By Cho Jin-seo
Staff Reporter
South Korean banks are weighing merger and acquisition (M&A) opportunities in Indonesia as its government is trying to greatly consolidate its financial sector this year.
The Industrial Bank of Korea (IBK), the Korea Development Bank (KDB) and Hana Bank are all doing preliminary work to acquire local banks or open more branches of local subsidiaries. Brokerage houses such as Korea Investment & Securities and Woori Investment & Securities are also actively seeking investment and business opportunities there.
Indonesia is one of the world's fastest growing and resource-rich economies, where the recent global crisis has only proven its economies robustness as well as its future potential. But what is really making the Indonesian M&A market attractive is a government deadline imposing a capital requirement for banks set for the end of this year.
According to KOTRA, Korea's trade promotion agency, the Indonesian government is going to shut down small banks whose capital is under 100 billion Indonesian rupiahs ($10.9 million at today's rate) after 2010. This is a strong move to facilitate the consolidation of small banks into bigger ones, and foreign buyers are all welcome to the M&A market as well as domestic ones.
Currently, there are 122 commercial banks, among them 10 controlled by foreign capital, in the country. KOTRA estimates that some 19 banks won't be able to meet the capital requirement unless they merge with others, and only about 15 big players will survive the chaos in the end, it said.
"There will be a large number of mergers and acquisitions in 2010 for banks that do not meet the 100 billion-rupiah hurdle,'' the report said. "Korean banks need to make advances there as the investment attractiveness of the Indonesian market keeps increasing."
A number of Korean bank CEOs have recently remarked that they are interested in buying banks in Indonesia. Min Euoo-sung, head of KDB, said that it plans to buy two to three banks in Indonesia, Thailand or in other Southeast Asian nations, according to the Hankook Economic Daily.
IBK's CEO Yoon Yong-ro has also reiterated this year that the bank completed audits on three to four banks in Indonesia, and will discuss with the Korean government, its major shareholder, the possibility of signing a deal. Hanabank also plans to open five to 10 more branches of its subsidiary and is allegedly considering buying another local bank.
Banks that are entering Indonesia are upbeat because the demand for capital has been high from local businesses. A strong deterrent for lenders, however, is the rapid economic growth itself. The Indonesia Stock Exchange index rose by almost 87 percent last year, making it the second best-performing in the Asia Pacific region, the Jakarta Post reported. Such a buoyant stock market makes firms turn to bonds or public offering of stocks in order to raise needed funds, instead of bank loans. This may mean less-than-expected profit for the commercial banking industry, but more business opportunities for players in the investment banking sector. This is why Woori Investment & Securities and several other securities companies are investing in the sector.
Korean firms are not the only ones who are enticed by the Southeast Asian giant. The country's vigorous economy has attracted favorable ratings from investment agencies and the global media. Indonesia was one of a few countries that "did not tip into recession" but "merely suffered slowed growth," along with China and India, according to a recent article in The Economist.
It is now even referred to as one of the BICI countries ― an acronym that refers to the four fast-growing economies of Brazil, India, China and Indonesia ― replacing Russia from BRIC.