As one of the last remaining Asian growth stars, banks have been jostling for a place in Indonesia in the last several years. Although stakes in many of the larger banks have already been scooped up by foreign institutions, the size of the local market, which has 122 commercial banks out of around 2,000 financial institutions, leaves plenty of room for the entry of new investors – and Bank Muamalat has emerged as one of the most sought after assets in the country.
Following news that its three majority shareholders, namely the IDB, Kuwait’s Boubyan Bank and Saudi’s Atwill Holdings, were looking to sell a controlling share in the bank, a series of potential acquirers circled in on Bank Muamalat. While the IDB is said to have informed the central bank, Bank Indonesia, that it has postponed the sale, the interest generated from the potential divestment suggests that it may not be long before the bank is snapped up by a new investor. However, pricing issues and uncertainty over Indonesian bank ownership rules may now scare off all but the most determined of acquirers.
Fundamentals intact
In comparison to Indonesia’s largest banks, Bank Muamalat is small, with total assets of just IDR24 trillion (US$2.8 billion) as at the end of June. However, with its network of 367 branches across Indonesia, a presence in Malaysia and a growing foreign remittance business, the bank presents an attractive prospect for foreign banks eyeing the promise that Indonesia holds.
The bank is also growing quickly, having recorded an almost 60% year-on-year surge in profits to IDR563.88 billion (US$66.08 million) in the second quarter of 2011. It has also grown its asset base 53.8% over the same period, while its balance sheet has remained healthy, with net non-performing financings improving to 3.57% in the second quarter of this year from 3.93% in the previous corresponding period.
Pricing an issue
Unfortunately for Bank Muamalat’s shareholders, the number of bidders for a stake in the bank did not guarantee a sale, and the deal fell through due to a disagreement on pricing.
It is unclear how much Bank Muamalat’s shareholders are looking to sell down their stake for, but due diligence conducted by the IDB, Boubyan Bank and Atwill is said to have valued the bank at IDR2.6 trillion (US$304.7 million).
Of course, an entry into Indonesia’s lucrative market, where banks offer an average return on equity of around 20%, is not without its price, and investors will have their work cut out for them sifting through lofty valuations. According to CLSA, on average the country’s top eight banks are trading at a price-to-earnings ratio of 11 times for 2012, higher than the region’s average of 9.7 times.
Recent acquisitions of local banks by foreign parties have also proven expensive, costing as much as over four times price-to-book value. Malaysia’s Maybank, which bought Bank Internasional Indonesia in 2008, paid 4.1 times book value for the deal. Shortly after, HSBC bought over 88.89% in the medium-sized enterprise bank, Bank Ekonomi Raharja, for US$607.5 million, also at 4.1 times book value.
Regulatory roadblocks
Although money talks in Indonesia, the country’s banking regulations are another matter entirely, with reports that the central bank could reduce ownership limits also said to have put off a potential buyout of Bank Muamalat.
This month, Bank Indonesia said it is looking into introducing rules on the maximum interest shareholders are allowed to hold in banks. Currently, it allows foreign banks to own up to 99% of local banks, but expectations are that under new rules, which may be announced at the end of this year, any one shareholder will only be allowed 50%.
Given the uncertainty this has introduced to potential mergers and acquisitions, it is likely that investors will hold back from taking stakes in Indonesia’s banks, even one as attractive as Bank Muamalat. On top of this, a glut of banking deals will probably emerge should the ownership limits come through, which will make banks cheaper in the future – a scenario which will certainly make potential investors think twice about shortchanging themselves by diving into a deal now.
Regardless of the roadblocks, Bank Muamalat’s solid fundamentals have made it a fruit ripe for the picking. With its majority owners keen to divest their holdings in the bank, it is more likely a question of when, and not if, the bank will see the emergence of new ownership.