Jul 23, 2014

Malaysia - Jitters over Indonesia's proposed banking bill

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Malaysian ownership of Indonesian banks came under the spotlight again following a proposed bill that compels foreign banks to trim their interests to 40 per cent.

Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, which have majority interest in banks there, could come under pressure if the law was applied retrospectively. Maybank has an interest of about 80 per cent in Bank Internasional Indonesia (BII), while the CIMB Group owns a 97.9 per cent stake in CIMB Niaga.

Analysts contacted by StarBiz said that this would depend on whether the law, if passed, would be retrospective or only applied to new entrants vying for a stake in Indonesian banks.

“If it is restrospective, then Maybank and CIMB will be impacted and could be forced into diluting their stakes,” an analyst with a bank-backed brokerage said.

“This will be a negative to the banking system in Indonesia in the long run. It is still early to gauge and make any conclusion on the fate of foreign banks in Indonesia,’’ the analyst said.

Reuters reported yesterday that Indonesian lawmakers were considering a bill that would force foreign banks to sell down majority stakes in local lenders.

Quoting Harry Azhar Azis, the deputy chairman of the multi-party parliamentary commission overseeing banking and finance in the country, the newswire said the bill would force foreign banks to reduce their holdings in Indonesian banks to a maximum of 40 per cent within a decade.

Since 2012, under the new regulations, the central bank has limited foreign equity ownership of local banks in Indonesia to a maximum 40 per cent.

Commenting on the Reuters report, a Maybank spokesperson said in a statement: “Given that this bill is reported to be still under consideration, we are not able to make any comments until there is greater clarity on the issue.”

Based on analysts’ estimates, BII’s contribution to Maybank’s earnings now stood at 7 per cent, while CIMB Niaga’s contribution to CIMB Group was about 30 per cent.

Meanwhile, MIDF Research banking analyst Kelvin Ong felt that the 2012 regulations would still be applied to existing foreign banks such as Maybank and CIMB in terms of their current stakes in Indonesia.

These, he said, included financial health checks and good corporate governance (CG) practices as well as the ability to contribute to the expansion of Indonesia’s economy.

They would be key factors in determining the actual percentage of equity ownership that would be allowed in Indonesian banks, Ong noted.

Pending new regulations, some industry observers and analysts concurred that the above factors would allow Maybank and CIMB Group to hold more than 40 per cent interest.

Ong expected banks with strong financials and good CG ratings to be allowed to hold more than 40 per cent interest. In this respect, he said, Maybank with its goood governance, strong regional presence and financial strength should be able to retain its existing shareholding in BII.

As for CIMB, analysts agreed that the impending merger talks with RHB Capital and Malaysia Building Society Bhd, if it goes through, would further beef up its capital position and financial strength as well its corporate governance position and hence not impact its current stake in CIMB Niaga.

Besides the proposal to sell down majority stakes in Indonesian banks, Reuters also said the proposed bill called for investments by foreign banks to be evaluated according to “reciprocity” or whether Indonesian banks could have similar market access to these banks’ home countries.

It also called for foreign banks to be locally incorporated, which would force them to ringfence a pool of capital in Indonesia to protect customers from losses if the lender ran into trouble overseas.

Daljit Dhesi

The Star

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