is your bank ready?* - pwc: audit and assurance, … page 3 pricewaterhousecoopers m&a in the...

is your bank ready?*

PwC*connectedthinking

M&A in the Indonesian Banking Sector

Jakarta, 30 August 2007

Introduction• Recent M&A transactions in Indonesia• Indonesian banking developments • Key driver of industry growth

2007 FS Asia M&A surveyBank Indonesia’s perspectives on M&ABanking industry in 2050Lessons learnt in M&A transactionsQuestions and answer session

30/08/2007

PricewaterhouseCoopersM&A in the Indonesian Banking Sector

2006 – 2007 M&A transactions

7.8776.0%Bank of IndiaSwadesi1.921.0%Sinar Mas MultiarthaShinta

N/A75.4%ACOM & BoTM – UFJNusantara Parahyangan

6.77100.0%BRIJasa Arta76.0%90.0%95.0%71.6%83.0%

Stake Sold

N/AState Bank of IndiaIndomonexN/AICBC Halim88.0RabobankHaga and HagakitaN/ATPGBTPN

28.96Commonwealth BankArta Niaga Kencana

Deal Value(USD mn)AcquirerTarget

Section 1 – Introduction

Source: Bloomberg, Factive, Mergermarket

30/08/2007


Deregulation in banking sector increased the number of banks (200) and total assets

1997


Economic crisis forced many imprudent banks into bankruptcy

Crisis1988

Deregulation1997-2004

Restructuring

Bank restructuring led to Government having a large portion of shares in banking sector

Privatisation of nationalised banks led to foreign acquisitions. The sector remains overbanked and API was introduced

> 2004Privatisation &Consolidation

Banking industry development

30/08/2007


5 5 5

144

72 71 71

27

26 26 26

7

44

2930 28

1997 2004 2005 2006

JV Banks and ForeignOwned BanksRegional DevelopmentBanksPrivate Banks

State Owned Banks

222 133

Source: Bank Indonesia

131 130


As the industry progresses, the total number of banks continue to decrease

30/08/2007


Year endNo. of Banks

1997222

2004133

2005131

2006130

2007

• Merger of Bank ArthaGraha and Bank Interpacific to become “Bank Artha GrahaInternational”

• BI liquidated Bank Global

Merger of Bank UFJ Indonesia and Bank of Tokyo Mitsubishi to become the Bank of Tokyo-Mitsubishi UFJ

Some major outcomes include:• 23 banks closed• 7 banks

nationalised • 40 banks sent to

IBRA supervision


Some M&A deals are underway

?

Some M&A transactions following the introduction of API: to dateAPI has limited effect on industry consolidation

30/08/2007


441

559

696792 824

371

2002 2003 2004 2005 2006 May-07

in Rp trillion

17%

215 268 313 358 370

91 114 140 176 208 209

80 112 151 207 226 245

200

2002 2003 2004 2005 2006 May-07

Consumer

SME*

Corporate

371 441 559 696 792 824

25%

18%

13%

17%

CAGR

Note: *) SME definition: loans < Rp 5 billion, consisting of investment and working capital loans (excluding consumption loans)Source: Bank Indonesia


Commercial bank loans Loan distribution based on types

Source: Bank Indonesia

Key driver of industry growth: commercial bank loans have been growing at CAGR 17%, driven by growth in consumer lending at CAGR 25%

30/08/2007


64%

69%

71%

76%

78%

84%

85%

124%

56%

0% 20% 40% 60% 80% 100% 120% 140%

Philippines

Indonesia

China

Singapore

Malaysia

Japan

Taiwan

Thailand

South Korea

27.9%

70.7%

82.3%

87.5%

96.2%

104.5%

116.9%

148.6%

24%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Indonesia

Philippines

Thailand

Japan

Malaysia

Singapore

South Korea

China

Taiwan

Note: LDR in late 2006Source: Indonesia Commercial Banking Report Q2 2007


Loan to deposit ratio (LDR)

Note: Loan to GDP in late 2006Source: Indonesia Commercial Banking Report Q2 2007

Loan to GDP ratio

Indonesia’s LDR and loan to GDP ratio are relatively low compared to its neighboring countries. The ratios suggest room for loan growth opportunity within the banking industry


2007 FS Asia M&A surveyBank Indonesia’s perspectives on M&ABanking industry in 2050Lessons learnt in M&A transactionsQuestions and answer session

30/08/2007


The survey: FS Asia M&A survey, Going for Growth, Report and Survey Result, June 2007

• Observed the outlook of M&A deals in financial sector in Asia

• Aimed to learn target countries and the objectives of M&A activity

• Surveyed 230 financial services executives across Asia in March –April 2007

Section 2 – 2007 FS Asia M&A survey

30/08/2007


M&A activity in Asia will continue

Our organisation will undergo significant M&A in the next five years”

• 74% of survey respondents in Asia believe their organisationswill expand through M&A in the next five years.


100%26%74%

Asia

19049141

100%Total31%69%

Indonesia

DisagreeAgree

30/08/2007


M&A activity in Asia will continue

Announced deal increased by 66% in 2006 to US$ 64.5 bn

0.30.6

0.91.6

22.2

3.34.5

5.99.5

10.3

0.3

12.4*10.7

0 2 4 6 8 10 12 14

IndonesiaNew Zealand

PakistanThailand

PhilippinesIndia

SingaporeMalaysia

Hong KongTaiwan

South KoreaJapan

China (PRC)Australia

0.10.060.2

0.72.3

0.80.80.8

4.25.9

4.915.9

0.8

0.9

0 5 10 15 20

IndonesiaNew Zealand

PakistanThailand

PhilippinesIndia

SingaporeMalaysia

Hong KongTaiwan

South KoreaJapan

China (PRC)Australia

2006

Source: FS Asia M&A survey

Announced deal value of FS M&A by country2005

In US$ bnIn US$ bn

Note: Of the US$ 12.4 bn of announced deal value in Australia in 2006, half originated from a single insurance merger deal.


30/08/2007


Drivers: intense competition is the key external driver

“What will be the main external drivers of your organisation’s M&A or restructuring activity over the next five years?”

2427354447

Asia (%)

25Increasing customer demands25Growing economy19

4438

Indonesia (%)

Regulatory liberalisation

Increasing competition from foreign playersIncreasing competition from domestic players


Note: The total does not add up to 100% since respondent may choose up to three options.

30/08/2007


Drivers: a stronger market presence is the key internal driver

“What will be the main goals of your organisation’s M&A or restructuring activity over the next five years?”


2434364647

Asia (%)

13Increasing shareholder value38Entering new products markets38

3156

Indonesia (%)

Improving capital efficiency

Entering new geographic marketsIncreasing market share


30/08/2007


Drivers: respondents are more bullish on M&A activity

“In which sectors is a financial buyer* most likely to be successful in acquiring a domestic company in your country today?”

• 75% of respondents in Indonesia prefer to acquire retail banks, while Asian respondents have equal interest in FS sub-sectors

Note: *) i.e. private equity buyer or investment fund **) e.g. in distribution or intermediariesThe total does not add up to 100% since respondent may choose up to three options.

1925Private banks7530Retail banks

27333435

Asia (%)

31Outsourcing service providers31Niche markets**

619

Indonesia (%)

Mutual fund or asset managersSecurities companies


30/08/2007


Casting the net wider: target countries

“In which countries or regions do you expect your company to conduct M&A activities over the next five years?”

47

39

28

20 18 16 1510 10 10 8 7

0

10

20

30

40

50

60

China India Hong Kong Indonesia Vietnam Malaysia Thailand Philippines Taiwan Japan Pakistan SouthKorea

%

2005 2006 Note: Numbers indicate percentage in 2006. The total does not add up to 100% since respondents may choose all that apply


30/08/2007


Barriers: high pricing of M&A deals

From your company’s point of view, what are the principal barriers to undertake M&A deals?

• High prices as the main barrier for M&A activity in Asia• However, 44% of Indonesian respondents suggested that lack

of attractive targets is the major barriers for M&A deals



233450

Asia (%)

25Uncertain regulatory requirements34438

Indonesia (%)

Lack of attractive targets2High pricing of M&A deals1BarriersNo

30/08/2007


Partnering to compete: respondents seek specific qualities in partners

“When considering potential investors or joint-venture partners, how important do you think the following attributes are?”

• FS firms rely on partnerships to explore opportunities• Cash and regulatory requirements are not the only measures• Strong management and collaborative nature as an important

attribute for partners


30%

70%

Indonesia

37%

63%

AsiaCollaborative nature

IndonesiaAsiaIndonesiaAsia

48%

52%

54%

46%

50%20%2 – 5

50%

Good Corporate Governance

80%1 - very important

Strong management

30/08/2007


Organic growth, 20%

Divestiture, 10%

Don't know, 5%Joint venture,

3%

Alliances, 7%

M&A, 7%Outsourcing,

48%

Outsourcing is the best strategy for cost reduction

“What do you think is the best strategy for your company to reduce costs?”

• Outsourcing is seen as the best option for reducing costs


(Indonesia: 56%)

30/08/2007


Outlook

• Increasing competition will continue to increase M&A activity• A strong M&A push from Asia’s regional players such as

companies from Singapore, Taiwan and China



2007 FS Asia M&A survey

Bank Indonesia’s perspectives on M&ABanking industry in 2050Lessons learnt in M&A transactionsQuestions and answer session

30/08/2007


• API, introduced in 2004, suggests significant M&A and capital reinforcement to achieve a more balanced structure.

• Full implementation of API is expected by 2014.

Specialised bank (regional, corporate, retail)

30 – 500.1 - 10National bank3 – 510 - 50International bank2 - 3> 50

No. of banks

Rural bank and bank with limited scope of business activities

Type of banks

< 0.1

Capital (Rp tn)

Section 3 – Bank Indonesia’s perspectives on M&A

API is expected to put the banking structure in balance

30/08/2007


Single Presence Policy and merger incentives

• Shareholders are prohibited from owning controlling stakes in more than one bank.

• Banks that undergo mergers and consolidations receive incentives.

Section 3 – Bank Indonesia’s perspectives on M&A


2007 FS Asia M&A surveyBank Indonesia’s perspectives on M&A

Banking industry in 2050Lessons learnt in M&A transactionsQuestions and answer session

30/08/2007


The study: Banking in 2050: How big will the emerging markets get?*

The report observed the possible changes in the scale of the banking sectors between now and 2050, using the relative domestic credit markets as a proxy.

Section 4 – Banking industry in 2050

30/08/2007


GDP growth projections

We extended a GDP growth model to encompass banking assets and profits to estimate the implications of E7 economies growth for banking.

GDP & GDP/capita projections from

PwC model to 2050

Banking assetsto GDP ratio trend

analysis

GDP modelassumptions

Banking assetsprojections

Return on assetstrend analysis*

Banking profitprojections*

Regressionanalysis

Expert judgement

Note: all projections done by country then aggregated to global levelSource: PwC model using data from IMF on banking assets and Fitch on profits


30/08/2007


Banking in 2050 video


30/08/2007


Video and the study key points


PwC study: the World in 2050 Rapid growth of E7 economies

Rising significance of E7 banking

Fundamentals as key drivers

Domestic credit in a country

Higher domestic credit/GDP of E7

E7 may be larger than G7 by 2050

Post-tax return on assets as proxy

E7 higher share of global profit

Key messages of the study

Drivers of long-term growth

Size of banking assets

Projecting forward

Key findings

Effects on banking profits

Long term banking profit

PricewaterhouseCoopers 8/30/2007M&A in the Indonesian Banking Sector

Indonesia case: 4-6% projected avg. real GDP growth 2005-50

Note: *) Includes projected real exchange rate appreciation (shown in light olive bars)

Source: PwC baseline scenario projections


0 2 4 6 8

India

China

Indonesia

Turkey

Brazil

Mexico

Russia

US

UK

Germany

Japan

% real GDP growthDomestic Currency US $ terms*

4.2% 5.8%

PwC study: the World in 2050

PricewaterhouseCoopers


Source: PwC, IMF data on domestic credit in 2004

0 2000 4000 6000 8000 10000 12000

USJapan

GermanyUK

FranceItaly

SpainAustraliaCanada

ChinaKorea

IndiaBrazil

MexicoTurkeyRussia

Indonesia

$ billion


Size of banking assetsIndonesia case: c.$100 bn of current size of the banking sector

c.$100 bn


2.8

0.4

0.3

0.1

0.2

0.2

0.2

8

7

6

5

4

0 2 4 6 8 10

China

India

Brazil

Indonesia

Mexico

Russia

Turkey

Domestic credit in US$ trillion (at a constant 2004 prices)

20502004

23

45

Source: PwC, IMF data on domestic credit in 2004

23

45


Size of banking assetsIndonesia case: c.$7,000 bn of projected domestic credit in the banking sector by 2050


Indonesia case: relatively strong positive relationship between income and banking sector penetration

E7 banking services sectors is expected to grow proportionately with GDP ratio*

Note: *) refers to to GDP per capita levelSource: IMF

GDP per capita ($k 1995 prices)

Turkey

IndonesiaMexico

Russia

Brazil

India

China

KoreaAustralia

Spain

CanadaItaly

France

UK GermanyJapan

US

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0 5 10 15 20 25 30 35 40 45 50

Dom

estic

ban

k cr

edit

as

%

GD

P


Projecting forward



Indonesia case: post-tax RoA of 1.3% Effects on banking profits

Source: Fitch

Post-tax return on assets (average for 2000-5*)

*Except for Russia, China, Germany and Japan where 2005 data used

Rus

TurkBra

Indo IndiaUS Aus

MexSpa Can

UKItaly

Fra Kor ChiGer

Jap

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%E7 G7

Global average = c.1%

1.3%

30/08/2007


Strategic implications

• High potential growth markets in E7 – particularly retail banking (mortgages, consumer credit etc)

• Rapid increases in M&A activity as E7 markets consolidate and attract inward investors

• Major opportunities for private equity firms• Major E7 banks will expand outwards both organically and

through M&A to access new markets, capital and skills• Banking world will look very different in 2025, and even more so

in 2050 in terms of global ‘balance of power’


30/08/2007


Some strategic questions

• Do we have an adequate presence in the E7 now? If not, when should we enter and/or how should we expand?

• How do we balance growth, profitability and risk in the E7?• In which E7 markets might we have a sustainable competitive

advantage vs lower cost local competitors? • Should we enter / expand by organic growth, acquisitions or

joint ventures? If the latter, who should our local partners be?• Which segments of the E7 banking markets look most

attractive?



2007 FS Asia M&A surveyBank Indonesia’s perspectives on M&ABanking industry in 2050

Lessons learnt in M&A transactionsQuestions and answer session

30/08/2007


How to win the customer in order to build organic growth?

What works in the battle for growth, either through organic or inorganic growth?

Section 5 – Lessons learnt in M&A transactions

How to cross an increasingly competitive M&A environment?

30/08/2007


How to win the customer in order to build organic growth?


• Put customers first through technology, information and people• Build growth from existing customers through 5 steps:

- Abandon product silos- Understand the customer- Identify a customer champion- Empower customer-facing staff- Follow customer metrics


30/08/2007


How to cross an increasingly competitive M&A environment?


• Examine prices carefully in the context of strategic goals• M&A could be a defence strategy to be in key market• Find a balance between organic growth and M&A• Ready for competition from regional players• Build capability and capacity


30/08/2007


Phases of acquisition process


Finding target

Sign MoU

Due diligence, valuation,

structuring

Submit bid and

SPA

Negotiate on bid

and SPA

Deal closing

Determine M&A

strategy

• Trading value high

• Limited structuring options due to BI regulations such as LLL and Single Presence Policy

• Client and due diligence team coordination

• Not many sizeable banks are up for sale

Note: SPA refers to Sale and Purchase Agreement

• Lengthy process of regulatory approval

• For multi-national corporations, lengthy process to get board approval due to limited knowledge of banking industry in Indonesia

30/08/2007


Assets• Undercollateralised of loan• Underprovision of loan• Lower interest rate of loan• Weak loan monitoring control and lack of proper loan documentation• Provision calculation not in compliance with BI regulation (e.g. internal appraisal

value used for collateral of loans > Rp 5 bn)• Lending concentration and reliance on related parties• Underprovision of third party receivables (if any)• Overstated marketable securities• Presence of idle assets not relevant to business• Overstated fixed assets• Underprovision in foreclosed assets or in unused assets• Overstated foreclosed assets and other assets (e.g. prepayments, deferred

expenses)

Potential due diligence findings


30/08/2007



Liabilities• Competitive funding resulted in high cost of funds in smaller banks• Funding concentration• Under provision for employee benefits • Potential liabilities on outstanding litigation cases

Others• Assets and liabilities mismatch• Accrual vs. cash basis in income and expense recognition • Reclassified P/L income and expense• Lack of internal control and flawed third party outsourcing• Fraudulent transactions• Compliance to BI requirements


30/08/2007



Taxation• Unreconciled withholding tax objects between those reported in tax returns and

those recorded in financial statements• Provision for possible losses on loans is higher than the allowable per tax

regulations• Unadjusted provision for possible losses on earning assets other than loans• Unqualified written-off bad loans is claimed as deductible expenses• Non-market interest rate charged on loans to employees• Unavailable Tax Exemption Letters for exempt parties which receive/earn interest

from the bank• VAT is not imposed on income from services other than banking services and sale

of taxable goods



2007 FS Asia M&A surveyBank Indonesia’s perspectives on M&ABanking industry in 2050Lessons learnt in M&A transactions

Questions and answer session

© 2007 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers. PwC

Stuart [email protected]

+62 21 5289 1213

PricewaterhouseCoopersJl. H.R. Rasuna Said Kav X-7 No.6

Jakarta 12940Indonesia

Telephone +62 21 5212901Facsimile +62 21 52905555/52905050

Website: www.pwc.com/id

Clifford D. [email protected]

+62 21 5289 0550

is your bank ready?* - pwc: audit and assurance, … page 3 pricewaterhousecoopers m&a in the...

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