with overseas banks leery of Indonesian exposure. With this kind of leg-up in the loan market, foreign banks last year accounted for 28% of all loans in the banking system, up from only 9% in June 1997.
All this places added pressure on local institutions to perform, merge or die. Another round of painful consolidation is imminent. As for Citibank, ABN AMRO and others, they can continue to offer their customers more security and better service, while squeezing more profit out of every dollar invested. That should keep Budi Sadikin smiling for some time to come.
Simon Montlake
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