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Extended Annual Review Report

Project Number: 42905 Loan Number: 2432 October 2013

Senior Secured Syndicated Loan Bank Mandiri (Persero) (Indonesia)

This is an abbreviated version of the XARR which excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS Currency Unit – rupiah (Rp)

At Appraisal

At Project Review 18 June 2008 12 August 2013

Rp1.00 = $0.00011 $0.00010 $1.00 = Rp9,281 Rp10,297

ABBREVIATIONS ADB – Asian Development Bank AFD – Agence Française de Développement CAGR – compounded annual growth rate ESMS – environmental and social management system LIBOR – London interbank offered rate PSOD – Private Sector Operations Department ROIC – return on invested capital

NOTE (i) In this report, “$” refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General T. Freeland, Private Sector Operations Department (PSOD) Director C. Engstrom, Private Sector Financial Institutions Division, PSOD Team Leader Team Members

S. Hruschka , Principal Investment Specialist, PSOD P. Bracey, Principal Investment Specialist, PSOD

P. Flegler, Investment Specialist, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of, or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgment as to the legal or other status of any territory or area.

CONTENTS

Page BASIC DATA i EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2

II. EVALUATION 3

A. Project Rationale and Objectives 3 B. Development Impact 3 C. ADB Investment Profitability 7 D. ADB Work Quality 8 E. ADB’s Additionality 8 F. Overall Evaluation 9

III. ISSUES, LESSONS AND RECOMMENDED FOLLOW-UP ACTIONS 9

A. Issues and Lessons 9 B. Recommended Follow-Up Actions 9

APPENDIXES 1. Project Related Data 10 2. Funding from International Financial And Government Institutions 16 3. Indonesia: Economic And Banking Sector Overview 17 4. Private Sector Development Indicators and Ratings – Financial Intermediaries 26 5. Comparative Financial Statements 28 6. Environment and Social Management System 29

BASIC DATA

Senior Secured Syndicated Loan: Bank Mandiri (2432−INO)

Key Project Data As per ADB

Loan Documents ($ million)

Actual ($ million)

Total Project Cost ADB Investment: A Loan 75.0 75.0 B-Loan 225.0 30.0 Total Loan: Committed

Disbursed 105.0 105.0 Outstanding 67.0

Key Dates Expected Actual

Concept Clearance Approval Board Approval Loan Agreement Loan Effectiveness First Disbursement Loan Closing

2008 2008 2008 2008 2008 2015

5 February 2008 29 July 2008

30 October 2009 13 November 2009

28 Jan 2010 30 October 2016

Financial and Economic Internal Rates of Return on Invested Capital (%)

Appraisal XARR

Return on invested capital (real) Economic return on invested capital (real)

Project Administration and Monitoring Number of Missions

No. of Person-Days

Concept Clearance 1 4 Due Diligence Mission 1 5 Private Sector Credit Committee Meeting -- -- Board Approval -- -- XARR Mission 1 2

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EXECUTIVE SUMMARY

In July 2008, the Board of Directors of the Asian Development Bank (ADB) approved a senior secured ADB-led syndicated loan to Bank Mandiri consisting of two facilities: (i) a $75 million direct A loan from ADB with a maturity of 7 years, and (ii) up to $225 million financed by participating commercial banks under mutually agreed terms under ADB’s B loan facility, with ADB the lender of record. The ADB-led syndicated loan aimed to provide borrowers in Indonesia with greater access to longer-term, US dollar-denominated loans.

ADB approached several large private sector multinational banks to build interest in the B loan to Bank Mandiri. The onset of the global financial crisis in 2008, shortly after ADB approved the project, heightened risk aversion and capital preservation needs in the banks that had previously shown interest in the B loan, and they withdrew from the syndication. Once the crisis had peaked in mid–2009, ING emerged as the only financial institution to support the project, providing a $30 million B loan commitment to Bank Mandiri. ADB, through its Private Sector Operations Department, proceeded with the project nonetheless. Despite the smaller syndication, both the timing and the size of the loan were considered significantly beneficial to Bank Mandiri and Indonesia’s banking system, particularly under the changed financial and economic circumstances brought on by the global crisis. The loan agreement with Bank Mandiri was finalized in October 2009 and disbursed in January 2010.

Bank Mandiri was created through the merger of four failed banks after the Asian financial crisis of 1997–1998 as part of the bank restructuring program of the Government of Indonesia. Bank Mandiri accounts for almost 20% of the banking system’s assets and is Indonesia’s largest bank by that measure. Among the several constraints on a continuation of the country’s rapid economic growth have been its comparatively narrow and shallow finance sector, poor infrastructure, and an adverse investment climate. Banking penetration remains low, and the deposit structure of Indonesia’s banks is heavily skewed to short-term liabilities, with almost no long-term deposits or funding available to facilitate the lending of long tenors that is greatly needed to finance infrastructure in particular. Deepening of the country’s financial sector is recognized as a prerequisite for sustained growth and development.

Due to its size and significance, Bank Mandiri was well-placed to further the goals of financial sector development. The objectives of ADB’s syndicated loan were to (i) support Bank Mandiri in strengthening its financial position and undertaking reform; (ii) assist Bank Mandiri in addressing its asset–liability maturity gap; (iii) help meet long-term capital expenditure funding needs; (iv) support the government’s strategy of encouraging private sector participation in infrastructure development; (v) help Bank Mandiri establish environmental and social safeguard policies; and (vi) catalyze lending to the bank by foreign commercial lenders and demonstrate the viability of long-term offshore funding for Bank Mandiri.

The overall impact of ADB’s loan to Bank Mandiri on private sector development is rated satisfactory. The credit facility was ADB’s first nonsovereign loan to a financial institution in Indonesia. The loan helped Bank Mandiri augment its long-term foreign currency lending capabilities and reduce its foreign currency asset–liability gap. More crucially, an implicit ADB objective of supporting vulnerable financial markets during times of crisis was successfully achieved through the project by helping Bank Mandiri raise long-term funding when global liquidity was freezing up due to the 2008 global financial emergency. ADB’s loan helped establish an environmental and social management system at Bank Mandiri, which had not had one before. It attracted other lenders through ADB’s B loan, as well as follow-on loans from other financial institutions. Overall, the loan helped Bank Mandiri make progress in its corporate

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reform process. Targeted outcomes specified in the project’s design and monitoring framework were also realized.

Bank Mandiri’s business and economic performance is rated excellent. As of 2012, Bank Mandiri had maintained its lead as the largest bank in Indonesia, and its capital position and recurring earnings were better than most of its peers. Its success reflects the bank’s consistently improving financial performance, dominant banking franchise, favorable short-term funding profile, high liquidity, and improving profitability. Bank Mandiri has also strengthened its organizational structure and branch infrastructure to provide more integrated service solutions and has benefited from a focus on human resources, technology, prudent risk management, and good corporate governance. The financial parameters related to Bank Mandiri’s business success and profitability—e.g., the real return on invested capital and the economic return on invested capital—are measurably higher than the hurdle rates set by ADB in its guidelines for extended annual reviews, and qualify for an excellent rating.

Investment profitability of the project is rated satisfactory. The margin charged by ADB to Bank Mandiri was in line with the commercially priced B loan funded by ING.

The project’s environmental, social, health, and safety performance is rated satisfactory. ADB’s loan to Bank Mandiri was classified in the financial intermediary category under ADB's Environment Policy (2002) and category C under ADB's Involuntary Resettlement Policy (1995) and ADB's Policy on Indigenous Peoples (1998). With ADB’s assistance, Bank Mandiri established its first environmental and social management system (ESMS). The bank’s ESMS is aligned with the social and environmental requirements of the government. Adherence to these standards was stipulated in ADB’s loan agreement and monitored via reports submitted by Bank Mandiri that confirmed that environmental and social issues and risks were being properly addressed.

ADB’s work quality is rated satisfactory. This is based on its (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) ADB’s role and contribution. The loan was an ADB-led syndicated effort that involved extended negotiations with several international banks over a prolonged period. ADB also worked closely with Bank Mandiri to formalize aspects of the loan collateralization process.

ADB’s additionality is rated satisfactory. The attractively priced, long-term syndicated loan helped Bank Mandiri enhance its foreign currency lending and improve its foreign currency asset–liability maturity matching. The timing was significant because alternate sources of long-term foreign currency funding and international loans began to dry up shortly after the ADB loan approval as the global financial crisis erupted, driving up the costs and limiting the availability of such funding. The project also enabled Bank Mandiri to further its proficiency with documentation formalities and collateralization and covenant reporting requirements for a syndicated loan deal. The groundwork undertaken by Bank Mandiri during the ADB loan process and informal inputs provided by ADB to other lenders facilitated follow-on funding to Bank Mandiri. It was due to ADB’s support under the project to develop environmental and social safeguard awareness and policies that Bank Mandiri instituted its first ESMS, which has led to further initiatives in green banking.

This review rates ADB’s Bank Mandiri syndicated loan project successful overall.

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I. THE PROJECT

A. Project Background

1. In July 2008, the Board of Directors of the Asian Development Bank (ADB) approved an ADB-led syndicated loan to Bank Mandiri in Indonesia. It consisted of two facilities: (i) a $75 million direct A loan from ADB with a maturity of 7 years, and (ii) a B loan of up to $225 million that was to be financed by participating commercial banks under mutually agreed terms, with ADB as the lender of record.1 The ADB-led syndicated loan aimed to provide borrowers in Indonesia with greater access to longer-term, US dollar-denominated loans. Due to delays related to the financial crisis of 2008–2009, the loan agreement was finalized in October 2009.

2. Bank Mandiri was created as part of a bank restructuring program by the Government of Indonesia after the 1997–1998 Asian Financial Crisis through the merger of four failed banks. Bank Mandiri is the country’s largest bank by assets and accounted for almost 20% of banking system assets in 2012. The government’s share in the bank currently stands at 60% after successive public equity offerings. Bank Mandiri operates six subsidiaries in Islamic banking, capital markets, vehicle finance, life insurance, general insurance, and microcredit banking.

3. In 2005, after a series of performance setbacks, Bank Mandiri formulated a comprehensive reform program focused on enhancing its corporate governance, resolving nonperforming loans, improving customer satisfaction, and accelerating its business expansion. Building up its long-term lending business faced a significant obstacle due to a lack of long-term funding sources in the domestic financial markets. ADB approved the 2008 credit facility to fill this gap in some measure, support Bank Mandiri because of its importance to Indonesia’s banking system, and help meet the need for long-term funding in Indonesia’s economy. The mobilization of resources through the B loan was intended to leverage ADB’s direct A loan and help Bank Mandiri widen funding relationships in the international financial community.2

4. ADB had provided a sovereign loan in 2002 to the Government of Indonesia to fund microcredit projects. The SDR15.87 million sovereign credit facility was relent to Bank Mandiri and is overseen by ADB’s Southeast Asia Regional Department.3 This review covers only ADB’s 2008 syndicated nonsovereign loan to Bank Mandiri, which has been overseen by ADB’s Private Sector Operations Department (PSOD).

B. Key Project Features

5. The project was ADB’s first nonsovereign loan to a financial institution in Indonesia. It was also the first time Bank Mandiri engaged in a transaction that concurrently involved (i) a multilateral development organization as the lender; (ii) a long-term, 7-year tenor; (iii) a B loan component; (iv) loan collateralization requirements; and (v) a requirement to adopt environmental and social safeguards.

6. ADB worked with several multinational private banks to build interest in the B loan to Bank Mandiri and at the time of approval in July 2008 had garnered indicative commitments of $225 million. The onset of the global financial crisis soon afterwards in late 2008 heightened

1 ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan—Bank

Mandiri (Persero). Manila. 2 B loans are loans made by ADB but funded by eligible third-party commercial financiers when ADB itself is also

providing lending directly in the form of an A loan. ADB is the lender of record. Eligible financial institutions participate in the B loans without recourse to ADB.

3 Loan number ADB 1327-INO: Microcredit Project.

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risk awareness at the participating banks and they withdrew from the syndication. After the crisis had peaked in mid–2009, ING emerged as the sole private bank to support the project, making a $30 million B loan commitment to Bank Mandiri. ADB’s PSOD decided to proceed with the transaction because, even in the reduced amount, the loan would help contribute to Bank Mandiri’s foreign currency liquidity and asset–liability management, given the scarcity of long-term US dollar funding available under the difficult new economic circumstances the global crisis had created.

7. The project allowed Bank Mandiri to access funding with a longer tenor at an opportune time in the economic cycle. The funding carried unique features and covenants to mitigate ADB’s risks, including collateralization through Indonesian government bonds.4 The collateral structure enabled the bank to obtain borrowing rates well below those available for noncollateralized alternatives during the crisis. The A loan had a maturity of 7 years and was priced at the 6-month London interbank offered rate (LIBOR) plus a credit margin. The B loan had a 5-year maturity and was priced at 6-month LIBOR plus a credit margin. Bank Mandiri was given a 30-month grace period to begin repayment. The aggregate balance of the $105 million in the two loans stood at $67 million as of August 2013.

C. Progress Highlights

8. ADB’s negotiations with Bank Mandiri for the project began in February 2008, resulting in agreement on the draft terms in April 2008 and a firm mandate to ADB in September 2008. The default of Lehman Brothers in the same month sparked the worst of the global financial crisis, including the withdrawal of European and American lenders from Asia and high volatility in the Indonesian sovereign bond market. The fact that the project encompassed ADB loan documentation based on euromarket templates, collateralization, B loan requirements, and environmental and social safeguard conditions added to the complications created by the crisis. A first, largely complete agreement was drafted in November 2008, but prevailing interest rates afterwards rendered a transaction unattractive to the borrower. This resulted in a hiatus in negotiations until the second quarter of 2009.5

9. On 3 August 2009, with interest rates stabilizing, ADB’s Pricing and Credit Enhancement Committee endorsed a pricing agreeable to all parties. The transaction was finalized in October 2009, and funds were disbursed in January 2010. A training program for Bank Mandiri staff on environmental and social safeguard measures that had been agreed upon with ADB was implemented in the same year. The transaction has proceeded without major concerns since then.

10. ADB’s credit facility enhanced Bank Mandiri’s foreign currency lending capacity and maturity profile of its foreign currency asset–liability position. Although ADB’s syndicated loan was relatively small compared with Bank Mandiri’s balance sheet and overall operations, its timing and impact supported the bank’s successful completion of several key business aspects of the first phase of its corporate reform program (para. 3). A key milestone in this process was a successful equity rights offering of $1.3 billion in February 2011.

4 The $105 million A and B loans are secured by Government of Indonesia floating-rate bonds.

5 Credit default swaps on Indonesian government bonds, which had been priced at 1.5%–2.0% during the initial loan

negotiation phase, rose to more than 10.0%. As a result, ADB, ING, and Bank Mandiri waited for sufficiently stable market conditions to launch the transaction.

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II. EVALUATION

A. Project Rationale and Objectives

11. Indonesia has enjoyed relative macroeconomic stability since the Asian financial crisis in 1997–1998, when its economy contracted by more than 13.0% and more than half of its banking assets and loans were written off. It has been helped by stable inflation and buoyant global demand for its commodities. (Background on the Indonesian economy, infrastructure investments, and financial sector are in Appendix 3.) Despite perceptions abroad that it is a fairly high-risk country, foreign investments in its service, manufacturing, and mining sectors and its stock market have been growing. Now that its economic goals have shifted from stabilization and recovery to achieving and sustaining higher growth, Indonesia has had to grapple with several growth-related constraints. These include inadequate infrastructure, a poor investment climate, and a narrow and shallow finance sector. Banking penetration in Indonesia remains low, and the deposit structure of its banks is mostly short-term, with almost no long-term deposits or funding that could help increase the longer-tenor lending the economy greatly needs. A deepening of the country’s financial sector is recognized as a prerequisite for sustained growth and development.

12. Due to its size and significance, Bank Mandiri was well-placed to further Indonesia’s goals of financial sector development. The objectives of ADB’s syndicated loan were to (i) support Bank Mandiri in strengthening its financial position and undertaking reforms; (ii) assist Bank Mandiri in addressing its asset–liability mismatch; (iii) help meet long-term capital expenditure funding needs in the country; (iv) support the government’s strategy of encouraging private sector participation in infrastructure development; (v) help Bank Mandiri establish environmental and social safeguard policies; and (vi) catalyze lending to the bank by foreign commercial lenders and demonstrate the viability of long-term offshore funding for Bank Mandiri.

B. Development Impact

13. The development impact of the investment is rated satisfactory based on the parameters of (i) private sector development; (ii) business success; (iii) economic sustainability; and (iv) environmental, social, health, and safety aspects.

1. Private Sector Development

a. Overall Assessment of Private Sector Development

14. The overall impact of ADB’s loan to Bank Mandiri on private sector development is rated satisfactory. The loan was successful in helping Bank Mandiri augment its long-term foreign currency lending capabilities and reduce its foreign currency asset-liability gap. More crucially, an implicit ADB objective of supporting vulnerable financial markets during times of crisis was successfully achieved through the project by helping Bank Mandiri, Indonesia’s largest bank by assets, raise long-term funding during the liquidity squeeze of the 2008–2009 global financial crisis. ADB’s loan helped establish an environmental and social management system (ESMS) at Bank Mandiri, which did not have one before. The project attracted other lenders through ADB’s B loan and subsequently generated follow-on loans from other financial institutions. Overall, the loan helped Bank Mandiri make progress in its corporate reform process. Targeted outcomes specified in the project’s design and monitoring framework were also realized.

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b. Beyond Company Impact

15. Given the small size of ADB’s loan relative to Indonesia’s financial sector, the investment can claim no more than a restricted macroeconomic impact. Nonetheless, Bank Mandiri’s importance as a leading bank during the crisis period made the intervention and its timing critical and extended its benefits beyond those achieved by the bank itself to the overall welfare of the wider financial system. ADB’s visible support for Bank Mandiri expansion during the crisis sent a positive signal to other lenders and the financial community in general. Although the initial B loan target could not be achieved due to the risk aversion repercussions of the global crisis, the fact that ADB and ING, and later the Agence Française de Développement (AFD), committed to Bank Mandiri helped to bolster the bank’s standing as a financial institution and, by extension, the standing of Indonesia’s financial system.

16. By helping establish an ESMS at one of Indonesia’s largest banks, the loan built greater awareness of the environmental risks and impacts of financial lending activities. The loan’s environmental management aspect came at a time when it helped focus more attention on the issue of environmental sustainability, which was just beginning to grow in Indonesia. The ESMS also provided a foundation for the bank’s subsequent initiatives in environmental and sustainable banking. In 2010, AFD followed ADB’s loan with a $100 million credit facility to Bank Mandiri to finance environmentally friendly projects related to climate change, energy efficiency, and the reduction of carbon emissions. In 2013, Bank Mandiri began formulating internal green banking guidelines to take on a greater role in financing environmentally friendly projects.

17. Indonesia’s banking and infrastructure sectors have exhibited two notable recent trends (Appendix 3, paras. 10 and 13). First, although system-wide bank credit grew during 2007–2012, it did not keep up with economic growth and has declined as a share of the economy. Second, the private sector’s contribution to infrastructure investment shrank to only 10.0% in 2010–2011 from 31% in the 1995–1997 period immediately preceding the Asian financial crisis. These trends reflect the rising risk aversion that gripped Indonesia’s banks after the 1997–1998 crisis, as well as the challenges they face in attracting long-term funding and making the long-term loans needed for infrastructure development. ADB’s loan in some measure helped counter such trends by augmenting Bank Mandiri’s foreign currency lending capabilities. Almost half of Bank Mandiri’s foreign currency loans in 2010–2012 were for investment purposes (Appendix 1, Figure A1.11) and more than two-thirds of the bank’s foreign currency loans were allocated to mining, manufacturing, and plantations (Appendix 1, Figure A1.9).

18. In 2011, Bank Mandiri became the largest mandated arranger of syndicated loans in Indonesia, contributing to the financing of projects in telecommunications, ports, plantations, mining, steel, oil, and gas. This success obviously cannot be directly attributed to the ADB loan, but ADB’s support to Bank Mandiri did provide reputational and confidence-building benefits that allowed the bank to build upon its strengths.

c. Direct Company Impact

19. The funding from ADB was successful in helping Bank Mandiri achieve the outcomes envisioned in the project’s design and monitoring framework. The funds supported Bank Mandiri’s foreign currency lending operations, helping it to make an additional Rp9.1 trillion (almost $1 billion) in foreign currency loans in 2010 (Appendix 1, Figure A1.8). An increase in foreign currency lending from about $3 billion in 2009 to $4 billion in 2010 can be attributed to three factors: (i) ADB’s A and B loans of $105 million; (ii) partial drawdown of AFD’s $100 million credit facility; and (iii) a higher foreign currency loan-to-deposit ratio of 87% in 2010 from 70% in

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2009, which resulted in additional loans of almost $800 million. 6 The increase was commendable given that the bank’s foreign currency deposits remained stagnant during 2008–2010, even though it benefited from rising local currency deposits through a domestic flight-to-quality during the crisis due to its status as government-owned financial institution (Appendix 1, Figures A1.2 and A1.3). More critically, its foreign currency time deposits contracted by almost 45% during this period, constraining its sources of stable foreign currency funding.

20. Another positive impact has been the improvement in Bank Mandiri’s foreign currency asset–liability gap and greater foreign currency lending for long-term investment projects from 2010 onwards. The share of foreign currency loans with a maturity greater than 2 years increased from 59% in 2009 to 72% in 2010 (Appendix 1, Figure A1.10). The share of foreign currency loans for investment purposes increased from 35% in 2009 to 46% in 2010 (Appendix 1, Figure A1.11). Improvement in Bank Mandiri’s foreign currency loan maturities, in part due to ADB funding, provided a countervailing effect to its overall increasing asset–liability gap, the latter necessitated by greater competition and portfolio lending needs (Appendix 1, Table A1.3).

21. ADB’s loan increased Bank Mandiri’s credibility, and ING’s participation in the B loan bolstered the positive signaling effects of ADB’s commitment. Meeting ADB’s lending requirements enhanced Bank Mandiri’s dexterity with international loan documentation and collateralization formalities, and covenant reporting requirements. This came in addition to the development of environmental and social safeguard policies that the project required and enabled. 7 Formalization of the necessary internal processes allowed Bank Mandiri to gain advantages of scale when it sought funding from AFD in 2010. ADB supported the process further by providing informal inputs when AFD was conceptualizing its project.

22. The assistance of ADB and other lenders has enabled Bank Mandiri to diversify its lending and to focus on what it regards as key areas of growth: microcredit, consumer finance, and corporate and commercial wholesale transactions. The emphasis on micro and consumer finance borrowers is particularly significant, given the weak banking penetration and access to finance in Indonesia compared with its peers (Appendix 3, paras. 17–18).

23. Overall, ADB’s loan supported Bank Mandiri through a volatile market phase and contributed to its corporate reforms. The success of the reform program’s 2005–2010 first phase allowed Bank Mandiri to embark on the second phase for 2010–2014. In 2011, Bank Mandiri obtained a $100 million 5-year loan from Standard Chartered Bank and refinanced an earlier $300 million loan from Deutsche Bank, further strengthening its foreign currency lending capabilities (see Appendix 2). Bank Mandiri also raised $1.3 billion in 2011 through an equity rights offering, strengthening its capital base, boosting its loan financing capabilities, and reducing the government’s stake from 67% to 60%. In 2012 Bank Mandiri swapped some of its high-cost government recapitalization bonds, issued during the 1997–1998 crisis, with a $250 million 3-year loan from Standard Chartered Bank. These transactions have all helped move Bank Mandiri toward its goal of becoming one of the five top banks in the Southeast Asia region by 2014 and a top three bank by 2020.

6 In 2009, Bank Mandiri disbursed $3.00 billion in foreign currency loans from about $4.40 billion of foreign currency

deposits, a 70% loan-to-deposit ratio. In 2010, the bank extended $4.00 billion in loans from $4.58 billion in deposits, an 87% loan-to-deposit ratio.

7 Deutsche Bank provided a 3-year $300 million loan to Bank Mandiri in February 2008. The transaction entailed

collateralization and was conducted directly by Bank Mandiri’s treasury. ADB’s loan was the first to be processed by a newly formed financial institutions group in the bank that was not involved in the Deutsche Bank deal.

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2. Business Success

24. Bank Mandiri’s business success is rated excellent. As of 2012, it had maintained its lead as the largest bank in Indonesia in asset terms, with almost 20% of the banking system’s assets. It also accounted for almost 20% of system deposits and loans, marginally less than Bank Rakyat Indonesia, a competitor of equivalent size (Appendix 1, Table A1.2). Bank Mandiri has a network of 1,810 branches, employs more than 30,000 personnel, and estimates that it adds about 1 million new customers every year. Foreign institutions have shown a high degree of confidence in Bank Mandiri and hold one-third of the bank’s equity (Appendix 1, Figure A1.1).

25. Bank Mandiri’s overall loan-to-deposit ratio rose to 78% in 2012 from 58% in 2008, reflecting increased competition and appetite for growth (Appendix 1, Figure A1.4). The bank’s balance sheet growth has been mirrored by stronger capitalization and a decline in nonperforming loans (Appendix 1, Figure A1.12). Bank Mandiri’s liquidity profile has remained healthy, and the successful equity rights offering in February 2011 improved the bank’s capital-to-assets ratio from 9.0% in 2008 to 12.5% in 2012. Its financial performance was robust during 2008–2012. Highlights from this period include

(i) Compounded annual growth rate (CAGR) of 13.6% in assets and 12.4% in deposits; (ii) a 2.7x increase in net income from Rp5.3 trillion to Rp14.3 trillion, with net interest

margins improving from 4.7% to 5.3%; (iii) a rise in return on assets from 1.7% to 2.7%, and growth in return on equity from

17.8% to 22.0%; (iv) a total loan portfolio CAGR of 21.0%; (v) CAGRs of 44.0% in microcredit loans and 25.0% in consumer loans; and (vi) CAGRs of 26.4% in small business loans, 23.8% in medium enterprise (commercial)

loans, and 14.6% in large enterprise (corporate) loans.

26. The capital position and recurring earnings of Bank Mandiri since the ADB investment have been better than most of its peer banks in Indonesia. Its performance reflects the bank’s consistent improvement in its financial performance, dominant banking franchise, favorable short-term funding profile, high liquidity, and improving profitability. Bank Mandiri has also strengthened its organizational structure and branch infrastructure to provide integrated service solutions and has benefited from a focus on human resources, technology, prudent risk management, and good corporate governance.

27. Project time-adjusted return on invested capital. This review used inflation-adjusted return on invested capital (ROIC) as an indicator in assessing Bank Mandiri’s business success against its cost of capital.8 Bank Mandiri’s weighted average cost of capital was derived using standard variables required to estimate the cost of equity and the historical average cost of debt during 2008–2012. Bank Mandiri’s real ROIC exceeds its cost of capital by an adequate threshold to qualify for an excellent rating for business success based on ADB guidelines for preparing extended annual reviews. 9

3. Economic Sustainability

28. Economic return on invested capital. The review used economic return on invested capital as a proxy to measure the contribution made to economic development by ADB’s loan to

8 The real ROIC of Bank Mandiri’s business was determined by calculating the return on all invested capital (share

capital and long-term loans), net income generated, and its terminal valuation derived using market-based variables.

9 ADB. 2007. Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations. Manila.

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Bank Mandiri. ADB’s loan did not target specific capital investments or expansion projects whose incremental costs and benefits could be quantified. Bank Mandiri’s real economic return on invested capital after adjusting for inflation is sufficiently above the maximum hurdle rate to qualify for an excellent rating.

29. This above rating is exemplified by changes in Bank Mandiri’s asset and lending mix. In 2008, government bonds generated one-third of the bank’s interest income, with the remainder attributable to its loan portfolio. By 2012, almost 90% of interest income came from loans. The bank’s loan portfolio grew 21% year-on-year during 2008–2012, while its bond portfolio remained flat. Loans to enterprises of all sizes grew by an average of 20% a year. CAGR in microcredit lending during the period was 44% and in consumer finance lending was 25%. In 2012, the mining, manufacturing, and plantation sectors accounted for more than two-thirds of medium enterprise loans and one-half of large enterprise loans. 9% of large enterprise loans went to power and road projects, creating a further sustained economic impact (Appendix 1, Figures A1.4 to A1.7).

4. Environmental, Social, Health, and Safety Performance

30. The project’s environmental, social, health, and safety performance is rated satisfactory. ADB’s loan was classified category Fl under ADB's Environment Policy (2002) and category C under ADB's Involuntary Resettlement Policy (1995) and ADB's Policy on Indigenous Peoples (1998).10 With ADB’s input Bank Mandiri established its first ESMS (para. 16). As part of the ESMS technical guidance for its credit officers, Bank Mandiri identifies sectors and projects that present potentially high risks of contributing to land contamination, water pollution, and industrial air pollution. They also identify large-scale projects that have environmental and social impacts. Where necessary, Bank Mandiri employs external specialists to conduct project due diligence to evaluate environmental compliance.

31. Bank Mandiri’s ESMS is aligned with the social and environmental requirements of the Indonesian government (Appendix 6). Adherence to these standards was stipulated in ADB’s loan agreement and monitored through annual ESMS reports submitted by Bank Mandiri that confirmed that environmental and social issues and risks were being adequately addressed. As part of its loan obligations, Bank Mandiri implemented ESMS training as a module in its training curriculum for bank staff. A synopsis of the training is included in Appendix 6, and Bank Mandiri has reported on the participation in and general contents of this training in its 2011 and 2012 ESMS reports.11

C. ADB Investment Profitability

32. ADB’s investment profitability is rated satisfactory. ADB’s loan to Bank Mandiri was for 7 years and priced at 6-month LIBOR plus a credit margin. Pricing the transaction proved time-consuming because the markets for Indonesia’s sovereign bonds and credit default swaps, employed as pricing comparators, fluctuated widely during the 2008–2009 financial crisis (footnote 5). The margin charged by ADB was in line with ING’s commercially priced B loan. In its 3 August 2009 meeting, ADB’s Pricing and Credit Enhancement Committee endorsed a pricing benchmarked to Indonesian government bonds of comparable maturity.

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An FI project involves a credit line or an equity investment to a financial intermediary, where an environmental management system is required unless all subprojects will result in insignificant environmental impact. Category C means the project did not result in any involuntary resettlement or impact on indigenous peoples.

11 There was no report for 2010, as the training program began late that year.

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D. ADB Work Quality

33. ADB’s work quality is rated satisfactory based on its (i) screening, appraisal, and structuring of the project, (ii) monitoring and supervision, and (iii) role and contribution.

1. Screening, Appraisal, and Structuring of the Project

34. ADB’s work in screening, appraising, and structuring the loan to Bank Mandiri is rated satisfactory. ADB led the loan syndication effort and conducted negotiations with several international banks over a prolonged period. Due diligence proceeded smoothly on the basis of Bank Mandiri’s well-documented internal processes and financials. Volatile capital markets during the negotiation phase warranted several recalculations of the loan’s pricing. Extreme volatility in early 2009 led to a temporary pause in the process, necessitating three meetings of ADB’s Pricing and Credit Enhancement Committee, including a final meeting on 3 August 2009.

35. The facility agreement and B loan participation agreement were structurally complex and based on standard euromarket documentation. Collateralization with Indonesian government bonds was also structured to standard international practice. It can be surmised that dealing with the documentation and collateral arrangements was a helpful experience for the borrower.

2. Monitoring and Supervision

36. ADB’s monitoring and supervision is rated satisfactory. PSOD regularly monitored Bank Mandiri’s business and financial performance through quarterly covenant and collateral compliance reports and periodic financial statements. PSOD also prepares an annual monitoring report that contains macroeconomic analysis, financial performance review, and risk rating calculation, which is submitted to ADB’s Office of Risk Management. A monitoring system was implemented to ensure that collateral coverage of Bank Mandiri’s outstanding loan balance remained at stipulated levels. HSBC Jakarta provides monitoring services on behalf of HSBC Corporate Trust and Loan Agency, Singapore and reports on security coverage on a monthly basis. Reporting has continued without incident since inception of the transaction.

3. ADB’s Role and Contribution

37. ADB’s role and contribution is rated satisfactory. ADB supported Bank Mandiri despite unpredictable market conditions, helped augment its foreign currency lending, and provided it with an additional buffer to weather the global financial crisis. ADB’s loan covenants have contributed towards Bank Mandiri’s corporate governance by improving disclosure, transparency, and compliance standards.

E. ADB’s Additionality

38. By providing an attractively priced, long-term syndicated loan of $105 million to Bank Mandiri, ADB helped the borrower enhance its foreign currency lending and improve its foreign currency asset–liability maturity position. The timing was significant because alternate sources of long-term foreign currency funding began to dry up shortly after loan approval as the global financial crisis erupted, driving up the costs of such funding—when it was available at all. The project also enabled Bank Mandiri to further its proficiency with documentation formalities and collateralization and covenant reporting requirements for a syndicated loan deal. The groundwork undertaken by Bank Mandiri during the ADB loan process and informal inputs provided by ADB to AFD facilitated the long-term $100 million AFD renewable energy credit facility to Bank Mandiri that came shortly after ADB’s loan, in June 2010 (para. 16 and 21). It

9

was due to ADB's support under the project to develop environmental awareness and policies that Bank Mandiri instituted its first ESMS, which has led to its initiatives in green banking.

39. Although a precise assessment of the incremental effect of ADB’s loan is not feasible due to the loan’s small size compared with Bank Mandiri’s overall operations, ADB’s loan notably increased Bank Mandiri’s international visibility and helped it sustain growth, enhance lending activities, receive funding from other lenders, and develop environmental and social safeguards. Bank Mandiri is currently exploring several options to raise additional US dollar-denominated long-term loans, indicating that demand for long-term funds still exceeds supply. ADB’s additionality is thus rated satisfactory.

F. Overall Evaluation

40. ADB’s loan to Bank Mandiri is rated successful overall (Table).

Evaluation of the Senior Secured Loan to Bank Mandiri Item

Unsatisfactory

Partly Satisfactory

Satisfactory

Excellent

A. Development Impact √

1. Private sector development √

2. Business success √ 3. Economic sustainability √ 4. Environment, social, health, and safety √ B. ADB's Investment Profitability √ C. ADB's Work Quality √

1. Screening, appraisal, and structuring √ 2. Monitoring and supervision √ 3. ADB's role and contribution √ D. ADB's Additionality √

Overall Rating Successful

ADB = Asian Development Bank.

III. ISSUES, LESSONS AND RECOMMENDED FOLLOW-UP ACTIONS

A. Issues and Lessons

41. Market framework. ADB can add value to government-controlled financial institutions through its private sector lending. This encourages the adoption of international market standards, environmental and social safeguard policies, and specific performance clauses and covenants. This in turn can help the borrower to more easily access follow-on funding from the international financial community.

42. Structure. ADB investments could generate more impact by combining senior loans with equity investments. PSOD initially considered an equity investment in Bank Mandiri’s but was unable to undertake a transaction. Equity investments in such cases could also provide ADB a board seat to facilitate monitoring of operations and influence project development outcomes.

B. Recommended Follow-Up Actions

43. None.

10 Appendix 1

PROJECT-RELATED DATA

A. Five-Year Financial Highlights

Table A1.1: Bank Mandiri (Parent Bank) Financial Highlights Indicator 2008 2009 2010 2011 2012

Gross loans (Rp billion) 159,007 179,688 219,032 273,962 339,974

Total Assets (Rp billion) 338,404 368,856 406,001 489,107 563,105

Total Liabilities (Rp billion) 307,890 335,202 366,283 429,928 492,454

Shareholders' Equity (Rp billion) 30,510 33,637 39,718 59,179 70,651

Net Income (Rp billion) 5,313 7,155 8,751 11,377 14,302

Gross NPL Ratio, Consolidated (%) 4.73 2.79 2.42 2.21 1.87

Net Interest Margin (%) 4.72 4.70 5.12 4.95 5.31

Cost–Income Ratio (%) 43.67 41.40 38.52 42.24 41.42

Return on Average Total Assets (%) 1.66 2.02 2.26 2.54 2.72

Return on Average Equity (%) 17.78 22.30 23.85 23.01 22.03

Tier 1 Capital Ratio (%) a 12.78 11.46 10.51 13.09 13.60

Total Capital Ratio (%) a 15.66 15.43 13.36 15.34 15.48

NPL = nonperforming loan. a The minimum Tier 1 and capital ratios mandated by Indonesia’s central bank are 5.00% and 8.00%, respectively.

Sources: Bank Mandiri, Asian Development Bank.

B. Ownership Structure

Figure A1.1: Ownership Structure of Bank Mandiri, 31 December 2012

(%)

Source: Bank Mandiri.

C. Competitive Position

1. Bank Mandiri is Indonesia’s largest bank in asset terms, accounting for almost 20% of banking system assets. It was created through the merger of four failed banks after the 1997–1998 Asian financial crisis. After successful equity offerings from 2003 onwards, the government's share in the bank has fallen to 60% from 100%. At year-end 2012, Bank Mandiri employed 30,762 employees and operated 1,810 branches across Indonesia and 7 branches or representative offices abroad. The bank is supported by its six subsidiaries in Islamic banking, capital markets, vehicle finance, life insurance, general insurance, and microcredit banking.

Government of Indonesia

59.6

Foreign institutions

and mutual funds

32.3

Domestic investors

8.1

Appendix 1 11

2. Indonesia’s second-largest bank by assets, Bank Rakyat Indonesia, is also 60% government-owned. Its business model centers on credit to small- and medium-sized enterprises and microfinance loans. Bank Central Asia is the third-largest bank and the largest private sector lender in Indonesia. It is listed on Indonesia’s stock exchange, but control lies with the owner of Djarum, a large tobacco company. The bank has a dominant position in the consumer, commercial, and small- and medium-sized enterprise markets. The country’s oldest and fourth largest bank is Bank Negara, which was also recapitalized by the government in the aftermath of the 1997–1998 crisis. The government still owns a 60% stake in it. 3. The two largest foreign-controlled lenders are Bank CIMB Niaga, an affiliate of the Malaysia-based CIMB Group, and Bank Danamon Indonesia, controlled by a consortium led by Singapore's Temasek Holdings. The Commonwealth Bank of Australia, the Australia and New Zealand Banking Corporation, and Maybank of Malaysia are also active in Indonesia.

Table A1.2: Indonesia Top Ten Banks, 2012

(Rp trillion)

Bank Total

Assets Loans Deposits Total

Equity

Operating Profit

(or Loss)

Net Profit

(or Loss)

Bank Mandiri a 563.1 340.0 435.5 70.6 17.3 14.3

Bank Rakyat Indonesia a 547.6 348.0 436.1 67.0 21.2 18.1

Bank Central Asia 436.7 256.7 370.3 50.5 14.3 11.9

Bank Negara Indonesia a 324.8 192.7 249.0 43.6 8.6 7.1

Bank CIMB Niaga 192.7 133.6 144.1 25.6 5.6 4.2

Pan Indonesia Bank 141.8 91.8 101.5 19.4 2.5 1.9

Bank Permata 132.2 87.0 97.9 18.4 (4.1) 0.0

Bank Danamon Indonesia 130.4 91.5 90.6 24.0 4.5 3.2

Bank Tabungan Negara a 111.9 75.4 75.8 10.3 1.9 1.4

Bank Internasional Indonesia 111.5 74.3 85.5 12.3 1.3 1.1 a State-owned banks.

Sources: Bank Indonesia, Moody’s.

D. Bank Mandiri Deposits

Figure A1.2: Total Deposits, 2008–2012

Figure A1.3: Foreign Currency Deposits, 2008–2012

Source: Bank Mandiri. Source: Bank Mandiri.

89.6 106.5 123.6 149.8

184.0

66.9 69.8

64.5

88.0

107.6 117.1

123.4 144.7

142.3

145.0

273.6 299.7

332.8

380.2

436.5

0

50

100

150

200

250

300

350

400

450

500

2008 2009 2010 2011 2012

Rp tr

illio

n

Time

Demand

Savings

7.4 9.7 11.7 12.0 15.3

15.1 18.0

21.0

25.3

36.1

21.4

14.9 11.9

16.5

14.9

43.9 42.6 44.6

53.8

66.3

16.0

14.2

13.4

14.2

15.2

12

13

14

15

16

17

18

19

20

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012

%

Rp trilli

on

Time

Demand

Savings

Share of total deposits, right scale

12 Appendix 1

E. Bank Mandiri Portfolio Characteristics

Figure A1.4: Loan Volume Outstanding by Segment, 2008–2012

CAGR = cumulative annual growth rate. Source: Bank Mandiri.

Figure A1.5: Retail Loans by Sector, 2012 (%)

Figure A1.6: Commercial Loans by Sector, 2012 (%)


a Auto and motorcycle loans through finance

companies. Source: Bank Mandiri.

Figure A1.7: Corporate Loans by Sector, 2012 (%)


76.4 82.7 93.6 111.7

131.7

43.8 50.6

64.7

81.1

103.0

15.1 17.4

22.8

30.3

38.5

19.3 23.6

30.7

39.0

47.7

4.4 5.4

7.3

11.8

19.0

159.0 179.7

219.1

273.9

339.9

58.1 60.0

65.8

72.0

78.1

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012

%

Rp trilli

on

Microcredit Consumer financeBusiness (small enterprise) Commercial (medium enterprise)Corporate (large enterprise) Loan-to-deposit ratio, right scale Segment CAGR (%)

Retail loans 28.4

Microcredit 44.3

Consumer finance 25.4

Business (small enterprise) 26.4

Commercial (medium enterprise) 23.8

Corporate (large enterprise) 14.6

All loans 20.9

Cumulative Annual Growth Rates (CAGR)

Microcredit18.1

Business (small

enterprise)36.6 Mortgages

25.0

Payroll loans6.5

Credit cards

4.8

Auto and motorcycles

6.9 Other

2.2

Consumer finance

45.4%

Manufacturing

34.8

Others 4.5

Plantations

8.9

Trade and

business

services

21.4

Mining 7.5

Agricultural

equipment 5.4

Transport 7.9

Vehiclesa

9.7

Others 21.3

Plantations 20.1

Manufacturing 20.1

Trade and business

services 14.8 Mining

11.5Electricity 6.5

Real estate & construction

3.3

Roads & bridges 2.4

Appendix 1 13

F. Bank Mandiri Foreign Currency Portfolio

Figure A1.8: Foreign Currency Loans Outstanding, 2008–2012

Figure A1.9: Foreign Currency Loans by Sector, 2012

(%)


Figure A1.10: Foreign Currency Loan Maturity Distribution, 2008–2012

Figure A1.11: Foreign Currency Loan Purpose Distribution, 2008–2012


36.5 29.8 38.9 40.4 49.6

83.1

69.8

87.1

74.9 74.9

23.0

16.6 17.7 14.7 14.6

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

2008 2009 2010 2011 2012

%

Rp tr

illio

n

Loan volume

Loan-to-deposit ratio, right scale

Share of total loans, right scale

Mining 36.9

Manufacturing 23.9

Trade and business

services 15.9

Agriculture 8.7

Transport 5.6

Utilities 4.5

Construction 2.5

Other 1.9

22.3

38.4

20.7 21.728.7

6.5

3.0

6.4 3.9

6.8

31.5

26.742.4

37.930.6

39.732.0 30.5 36.4 33.9

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012

%

Over 5 years 2–5 years 1–2 years Less than 1 year

46.6 48.0 51.4

27.6 29.5

5.7 3.7 1.7

11.7 16.4

39.6 34.8 46.2

50.7 45.1

8.1 13.5 0.7

10.0 8.9

0

10

20

30

40

50

60

70

80

90

100

2008 2009 2010 2011 2012

%

Syndicated Investment Export/others Working capital

14 Appendix 1

G. Bank Mandiri Non-Performing Loans

Figure A1.12: Nonperforming Loan Trends, 2008–2012

Note: Does not include loans to other banks. Source: Bank Mandiri.

Figure A1.13: Retail Nonperforming Loans, 2008–2012

Figure A1.14: Corporate and Commercial Nonperforming Loans, 2008–2012


4.7

2.6

2.2 2.2

1.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012

%

Nonperforming loans

5.2

5.8

4.7

4.1

3.2

2.5

2.4 2.1

2.0 1.8

2.3

3.3

2.6 2.5 2.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2008 2009 2010 2011 2012

%

Microcredit

Consumer finance

Business (small enterprise)

4.2

2.3

2.4

1.4 1.1

7.9

3.3

1.9

2.6

1.8

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2008 2009 2010 2011 2012

%

Commercial (medium enterprise)

Corporate (large enterprise)

Appendix 1 15

H. Bank Mandiri Asset-Liability Gap Analysis

Table A1.3: Bank Mandiri Gap Analysis (Consolidated), 2008–2012

Maturity Bucket

≥1 month ≥3 months ≥6 months

Year Item <1 month <3 months <6 months <12 months ≥12 months Total

2008 Assets (Rp billion) 94,092 22,035 18,717 26,130 197,465 358,439

Liabilities (Rp billion) 278,351 18,805 9,803 6,115 14,822 327,897

Gap (Rp billion) (184,259) 3,230 8,914 20,015 182,642 30,542

Cumulative Gap (Rp billion) (184,259) (181,029) (172,115) (152,100) 30,542 30,542

Cumulative Gap Ratio (%) 33.8 39.1 43.9 51.4 109.3 109.3



Gap (Rp billion) (215,361) 13,771 10,078 29,236 197,573 35,298





Gap (Rp billion) (251,762) 16,473 18,393 40,461 232,483 56,048





Gap (Rp billion) (256,648) 17,193 21,906 54,640 272,854 109,945





Gap (Rp billion) (281,126) 71,748 24,449 68,035 245,608 128,714



Figure A1.15: Bank Mandiri Cumulative Gap, 2009 vs. 2012

Sources: Bank Mandiri audited financial statements, Asian Development Bank calculations.

29.3

39.0 43.8

53.1

109.8

33.8

54.3 60.7

75.3

126.2

0

20

40

60

80

100

120

140

<1 month ≥1 month <3 months

≥3 months <6 months

≥6 months <12 months

≥12 months

%

Maturity Bucket

2009

2012

Appendix 2

16

FUNDING FROM INTERNATIONAL FINANCIAL INSTITUTIONS

Table A2.1: Foreign Currency Senior Loans Extended to Bank Mandiri by International Financial Institutions

Institution

Loan Amount ($ million) Benchmark

Drawdown/ Agreement

Date Maturity Date

Deutsche Bank 300.0 3-month LIBOR Feb 27, 2008 Feb 1, 2011

Oversea Chinese Banking Corporation and syndicate

55.0 12-month SIBOR Sep 3, 2008 Sep 10, 2009

ADB A Loan 75.0 6-month LIBOR Oct 30, 2009 Oct 30, 2016

ADB B Loana 30.0 6-month LIBOR Oct 30, 2009 Oct 31, 2014

AFD 100.0 6-month LIBOR Jun 17, 2010 Multipleb

Deutsche Bank 300.0 6-month LIBOR Jun 16, 2011 Jun 23, 2016

Standard Chartered 100.0 3-month LIBOR Jul 4, 2011 Jul 11, 2016

Standard Chartered 250.0 6-month LIBOR Jun 28, 2012 Jul 9, 2015

a Funded by ING.

b The AFD loan was drawn in multiple tranches over a 2-year period, with tranche maturities ranging from 5 to 7 years.

ADB = Asian Development Bank, AFD = Agence Française de Développement, LIBOR = London interbank offered rate; SIBOR = Shanghai interbank offered rate. Source: Bank Mandiri.

Appendix 3 17

INDONESIA: ECONOMIC AND BANKING SECTOR OVERVIEW 1 A. Economic Overview 1. Indonesia’s economy grew within a range of 4.50%–6.50% a year during 2003–2012 (Figure A3.1), reflecting a return to macroeconomic stability after the devastating impact of the 1997–1998 Asian financial crisis, when it contracted by more than 13.0%. Gross domestic product (GDP) growth in 2012 was 6.20%, down only slightly from 6.46% in 2011. Private consumption and investment spending were the biggest contributors to growth during 2010–2012. Weakness in Indonesia’s major commodity exports, which include copper, rubber, palm oil, nickel and tin, were a drag on growth in 2012. This combined with greater oil and gas import demand reduced Indonesia’s trade balance by two-thirds in 2012 from 2011 (Figure A3.2).

Figure A3.1: Indonesia Economic Growth, 2003–2012

Figure A3.2: Indonesia Trade Growth, 2003–2012

GDP = Gross Domestic Product. Sources: Asian Development Bank statistical database system and estimates, Badan Pusat Statistik Indonesia.

Note: 2012 figures are preliminary. Sources: Asian Development Bank statistical database system, Badan Pusat Statistik Indonesia.

2. The global financial crisis of 2008–2009 reduced Indonesia’s exports by 10.0% in 2009 and resulted in a 15.0% depreciation of the rupiah against the US dollar. Economic growth in 2010–2011 helped the currency recover, with Indonesia’s healthy trade balances supporting its

1 Sources for this section include ADB staff research and the following reports:

(i) Asian Development Bank. 2013. Asian Development Outlook 2013. Manila; (ii) Bank Indonesia. 2013. Indonesian Financial Statistics. Jakarta (March); (iii) Badan Pusat Statistik (BPS)—Statistics Indonesia. March 2013. Statistical Yearbook 2012. Jakarta; (iv) World Bank. 2013. Indonesia Economic Quarterly Update. Washington, DC (March); (v) Business Monitor International. 2013. Indonesia Business Forecast Report. London (Quarter 1); (vi) Indonesia Investment Coordinating Board. 2012–2013. Investment Realization Reports. Jakarta; (vii) IHS Global Insights. May 2013. Indonesia Country Monitor. Englewood; (viii) Economist Intelligence Unit. 2012. EIU Indonesia Financial Services Report. London (April); (ix) Standard and Poor’s. 2013. Indonesia Banking Outlook 2013. Singapore (February); (x) Moody’s. 2013. Indonesia: Banking System Outlook. Singapore (January).

The section is also based on ADB staff calculations and data from the following databases: (i) World Bank—World Development Indicators Database; (ii) Asian Development Bank—Statistical Database System; (iii) International Monetary Fund—Financial Access Survey Database; (iv) CEIC—Global Database.

4.8 5.05.7 5.5

6.36.0

4.6

6.2 6.5 6.2

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%%

Private consumption Government consumption

Investments Net exports

Discrepancy GDP growth

0

50

100

150

200

250

300

-20

-15

-10

-5

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Rp tr

illio

n

%

Trade balance (right scale)

Export growth year on year (left scale)

Import growth year on year (left scale)

Appendix 3

18

international reserves and current account (Figures A3.3 and A3.4). Lower exports in 2012 led to a current account deficit of 2.7%, putting pressure on the rupiah, which depreciated by 8.0%. In absolute terms, foreign direct investment (FDI) in Indonesia remained strong during 2005–2011 (Figure A3.4), but the inflows as a share of GDP were below those of the People’s Republic of China (PRC), Malaysia, Thailand, and Vietnam and similar to those into India.

Figure A3.3: Gross Reserves and Exchange Rates, 2003–2012

Figure A3.4: Current Account Balance and Foreign Direct Investment, 2003–2012

Source: World Bank. FDI = foreign direct investment, GDP = Gross Domestic

Product. Source: World Bank.

3. The Indonesian stock market was among Asia's best-performing bourses in 2009–2012, as share prices surged following the 2008–2009 global crisis. The stock market remains small in terms of capitalization compared with the size of the economy (Figure A3.5). A key hindrance is the size of the investor base—only 1 million investors nationwide in a population of 247 million. Government bonds dominate the bond markets and international issuances. A $3 billion issue of 10- and 30-year US dollar-denominated bonds in April 2013 was four times oversubscribed.

Figure A3.5: Equity Market Performance, 2003–2012

Figure A3.6: Population and Unemployment, 2003–2011

GDP = Gross Domestic Product. Source: World Bank.

Sources: World Bank, Badan Pusat Statistik Indonesia.

8,000

8,500

9,000

9,500

10,000

10,500

11,0000

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Rp/$

$ b

illio

n

Reserves, including gold (left scale)

Rupiah per $, period average (right inverted scale)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-5

0

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%$ b

illio

n

FDI net inflow (left scale)

Current account balance to GDP (right scale)

FDI net inflow to GDP (right scale)

23

29 28

38

49

19

33

51

46 45

0

5

10

15

20

25

30

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%%

Value of stocks traded to GDP (right scale)

Market capitalization to GDP (left scale)

6

7

8

9

10

11

12

190

200

210

220

230

240

250

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

mill

ion

Population (left scale) Unemployment rate (right scale)

Appendix 3 19

4. Unemployment in Indonesia has been on a steady decline from 2005 (Figure A3.6). New jobs generated in 2012 exceeded the number of entrants into the labor market, with the unemployment rate dropping from 6.56% in 2011 to 6.10% in 2012. However, underemployment remains high at 29%, with most of the work force employed in the informal sector. Of particular concern is the youth unemployment rate, which is five times the overall rate. Despite a notable decline in poverty from 2006 on (Figure A3.7), inequality has been rising, compared with several of Indonesia’s Asian peers (Figure A3.8). The World Bank estimates that economic vulnerability remains high, with nearly 40% of the population at consumption levels that fall below 1.5 times the national poverty line.

Figure A3.7: Poverty Headcount, 2003–2012

Figure A3.8: Change in Gini Index of Inequality


Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China. Source: World Bank.

5. Indonesia’s strategic location between the Indian and Pacific Oceans and its proximity to major east–west trade routes make it an important economy. It is resource-rich and the world’s largest producer of palm oil. It has a low-cost labor force that is the fourth largest in the world and among the world’s youngest. However, it is perceived as one of Asia’s riskier investment destinations, leaving the economy vulnerable to sudden capital outflows during periods of risk aversion such as those produced by the financial crises of 1997–1998 and 2008–2009. A key risk to growth concerns the investment outlook, especially related to infrastructure (paras. 6–10). B. Investments And Infrastructure Spending 6. Indonesia’s physical infrastructure weaknesses have become a growing concern for firms operating and investing in the country. Indonesia currently compares unfavorably with several other comparable developing Asian nations (Figure A3.9). The country’s archipelagic geography makes it difficult to interconnect infrastructure nationally, although it also gives urban and manufacturing centers the potential advantages of easy access to ports, lower transport costs for exports, and better export competitiveness. The high political priority accorded to infrastructure investment has led the government to examine ways of tapping funding from the nonbank financial sector and through public–private partnerships. The British Chamber of Commerce estimates that Indonesia will require infrastructure investment of $70–$100 billion in 2013–2017. This will be necessary to bring about the sustained GDP growth levels of above 7.0% required to make progress on such fundamental issues as employment and poverty.

17.4 16.7 16.0 17.8 16.6 15.4 14.2 13.3 12.5 12.00

5

10

15

20

25

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

National Rural Urban -10 -5 0 5 10

Kazakhstan (1996–2009)

Thailand (1994–2010)

Nepal (1996–2010)

Cambodia (1994–2009)

Bangladesh (1996–2010)

Azerbaijan (1995–2008)

Viet Nam (1993–2008)

Philippines (1994–2008)

Sri Lanka (1994–2010)

Pakistan (1997–2008)

India (1994–2010)

Mongolia (1995–2008)

Indonesia (1996–2010)

Georgia (1996–2010)

Lao PDR (1992–2008)

PRC (1996–2008)

Change in Gini Points

Appendix 3

20

Figure A3.9: Infrastructure Ratings (100 = Highest Score)

Figure A3.10: Gross Fixed Capital Formation, 1994–2012

Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China. Source: Business Monitor International.


7. Excluding a large electricity investment program in 2007–2009, the World Bank estimates that infrastructure investment as a share of GDP has remained about 3.0% since the 1997–1998 Asian crisis, compared with pre-crisis levels of about 7%. This is far below the averages of many Southeast Asian countries, including those of the PRC, Thailand and Vietnam, all of which show figures above 7% of GDP. The overall level of gross fixed capital investment in the economy, which encompasses capital expenditures on buildings, machinery and equipment, has trended downwards following the Asian crisis (Figure A3.10). Annual investment growth has yet to recover to pre-crisis levels. However, driven by construction, the overall investment-to-GDP ratio has recovered strongly since falling during the crisis, rising to 34% in 2012 and thereby surpassing the pre-crisis level of 29%.

Figure A3.11: Investment Realization from Foreign Sources, 2003–2012

Figure A3.12: Investment Realization from Domestic Sources, 2003–2012

Sources: CEIC database, Indonesia Investment Coordinating Board.


8. The Indonesia Investment Coordinating Board reported FDI (excluding the oil and gas sector) of $24.6 billion in 2012 (Figure A3.11). The volume of FDI inflows during 3 years of 2010–2012 equaled those of the prior 7-year, 2003–2009 period. Almost one-half of foreign

28.8

29.4

33.4

37.4

39.1

40.5

47.4

48.6

49.1

54.3

58.2

60.1

61.0

66.0

0 10 20 30 40 50 60 70

Bhutan

Nepal

Pakistan

Cambodia

Lao PDR

Bangladesh

India

Philippines

Indonesia

Sri Lanka

Viet Nam

Malaysia

Thailand

PRC

Score

-40

-30

-20

-10

0

10

20

0

5

10

15

20

25

30

35

40

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

%%

Year-on- year growth (right scale)

% of gross domestic product (left scale)

5 5

9

6

10

15

11

16

19

25

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$ b

illio

n

Services

Manufacturing and processing

Agriculture and mining

12 15

31

21

36

20

38

61

76

92

0

10

20

30

40

50

60

70

80

90

100

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Rp tr

illio

n

Services

Manufacturing and processing

Agriculture and mining

Appendix 3 21

investments during 2003–2012 were in the services sector, while domestic investment has gone primarily into manufacturing (Figure A3.12). The majority of FDI has been directed towards the Java investment corridor, which includes the Jakarta Capital Territory (Figure A3.13).

Figure A3.13: Foreign Investments by Investment Corridor, 2012 (%)

Figure A3.14: Infrastructure Investment by Sector, 1995–2011


Source: World Bank.

9. The World Bank estimates that the transport sector has seen the greatest increase in share of overall infrastructure investment, from 22.0% in 1995–1997 to more than 50.0% in 2010–2011 (Figure A3.14). This has been driven mainly by subnational governments, which accounted for almost 40.0% of infrastructure spending in 2010–2011 (Figure A3.15). The marked increase from prior years is due to fiscal decentralization, although these investments have raised some concerns about their efficiency and quality. In contrast, toll road development has lagged due to implementation challenges, with total toll-road length of only 742 km in 2010. 10. The most notable trend in infrastructure investment has been a decline in the private sector’s contribution to only 10.0% in 2010–2011 from almost one-third in 1995–1997 (Figure A3.15). Nominal investment value fell to a post-crisis average of $2.3 billion per annum during 1998–2011 from $5.4 billion per annum during 1995–1997 (Figure A3.16). The energy sector has accounted for the biggest fall in private investment (except in 2008 and 2010). The drop in private sector participation partly reflects the regulatory and institutional challenges that Indonesia is facing in attracting public–private partnerships.

Figure A3.15: Infrastructure Investments by Source, 1995–2011

Figure A3.16: Private Participation in Infrastructure Investments, 1995–2011

Source: World Bank. Source: World Bank.

Sumatera15.2

Java55.6

Bali and Nusa

Tenggara4.6

Kalimantan13.1

Sulawesi6.1

Maluku0.4

Papua5.0

4635

2338

26

26

2538

21

13

2233 31 35

52

6 7 8 6 9

0

10

20

30

40

50

60

70

80

90

100

1995–1997 1998–2000 2001–2006 2007–2009 2010–2011

%

Irrigation, water and sanitation Transport Telecoms Energy

26 3018

1221

79

2027

39

3733 39

44

30

31 29 2317

10

0

10

20

30

40

50

60

70

80

90

100

1995–1997 1998–2000 2001–2006 2007–2009 2010–2011

%

Private State-owned enterprises

Subnational governments Central government

0

1

2

3

4

5

6

7

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

$ b

illio

n

Water and sanitation

Transport

Telecoms

Energy

Appendix 3

22

C. Banking Sector Overview 11. Indonesia’s banking sector faced near-collapse during the 1997–1998 Asian financial crisis, which exposed serious weaknesses in governance, regulations, and business practices in the financial industry. This prompted the government to carry out consolidation and reforms in the sector. The number of commercial banks has fallen to about 120 from 220, and the central bank has been encouraging further consolidation. The government has a large sector presence through stakes in four state-owned banks—a legacy of the bail-outs and takeovers in the wake of the crisis (see Appendix 1, Table A1.2). 12. The global financial crisis of 2008–2009 also tested the system, but the sector came out relatively unscathed, suffering only a marginal, short-term impacts. The sector’s performance has been strong since then, with high profitability and growth. Benign inflation and high lending spreads since 2007 (Figure A3.17) allowed banks to grow their loan portfolios, increase profitability, and build capital reserves. The loan-to-deposit ratio of Indonesia's banking system reached 84% in 2012 from 66% in 2007, due to regulatory initiatives and the banks’ appetite for growth. The strong balance sheet growth is reflected in improvements in capitalization and declining levels of nonperforming loans (Figure A3.18). The liquidity profile of the larger banks has remained strong due to their sizable holdings of liquid assets, including cash, balances with the central bank and other banks, and government securities.

Figure A3.17: Inflation and Interest Rates, 2003–2012

Figure A3.18: Bank Reserves and Non Performing Loans, 2007–2012

Source: World Bank. Source: World Bank.

13. In nominal terms, system-wide bank credit grew at a 16% compound annual growth rate (CAGR) during 2007–2012 (Figure A3.19), although credit expansion did not keep up with growth in the economy. Bank credit declined from 50.0% of GDP in 2003–2004 to less than 40.0% during 2007–2011. Credit to the private sector in Indonesia accounted for only 32.0% of GDP in 2011, a considerably lower figure than those in other developing Asian countries (Figure A3.20). The relatively small size of Indonesia’s financial sector compared with those in other emerging markets partly reflects the severe impact of the 1997–1998 crisis on the banking sector, where one-half of all assets and loans were written off. The country’s low credit-to-GDP penetration suggests ample headroom for further growth. With bank loans and deposits having declined relative to GDP from 2005 onwards, Indonesian companies have been funding their expansion primarily through retained earnings.

0

2

4

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

Lending interest rate

Annual consumer price inflation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012

%%

Bank capital to assets ratio (left scale)

Bank nonperforming loans to total gross loans (right scale)

Appendix 3 23

14. Indonesia’s capital markets remain small, which also limits the funding available for long-term investment opportunities. The role played by nonbanking financial institutions is also minimal for a country of Indonesia’s size and income. The government aims to encourage development of the nonbank financial sector in 2013–2017, including the insurance, pension, mutual fund, venture capital, and leasing industries. The government is also aiming to build a strong Islamic banking sector, which currently accounts for only 5.0% of banking system assets.

Figure A3.19: Banking Sector Domestic Credit, 2003–2012

Figure A3.20: Domestic Credit to Private Sector, 2011

GDP = gross domestic product Source: World Bank.

GDP = gross domestic product, PRC = People’s Republic of China. Source: International Monetary Fund.

15. Banks, especially larger ones, have access to funding through their proportionately large, low-cost current and saving account deposits. However, these deposits provide funding that is short-term in nature, with more than 90% having maturities of less than 1 month. Savings and current accounts account for more than one-half of the banks’ total funding base, and time deposits, mostly with maturities shorter than 1 month, account for the rest (Figure A3.21). Short-term working capital loans comprise 49% of all Indonesia credit, with consumer loans making up 30.0% (Figure A3.22). Foreign currency deposits and loans make up about 15.0% of all loans. The bulk of household borrowing is for consumption purposes, with only 30.0% used for housing purchases.

Figure A3.21: Composition of Bank Deposits, 2003–2012

Figure A3.22: Bank Lending Composition, 2003–2012

Sources: CEIC database, Bank of Indonesia. Sources: CEIC database, Bank of Indonesia.

25

30

35

40

45

50

55

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

IDR

trill

ion

Net domestic credit (left scale)

Domestic credit provided by banking sector relative to GDP (right scale)

0 20 40 60 80 100 120 140

Azerbaijan

Pakistan

Cambodia

Sri Lanka

Indonesia

Philippines

Georgia

Armenia

Kazakhstan

Bangladesh

India

Mongolia

Nepal

Viet Nam

Malaysia

PRC

Thailand

(% of GDP)

848 922 1,076

1,229

1,463

1,682

1,914

2,305

2,736

3,164

12

14

16

18

20

22

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%IDR

trill

ion

Time

Saving

Demand

Foreign currency deposit share (right scale)

441 559

696 792

1,002

1,308 1,438

1,766

2,200

2,708

10

15

20

25

30

0

500

1,000

1,500

2,000

2,500

3,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

%

IDR

trill

ion

Consumer

Investment

Working Capital

Foreign currency loan share (right scale)

Appendix 3

24

16. Lending spreads, with net interest margins above 5.0%, remain extremely attractive in Indonesia compared with peers (Figure A3.23). Given rapid growth in loan portfolios, the Indonesian regulator has taken several measures to strengthen the banking system. These include a maximum loan-to-value ratio of 70% for property purchases, higher up-front payments for vehicle purchases, and tighter standards for credit card issuance. In July 2012, the regulator restricted the size of individual ownership holdings in private banks. Beginning March 2013, the minimum capital of Indonesia’s banks has been set at 8.0% to 14.0%, depending on their individual risk profiles, compared with the 8.0% required previously for all banks. Banks have been told to gradually raise their lending exposure to micro, small and medium-sized enterprises to a minimum 20.0% by 2018. To increase US dollar liquidity, foreign oil and gas contractors are now required to deposit US dollar-based export earnings with local banks. D. Banking Penetration

Figure A3.24: Commercial Bank Branches per 100,000 Adults, 2011

Figure A3.25: Commercial Bank Branches per 1,000 Square Kilometers, 2011

Source: International Monetary Fund. Source: International Monetary Fund.

17. Measured by the demographic penetration of branches, access to financial services in Indonesia is relatively low (Figure A3.24). The geographical branch penetration is also low due to the country’s archipelagic territory (Figure A3.25). Indonesian residents are still only light users of bank accounts. Some 20% of the adult population owns or shares an account at a

0 10 20 30 40 50 60 70

Kazakhstan

Viet Nam

Cambodia

Tajikistan

Nepal

Kyrgyz Rep.

Bangladesh

Philippines

Indonesia

Pakistan

Azerbaijan

Malaysia

India

Thailand

Sri Lanka

Armenia

Georgia

Uzbekistan

Mongolia

0 10 20 30 40 50 60 70

Kazakhstan

Mongolia

Kyrgyz Rep.

Tajikistan

Cambodia

Malaysia

Viet Nam

Indonesia

Azerbaijan

Nepal

Georgia

Thailand

Pakistan

Armenia

Philippines

Uzbekistan

India

Sri Lanka

Bangladesh

Figure A3.23: Interest Rate Spread— Lending minus Deposit Rate, 2011

PRC = People’s Republic of China. Source: World Bank.

0 2 4 6 8 10

Malaysia

Viet Nam

Sri Lanka

PRC

Bangladesh

Philippines

Thailand

Indonesia

Mongolia

Pakistan

Azerbaijan

Armenia

%

Appendix 3 25

formal financial institution, according to a household survey conducted in 2011 by the World Bank and Gallup of the United States. There are 600 deposit accounts per 1,000 adults in Indonesia, compared with rates of almost 1,400 per 1,000 in Kazakhstan and Thailand and 850 per 1,000 in India (Figure A3.26). Indonesia has almost 216 loan accounts per 1,000 adults, a higher ratio than India’s but significantly lower than Malaysia’s or Thailand’s (Figure A3.27).

Figure A3.26: Household Deposit Accounts per 1,000 Adults, 2011

Figure A3.27: Loan Accounts per 1,000 Adults, 2011

Source: International Monetary Fund. Source: International Monetary Fund.

18. The share of financial intermediation in Indonesia’s GDP has declined during 2005–2012 (para. 13). The country’s credit and deposit levels are lower as a percentage of GDP than in most other developing Asian nations, and compare poorly with those in Bangladesh, India, Malaysia, Thailand, and Viet Nam. In 2011, total outstanding deposits accounted for 43.4% of GDP (Figure A3.28) and credit for 34.3% of GDP (Figure A3.29).

Figure A3.28: Outstanding Deposits with Commercial Banks, 2011

Figure A3.29: Outstanding Loans from Commercial Banks, 2011



0 500 1000 1500

Pakistan

Bangladesh

Indonesia

Georgia

India

Thailand

Kazakhstan

0 100 200 300 400 500 600 700

Cambodia

Pakistan

Uzbekistan

Bangladesh

Bhutan

India

Indonesia

Thailand

Georgia

Malaysia

0 20 40 60 80 100 120 140 160

Azerbaijan

Tajikistan

Kyrgyz Rep.

Armenia

Georgia

Uzbekistan

Kazakhstan

Pakistan

Cambodia

Philippines

Indonesia

Sri Lanka

Nepal

Bangladesh

India

Thailand

Mongolia

Malaysia

Viet Nam

PRC

(% of GDP) 0 20 40 60 80 100 120 140

Kyrgyz Rep.

Tajikistan

Pakistan

Philippines

Azerbaijan

Uzbekistan

Indonesia

Cambodia

Armenia

Georgia

Sri Lanka

Nepal

Kazakhstan

India

Bangladesh

Mongolia

Thailand

Malaysia

PRC

Viet Nam

(% of GDP)

Appendix 4

26

PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: FINANCIAL INTERMEDIARIES

Indicators Ratingsa Justifications

Monitoring indicators can be partly derived from RRPs. Several indicators are essentially judgmental. Their use and ratings should consider the operating context, and ADB aims, strategies, and project proportions.

1. Beyond Intermediary and Subborrower Impacts

1.1 Private sector expansion and institutional impact

1.1.1. Contributes to an increased private sector share and role in the economy, and to sustainable jobs or self-employment

1.1.2. Contributes to expanded SME lending with good portfolio and sub-borrower performance

1.1.3. Contributes to institutional change by

(i) improving supply and access generally to formal credit and banking service to SMEs;

(ii) influencing a more enabling environment for SMEs via lobby activity, policy dialogue, or otherwise in which the bank(s) become more engaged

Satisfactory

The loan contributed to a greater supply of longer tenor US dollar-denominated loans for Indonesia’s corporations. ADB’s syndicated loan contributed towards the growth and expansion of Bank Mandiri’s foreign currency loan portfolio and lending with longer maturities.

1.2. Competition. Contributes to new competition for

SME business among local banks (including new product and service offerings, local currency products) and/or contribution to increased competition in key sub-borrower markets

Not Applicable

1.3. Innovation. Contributes to new ways of offering

effective banking services to SMEs (including new products, services, and technologies) in ways that are replicated by other banks and in the financial system (item 2.2)

Satisfactory

Bank Mandiri is well-known in the market for continuous innovation and achieving a quick time to market when offering new products that cater to its customers’ evolving needs.

1.4. Linkages. Contributes to local savings and

deposits mobilization via networks of participating bank(s), and/or relative to size of sub-portfolios; contribution to notable upstream or downstream link effects to sub-borrowers’ businesses in their industries or the economy.

Not Applicable

ADB funding in 2009–2010 helped Bank Mandiri’s gain access to additional international funding during 2010–2012.

1.5. Catalytic element. Contributes to mobilization of

other local or international financing to SMEs, and to positive demonstration to market providers of debt and risk capital to SMEs

Satisfactory

ADB’s syndicated loan entailed $30 million B loan funding from ING. The groundwork undertaken by Bank Mandiri during the ADB loan process and informal inputs provided by ADB to AFD facilitated the long-term $100 million AFD renewable energy credit facility to Bank Mandiri that came shortly after ADB’s loan, in June 2010.

1.6. Affected laws, frameworks, regulation.

Contributes to improved laws, regulation, and inspection affecting formal SME banks and banking services to SMEs in the local financial system

Not Applicable The loan is too small to have impact on laws, frameworks, and regulation.

1.7. Wider demonstration of new standards.

Contributes to raised standards in the financial sector or in sub-borrower industries and sectors in corporate governance, transparency, and stakeholder relations

Not Applicable There is no evidence that the loan had an impact on wider demonstration of new standards.

Appendix 4 27

Indicators Ratingsa Justifications

2. Participant Banks And Sub-borrower Impacts

2.1. Skills with wider impact potential. Contributes

(i) to improved SME credit approach at all stages in the participant bank(s) in ways that will be replicated by other providers of SME finance and banking service; and (ii) via the participating bank(s) to improved sub-borrower skills in operation of their businesses, e.g., via good appraisal, and monitoring by the bank(s)

Satisfactory

Bank Mandiri’s capital position and earnings have remained strong when compared with most of its peers. Its performance reflects the bank’s consistent improvement in its financial performance, its dominant banking franchise, a favorable short-term funding profile, high liquidity, and improving profitability. Bank Mandiri has also strengthened its organizational structure and branch infrastructure to provide more integrated service solutions and has benefited from a focus on human resources, technology, prudent risk management, and good corporate governance.

2.2 Demonstration and new standards-setting potential. Demonstrates potential through

improved and achieved standards in corporate governance and transparency, stakeholder relations, and ESHS spheres

Satisfactory

The loan enabled Bank Mandiri to further its proficiency with documentation formalities and collateralization and covenant reporting requirements for a syndicated loan deal. ADB’s loan also helped establish an environmental and social management system at Bank Mandiri, which had not had one before.

Overall Rating Satisfactory

ADB = Asian Development Bank, ESHS = environmental, social, health and safety, SME = small and medium-sized enterprise, PSD = private sector development, RRP = report and recommendation of the President. a Ratings scale: excellent, satisfactory, partly satisfactory, unsatisfactory. The rating is not an arithmetic mean of the individual indicator ratings, which have no fixed weights. It considers already manifest actual impact (positive or negative) and the potential impact and risk to its realization.

Appendix 5

28

COMPARATIVE FINANCIAL STATEMENTS

Table A5.1: Bank Mandiri (Parent Bank)—Statements of Financial Position, 2008–2012 (Rp million)

Balance Sheet 2008 2009 2010 2011 2012

Customer loans, net 147,735 168,156 208,653 262,851 327,233

Other earning assets 151,992 161,056 149,914 162,997 163,859

Fixed Assets, net 4,417 4,503 4,845 5,472 6,184

Other Non-earning Assets 34,260 35,141 42,588 57,788 65,828

Total assets 338,404 368,856 406,001 489,107 563,105

Total deposits & money market funding 279,342 309,458 339,989 392,675 449,578

Other liabilities 11,566 10,924 9,762 13,981 19,083

Other money-market funding 5,191 5,296 7,913 9,168 10,365

Long-term Borrowings 11,792 9,525 8,619 14,104 13,428

Total liabilities 307,890 335,202 366,283 429,928 492,454

Common Stock (including capital surplus) 17,262 17,397 17,459 28,862 28,862

Retained earnings 7,499 10,928 16,880 24,854 36,216

Reserves 5,753 5,329 5,379 5,463 5,572

Total equity 30,514 33,653 39,718 59,179 70,651

Total liabilities and capital 338,404 368,856 406,001 489,107 563,105

Table A5.2: Bank Mandiri (Parent Bank)—Statements of

Comprehensive Income, 2008–2012 (Rp billion)

Profit and Loss Statements 2008 2009 2010 2011 2012

Net interest income 12,976 14,640 17,498 19,298 24,164

Net fee and commission income 3,575 4,442 3,973 4,951 6,336

Other operating Income 1,333 1,594 3,490 5,217 4,645

Total operating income 17,885 20,676 24,961 29,466 35,144

Operating expenses (7,886) (8,674) (9,658) (12,485) (14,864)

Pre-provision income 9,998 12,002 15,303 16,981 20,280

Loss provisions (2,662) (845) (2,422) (2,840) (2,990)

Income after loss provisions 7,336 11,157 12,881 14,141 17,290

Net non-operating income 591 (567) 163 499 760

Pre-tax income 7,927 10,590 13,044 14,640 18,050

Taxes (2,614) (3,434) (4,293) (3,263) (3,748)

Net income 5,313 7,155 8,751 11,377 14,302

() = negative Source: Bank Mandiri audited financial statements.

Appendix 6 29

ENVIRONMENT AND SOCIAL MANAGEMENT SYSTEM A. Summary 1. Bank Mandiri’s environmental and social management system (ESMS) aims to ensure that its operations are environmentally sound and acceptable and will thus minimize exposure to environmental and social risks. The ESMS framework comprises (i) an overall policy objective, (ii) environmental and social assessment processes and procedures that are consistent with good practices in corporate banking and financing processes, (iii) monitoring and reporting mechanisms, and (iv) formal organizational capacity and training programs at Bank Mandiri for handling environmental and social issues. 2. As part of the bank’s credit approval process, Bank Mandiri’s ESMS requires borrowers to develop and obtain environmental approval from the government through an environment impact assessment (Analisis Mengenai Dampak Lingkungan Hidup or AMDAL) and a Program for Pollution Control, Evaluation and Rating compliance report, which is part of a national-level public environmental reporting initiative. As part of its ESMS technical guidance for credit officers, Bank Mandiri identifies potentially high-risk sectors and projects that can contribute to land contamination, water pollution, industrial air pollution, as well as large-scale projects that may have environmental and social impacts. Where necessary, Bank Mandiri employs external specialists to conduct ESMS due diligence of projects. The bank periodically monitors borrowers’ compliance with the government’s environment impact assessment and compliance report requirements and any environmental and social management plan that is part of the loan agreement between Bank Mandiri and the borrower.

3. In 2013, Bank Mandiri began formulating sustainable banking principles in anticipation of green banking regulations expected to be issued by Indonesia’s central bank. The regulations will aim to encourage sustainable development and allow banks to take a wider financing role in green projects. As part of the policy, banks would be required to include environmental risk assessments during the loan due diligence process. Bank Mandiri’s ESMS forms a foundation for its sustainable banking initiatives.

B. Environment and Social Management System Training 4. ESMS is a learning module in Bank Mandiri’s basic commercial and business banking academy class and its environmental risk analysis class. The module covers (i) internal environmental and social policy and external regulation on environmental issues; (ii) environmental and social aspects as part of credit processes and procedures, including target markets, documentation, on-site verification, ratings, credit memorandum, and monitoring; (iii) environmental and social monitoring and reporting; and (iv) technical guidance for environmental and social risk analysis.