Indonesia acquisition could cost Bangkok Bank

Commercial banks in Southeast Asia usually find it hard to move abroad in a region where local players normally have a huge advantage in terms of trust from consumers.

There is no escaping the fact that the majority of ASEAN banks dominate their local markets. For example, the top three Singapore banks control around 80 per cent of the assets there. The top four banks in Thailand and Malaysia control 60 per cent of their domestic markets. 

Bangkok Bank is still the only Thai bank that has proven to be strong enough to operate abroad with 17 overseas branches, eight other ASEAN countries and 14 overseas branches in East Asia, including two wholly-owned subsidiaries in Malaysia and China.

The poor showing of local banks abroad was one of the reasons that BBL shareholders raised their eyebrows when the banking giant announced that it will acquire Indonesia’s PT Bank Permata (BNLI) for a deal worth US$2.7 billion, or 81.3 billion baht. The bank has scheduled a shareholders’ meeting to approve the deal next month.    

Doubts over the acquisition also stems from consumer consensus that BBL is considered to be one of the most IT-challenged banks in Thailand. Its digital banking system seems to breakdown more often than its peers at the end of each month due to an overflow of traffic.

The trade flow between Thailand and Indonesia is not large enough to justify the deal, which BBL expects to be the key focus of its international expansion strategy. According to data from the Bank of Thailand, exports from Thailand to Indonesia, the largest economy in ASEAN, were worth US$9.098 billion baht in 2019, down from US$10.248 billion in 2018.

The value in 2019 was less than that of the exports to Malaysia (US$10.459 billion) and Vietnam (US$12.115 billion). Imports from Indonesia to Thailand (US$7.233) were also less than imports from Singapore (US$7.642 billion) and Malaysia (US$12.858 billion) in 2019. This brings the total trade value between the two countries in 2019 to around US$16.33 billion.

Indonesian acquisition

“Based on our first-hand experience in Indonesia and deep understanding of the banking sector, we believe that the Indonesian banking sector is poised to continue delivering attractive growth while maintaining healthy margins,” said Chartsiri Sophonpanich, President of Bangkok Bank in a statement on December 12.

BBL’s Jakarta branch was established in the country in 1968 and is licensed by the Indonesian government to provide full commercial banking services to its customers. They also have two sub-branches, in Surabaya and Medan.

“Permata offers us a solid scalable platform with capabilities that complement our strategic objectives, including an extensive distribution network, a strong retail deposit franchise and brand, and advanced digital capability,” he added.

Aside from questions over BBL’s digital ability and the lack of trade flow between the two countries, the deal, which would be the biggest acquisition of an overseas lender by a Thai bank, was also considered to be quite expensive by some experts. The buyout statement for the deal said the bank “does not expect” to raise equity for the funding of this transaction.

These concerns were reflected in BBL shares; it went down by 10 baht, or 6.91 per cent, to its three-year low of 151.50 baht as the market closed on December 13, a day after the deal was announced. Thai brokers said on the day that investors were concerned that the above-market price would affect its profit.

Conversely, shares of Standard Chartered – who disposed of its stakes in BNLI, which will net about US$500 million – actually climbed by more than 2 per cent on the day that the deal was announced. The sale of the Indonesian bank is part of Standard Chartered’s restructuring efforts. The bank’s CEO Bill Winters said last year that its stake in Permata was “noncore.”

Bank Permata (BNLI)

BNLI is a mid-size lender in Indonesia with over 320 branches in more than 60 cities. They mainly focus on corporate wholesale, which accounts for 60 per cent of their portfolio. The bank has around 2 million customers and its equity was worth around 50 billion baht with a return on equity of 6 per cent and a price to book ratio of 1.1 times at the time of buying. But it was picked up by BBL at 1.8 times its normal value.

In the past, both DBS and OCBC pulled out from their bid to acquire BNLI at 1.6 times the value of its normal value because even that was too expensive for them.

“[I’m] surprised to see BBL wants to go in,” one banking analyst in Thailand said.  

Highly placed sources who were involved with the expansions of two major banks in the region said that now is not “the right time” to enter the Indonesian market as the right time would have been two decades ago.

“Timing wise, I may take the liberty to say that they (Bangkok Bank) may have missed the boat because the markets are very volatile now,” one source told Thai Enquirer. “Worst of all is the fact that there is no room for medium and small sized banks in Indonesia anymore because the market is a playground for only big boys such as BCA, Mandiri, and BRI,” he added.

The source explained that big players in Indonesia are now eating up all the market share and niche players such as BNLI are going to be able to make that much of a difference. Indonesia has been trying to restructure its banking sector, which is full of small players, by encouraging mergers and acquisitions.

Citi analyst Robert Kong wrote on one of his client notes in December that the decision by DBS and OCBC to pull out from the deal was a positive move given that the deal came when a merger and acquisition in Indonesia would face “significant challenges.” These include the difficulty in managing network duplication and to squeeze out cost savings amid a “multi-year rationalisation process” that is currently being used.

Another highly placed source also told Thai Enquirer that the price paid by BBL was “way overboard.”

“There is no way that the bank would be able to make it anywhere close to where the other banks are in Indonesia,” the source said. “Being the nineteenth largest bank is not that big of a deal,” he added. Indonesia, which is Southeast Asia’s biggest economy, has more than 100 lenders.

The source explained that there was no way that BBL and BNLI would together make it to the big leagues unless they expand by acquisition, which is not going to be easy, he added.

The top three banks, in terms of assets, in Indonesia control most of the market, including PT Bank Central Asia, PT Bank Rakyat Indonesia, and PT Bank Mandiri with a market cap of US$49.01 billion, US$38.32 billion, and US$25.29 billion, respectively, by the end of 2018. The three banks were also the second, third and sixth largest banks in Southeast Asia in terms of market capitalisation. Assets of all three banks were growing at nearly or by a double-digit growth in the first quarter of 2019 as well.

One highly placed source admitted that while there is growing middle-class in Indonesia and a large unbanked population, the BBL operation in Indonesia could still go the same way as DBS in Thailand where they were “pushed out of the market” as “only the big boys are of any relevance in Thailand.”

“It seems as though Bangkok Bank wants to show its shareholders that it is doing something to shore up the valuations at which it is trading,” he said.

He also added that the current valuation of Bangkok Bank, which is trading at 0.8 times book value is putting pressure on the bank’s management to show that it is doing something. This is why it went on to make the acquisition at prices that are “above the market norms.”

As the Thai economy has been facing an economic slowdown since last year with increasing household debt, deteriorating asset quality, and low-interest rates, Kevin Kwek, a Singapore-based analyst at Sanford C Bernstein & Co, told the Straits Times in December that BBL’s move in Indonesia points to the limited growth opportunities in Thailand.

“It says a lot about Thai opportunity, though, for a Thai bank to look to Indonesia for growth despite obvious challenges,” he told the newspaper.

The Bank of Thailand (BOT) last Wednesday lowered the country’s policy interest to be at 1 per cent for the first time in history, as it is expecting a slower than expected growth this year. The BOT said in early February that its latest estimation of 2.8 per cent GDP growth for 2020 is no longer attainable for this year because of the coronavirus outbreak and the delay in the disbursement of the 2020 fiscal year budget.

Tanapat Chatsatien, a bank analyst at Trinity Securities, told Thai Enquirer that the merger and acquisition is not “that bad of a deal” as BNLI has been growing by more than 20 per cent in the past three years.

“Firstly, I do not see a loss from the deal,” he said. “Secondly, the concern over the price is not clear since Permata is truly more expansive than BBL, but its growth of over 20 per cent in the past three years is higher than BBL whose growth has been stagnant. This means that the 1.77 times booking ratio can still be justified by Permata’s growth,” he added.

The last point that Tanapat made is that BBL valuations, such as its return on equity, will “definitely” improve after the deal has gone through, as BNLI’s profit will be counted into BBL’s. BBL is expecting to make payments for its acquisition of BNLI in the third quarter this year while BNRI’s profit in the first nine months of 2019 is to 8 per cent of BBL’s profit in the same period of time, he noted.

“If BBL’s earnings have been backed up by 8 per cent from Permata while BBL has not increased its capital, it would mean that its return on equity (ROE) would definitely improve but its ROA (return on assets) could be less because Permata’s ROA is smaller,” he added.

Tanapat also pointed out that investors have neglected that BBL is riding on high reserves where its loan to deposit ratio was around 80 per cent compared to more than 90 per cent in other major banks.

“With such high reserves, the use of it to invest represents a more effective way to manage its fund flow so this is not bad news for them,” he said.

Apichat Poobunjirdkul, senior strategist at Tisco Securities told Thai Enquirer that the sentiment around the acquisition is split in half in Thailand as most Thai people who know the bank well have always viewed the bank as conservative.

“Even though we do not know Permata, we still think that if BBL has carefully considered the deal, we will trust BBL,” he said. “Foreign investors on the other hand do not believe the deal because they are closer to Permata than us.”

He said that people who know Permata will still remember when its non-performing loans surged considerably in 2016 when the Indonesian economy was beginning to struggle and companies were unable to pay back their loans.

“They have thrown away those portfolios in 2016 and 2017 and they are beginning to make a comeback now,” he said. “But foreign investors are still wary that the deal would be bad for BBL because Permata is considered as a high risk.”

BBL will hold a meeting on the acquisition on March 3. If their foreign shareholders manage to block the deal with their votes then things could be more complicated and the deal could be over, he noted.

“The deal requires an at least 75 per cent approval rate from eligible shareholders who can vote. The majority of people who can vote are Thais, but they still require some foreign votes to go their way, [and] none of the foreign holders told me that they would vote positively. We still have to wait and see what is going to happen,” he added.

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