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Andalusia Antar Benua

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Andalusia Antar Benua

  1. 1. EXECUTIVE SUMMARY1. Bank in Indonesia is facing an opportunity to double its market capitalization by building adominant presence in the Indonesian Mass Market2. We completed our assessment of the Mass Market by mapping the Rp50-200 million SmallBusiness loan segment. This segment is very attractive:• The size of the market is significant (revenue pool of ~IDR8 trillion, to be added to theIDR50 trillion represented by Micro Business, Credit Class, and Lower Mass segments)• The segment is under-penetrated (only 25% of potential customers are served today)• Customers are neither sophisticated nor price sensitive• There is an additional opportunity – not quantified in this document – to capture depositrevenue by consolidating the wallet of credit customers (mostly from BCA)3. Small Business customers require a simple value proposition:• User-friendly – documentation requirements and turnaround time• Accessibility – with simpler collateral requirements• Convenience – Location close to these customers• Simplicity – Products targeted specifically to the needs of Small Business sub-segments
  2. 2. EXECUTIVE SUMMARY4. To capture the Mass Market opportunity, We needs to build a fundamentally newdelivery engine combining acquisition of “good” BANKs and/or building Bank “Units”from scratch• ~600 Units will give us 20% of the existing mass market (IDR10 trillion assets)• Depending on execution speed, the project NPV is in the IDR6-9 trillion range• Cash outlay is in the IDR100-600 billion range depending on the speed of the rollout.5. Overall, banking industry remains in a stable condition and convinced to be runprudently, which is reflected in the well-maintained CAR and safe level of NPL.Improved market confidence also bring more optimism to further BankingIntermediation function, Going forward, BI will keep a close watch on bank lendinggrowth to keep it within the range envisaged in the Bank Business Plans. Specialefforts will be devoted to increase credit for productive purposes.
  3. 3.  Introduction Overview Indonesia is set to be one of the economicpowerhouses •Indonesia’s banking sector has stabilised, ready for rapid of the twenty-firstcentury •The country is the fourth most future growth. Bad debt ratios are declining,demand is populous in the world, is rich in oil, coal and rising and balance sheetquality has improved; minerals (including gold, copper and the world’s largest tin • By 2050, Indonesia’s economy could be bigger than projected domestic credit isexpected to be some the UK or Germany times • Although international organisations have built up a significant INVESTMENT •Acquisition (up to 99% foreign ownership permitted) presence in the Indonesianbanking sector is VERY PROMISING through the sale could prove a relatively quickand effective way to of banks • Now, Indonesia is moving to the centre of the radar as interest •For example, a survey of 230 financial executives from across – Significant foreign investment inbanking sector: Bank Central Asia 2002 51% Farallon Capital Bank Niaga 2002 51% Commerce Asset Ventures SdnBhd Bank Danamon 2003 51% Temasek/Deutsche Bank Internasional Indonesia 2003 51%Temasek/Kookmin Bank Lippo 2004 52% Swiss Bank Consortium Bank NISP 2004/05 71% OCBC Bank Buana 2004/05 61% UOB Bank Permata 2004 51% StandardChartered/Astra Bank Lippo 2005 83% Khazanah Nasional Bhd.Financial Services Investment prospectsin the Indonesian banking sector
  4. 4.  Having largely recovered from the impact of the Asian • The corollary of this immense economic potential will be financial crisis of1997, the Indonesian economy is now transformational long-term growth in demandfor banking pushing forward into a period of strong and sustained services • PricewaterhouseCoopers research indicates that growth. GDP expanded by 5.5% in2012 and is expected to by 2050, Indonesia will have developed a banking sector increaseby an average of 5.8% until the end of the decade comparable in scale to a major Europeaneconomy such as • Inflation has fallen from a high of 18% in late Greek or ItalySource: Economist Intelligence Unit, „Country Profile‟Indonesia, 21.05.012Investment Environment
  5. 5. • Opportunities in the Small Business market• Developing the model to capture opportunitiesin the Mass Market and Small Businesses• Next steps• AppendixContent
  6. 6. OVERVIEW OF INDONESIA’S BANKINGSEGMENTSROUGHESTIMATETargetsegmentAffluentMassaffluentMassUnbankablesSegmentsCommercial banksBRIandBPRsAnnualhouse- holdincomethresholdIDR millionNo. ofhouseholds MillionsPotentialloan rangeIDR millions~0.5+150~2 ~50-150(+ creditcards)~41~1-50~12–~400~150~5Target segmentconsist ofapproximately ~40million householdsSource: Asian Demographics; teamanalysis
  7. 7. BusinessIndividualSmallbusinessCreditclass• Profile: Small shopowners• Profile: Middle-working class(typically white collar)• Household income: IDR 25-150 million• Loan range: IDR8-10 million• Typical products: Creditcards,Debit cards, unsecured loans• Household income: IDR25-150million• Loan range: IDR30-40 m• Typical products: Smallloans, forinvestments, working capitalMicrobusinessLowermass• Profile: Stallowners, smalltraders, farmers• Profile: Governmentservants, blue collar workers• Household income: IDR5-25million• Loan range: IDR1-2 million• Typical products: Emergencyloans,small consumption credit loans• Household income: IDR5-25million• Loan range: IDR 3-5million• Typical products: Workingcapital, smallloans~150~25~5EXAMPLESAnnualhouseholdincome threshold(in IDR million)Source: Team analysis; sitevisitsMASS SEGMENT CAN BE FURTHER BROKENDOWN IN FOUR DISTINCTIVE SUB-SEGMENTS
  8. 8. Number of loan accounts between IDR50-IDR200 millionThousand of businesses or accountsMost banks have "commercial lending" approach which makes serving Small Businessesinefficient•Cumbersome processes and long turnaround time (typically537700Total numberof loans IDR50-200million• Stringent collateral requirement• High operating costMarket is only 25% penetratedBPRs and BRI unit desas do not go beyond IDR50M loansize163• BRI holds ~19% market share• Bank has ~17,000 loan accounts in thissegment (~6% market share)Source: Asian Demographics; BPS; US AID; Bank Indonesia; team analysisTotal numberof businessesUntappedbusinesses>2weeks)THE SMALL BUSINESS SEGMENT ISCURRENTLY UNDER-PENETRATED …
  9. 9. • Smallbusiness• Creditclass• Microbusiness• Lower massSegmentNo. ofHH/businessMillion units2.52.916.319.2Annual revenuepoolsizeIDRtrillions~23.0-31.0~7.0-9.0~15.0-25.0~6.0-12.0Currentplayers• BRI, BPR• BCA, Mandiri, BNI,Danamon, BII, other banks and non-bank FIs (e.g. GECapital)• BRI, BPR• BRI, BPR~41 millionhouseholdsIDR 50-80trillionp.a.ROUGHESTIMATEKeyquestion:How muchpotential canwe capture?Source: Asian Demographics; annual reports; site visits; team analysisOPPORTUNITIES ARE HIDDEN IN THE LOWERINCOME SUB-SEGMENTS WITH FEWERCOMPETITORS
  10. 10. ROUGHESTIMATENumber of loan accounts IDR 50million Million households/accounts26.015.03.1 1.810.141.0Source: BI; annual reports; site visits; team analysisTotal no. Untapped Total no. BRI BPR BPD,of HH in potential of loans commer-mass IDR 50 cialsegment million banksROUGHLY 26 MILLION HOUSEHOLDS IN MASSSEGMENT CURRENTLY UNTAPPED
  11. 11. * For secured lending; assumptions: mortgage rate currently at approx. 15%, deposit interest rate atapprox. 7%** For good BPRs, NPLs as low as 2-4%Players2322BRIBPR(overallindustry)Interest spread forloans IDR 50millions Percent1.6~9**NPLratioPercent~8*Industryaverage~7Source: Annual reports; field visits; team analysisMASS MARKET HAS ATTRACTIVE ECONOMICSWITH LOW NPL LEVELS POSSIBLE
  12. 12. Previously reviewedNew segmentexploredSmallbusinessProfes-sionalsUnbankableMicrobusinessCreditclassTurnover ofIDR350-1,000 millionSmall family-ownedbusinesses, mainlyinretail andtrading, typicallywith <20 employeesLoan sizeIDRmillions2005051Low - Middleworkingclass (whitecollarworkers)Government servants,blue collarworkersLowermassSME,commercial, corporateAffluentHouseholdincomeIDR millions150-40025-1505-25Self -employedEmployeesTurnover ofIDR10-350 millionMicroenterprises, mainly stall owners& pettytraders>400AffluentSource: Asian Demographics; Bank Indonesia; BPS; team analysisMassaffluentMassUnban- kableMASS MARKET SEGMENTATION OVERVIEW
  13. 13. Number ofentitiesMillions* Lower target spread are for current tapped market. Assume that banks can charge a higher rate for untappedcustomers** Includes micro and what was formerly known as small businesses (turnover IDR50 – 350m) in earlier progressreviewAverage loansizeIDR millionsTotal loanpotentialIDR trillionsLoanspreadPercentRevenuepoolIDR trillionsEMPLOYEESCreditclassLowermassSELFEMPLOYEDSmallbusinessMicrobusiness**2.919.2~0.718.81-2~847-9***19-38~58123-18032%9%-15%*27%-32%36-538-1023-2932%7-96-12~8SMALL BUSINESSES ADD IDR8 TRILLION REVENUE TO THEIDR50 TRILLION OF THE REMAINING MASS SEGMENTS
  14. 14. * BNI built 76 micro-banking units to attack loans IDR50 million** Play through Swamitra (196 units to Indonesia)5,0001,00020050* **MandiriBNIBCABRIBIIBukopinNISPLippoBuana DanamonBPRsLow focus HighfocusSUCH SMALL BUSINESS LOANS ARENOT THE FOCUS FOR MOST BANKS
  15. 15. * In bracket is proportion of the project that can be financed by bank** Can make exceptions and loan up to 15 yearsSource: Branch Visits/InterviewsBRI BNI Bukopin NISP Buana Danamon• Product name Kredit Ritel Kredit Produktif Kredit Usaha Kecil KRK (WC), KreditAksep (Inv.)KRK (WC),Angsuran (Inv.)KAB & KRK(micro)• Size of Loan 50 – 5 billion 50 million – 5 billion 100 million – 1.5billion50 m – 5 billion N/A 50 – 200 million• Duration– Working Capital*1 year (100%) 1 year (100%) 1 year (80%) 1 year (100%) 1 year (70%) 1 year (75%)– Investment* <5 years (65%) <5 years** (65%) <5 years (70%) <5 years (70%) <5 years (70%) <5 years (75%)• Pricing– Interest17-19% 16.5% 18.5% 15.5% 17% 18.5%– Provision 1% (0.5% for 1% 1-3% by loan 1% 1% 1%extension) duration– Admin. Fee Maximum 150 Maximum 150 Maximum 250 0.1% 0.1% 0.2%thousand thousand thousand• Collateral Land/Building Land/Building (HGB) Land/Building Only land with “Hak Pakai” Land/Building(HGB) (70-80%); (100%), inventory; (HGB) (80%); building (85%). acceptable (70%) (Hak Milik) (75%);Secondary: Auto Secondary: Auto Secondary: Auto Secondary: Land Auto and(60%) (60%) (80%) only and auto receivable as(negotiable) secondarycollateral• Credit Process– In branchBranch Retaill Business Ctr Regional Office Branch Regional office Branch– Approval time 1-2 months 2-3 weeks 3-4 weeks 3 weeks 2-3 weeks 3-4 weeks• Other conditions Be in business Be in business for 2 Be in business for Be in business for Accept 1 year Be in business forprofitably for 2 years. Only borrow 2 years 2 years. business 2 yearsyears from BNI experience.• Distribution point Lending Branch(larger branches)Retail businesscenters (e.g. onlyRegional office Limited branch Regional office 170 lending branchfour in Jakarta)MARKET LANDSCAPE : NO ONE HAS AREAL DISTINCTIVE OFFERING FOR THEM
  16. 16. Both potential and existingcustomers prefer simplicityover price* Clearly unaware that 16%flat rate is approximatelyequivalent to 29% effective“Which of the hypothetical packages do youprefer?”Percent respondent (by group)Potentialcustomers“I am thinking of switching to BRI.They have a product offeringinterest 16% flat, while inIndonesia is 19% effective”*“I make more money than theinterest payments. I get a loan –I make money. Just by beingable to pay cash to my suppliers,I may have recouped the interestexpenses.”“When I borrow money, it istypically because of cash-flowproblem. I don’t mind paying a bitmore if they give me moneyfaster.”Package 1•1% monthly rate•Cumbersome loanprocess andrequirements14%86%Package 2•1.5% monthly rate•Simple loanprocess** andrequirementsCurrentcustomers40%60%Quotes fromcustomersSource: Customer interviews; mystery shoppingSMALL BUSINESS CUSTOMERS ARE NEITHERSOPHISTICATED NOR PRICE SENSITIVE
  17. 17. Deposit needs alreadyfulfilled by BCA andother commercialbanksGap inLoanNeedsDeposit• Savingsaccount• Current accountCredit• Loan– WorkingCapital– InvestmentMOREOVER, THERE IS POTENTIAL TO CAPTURE THE WHOLEWALLET BY FULFILLING THE LOAN GAP
  18. 18. – Head of retail banking of a competing bank– North Sulawesi head of Regional Chamber of Commerce– 1 senior account officer of a leading bank– 1 notary* 16 commercial banks, 2 BPRs and 2 Swamitra (Bukopin‟sKey successfactor• User-friendlydocumentationrequirementsand turnaroundtime• Accessibilitywith simplercollateralrequirements• ConvenienceLocation closeto thesecustomers• SimplicityProductstargetedspecifically tothe needs ofSmall Businesssub- segments35 customer interviewsconducted20 branchesvisited6 other interviews conducted– 2 in Indonesia branch managers123++4Source: Team interviews, mystery shoppingFURTHER STUDY INTO THIS SEGMENTREVEALS 4 KEY SUCCESS FACTOR
  19. 19. USER FRIENDLY DOCUMENTATION AND FASTTURNAROUND“When I need to borrow, I‟d rather pick a bank that can process my loan applicationfaster”* 4-6 documents; including a certificate from the Ministry of Justice** In addition: premise diagram, map of location*** With complete documentation. When incomplete, may take a few monthsBusiness Document•Application form•Tax registration(NPWP)•Company registration(TDP)•Business operationregistration (SIUP)•Location approval(Surat domisili)•Incorporation letters*•Personalidentification•Current accountrecords•Financial statements• Production records• Purchasing records• Family certificate(KK)• Marriage certificate(Surat nikah)Collateral Document•Licenses (Hak Pakai/SUB/SHM)•Sales contract (AJB)•License to build(IMB**)•Property tax (PBB)•Insurance. . . But documentation requirementsby banks are daunting and process isslowChecklist:“I never do a cash flow or balance sheetstatements. My income statement is alsoincomplete. If I have to do thesedocumentations, I will not apply for a loan.”Customers demand simpledocumentation and fast turnaround . . .Typical turn-around time >2weeks***1Source: Customer
  20. 20. 20ACCESSIBLE AND SIMPLE COLLATERALREQUIREMENTS* Tanah Helikopter is ancestral land and is not located by the street (a major requirement formany banks)** Buana accepts hak Pakai as 70% collateral, HGB as 80%, and Hak Milik as 100% Source:Customer & branch interviewsCustomers often have differentcollateral…Accepted as collateral by commercialbanks“I want to borrow but I have only HakPakai (Right to use- for the shop). Banks cannot acceptthis as collateral. Thus, I cannotborrow”“Many of the potential customers have houses onTanah Helikopter*. To cover these customers, wemust accept their simpler collateral”Danamon Branch ManagerFullownershipLeaseNotaccepted ascollateral bycommercialbanks… than those accepted bybanks• Hak Guna Bangunan is morecommon in Jakarta• Hak Pakai is more commonoutside Jakarta (e.g.Kotamadya Surabayapredominantly issues HakPakai)“We have to take Hak Pakai because this is theonly collateral most of these people have.”Bank Buana Account Officer2Sertifikat Hak Milik•Certificate ofownership•No time-limit•Only available forIndonesia citizenHak GunaBangunan(HGB)•“Right-to-use” issuedby the government•20-30 yearsduration•Can be extendedTanah Adat•“Ancestral land”•No time-limit•More commonoutside JavaHak Pakai**•“Right-to-use” typicallyissued by SOEs andprovincial governments•20-30 years duration•Can be extended
  21. 21. CONVENIENT ACCESS TO BRANCHES AND BANK STAFF“I need the bank to be near my customers (smallclove sellers in the market).”A clove trader“I have to man this shop. I do not have people Ican trust to bring the payment back to branch.If I go to a far-away bank, I loose money”Owner of an electrical shop, Surabaya“I do my business on cash basis. I need thebank to be near the shop”Owner of agold shop, Bekasi“We go out to the shops to visit customers and getthe business. They cannot leave their shopsduring business hours.”NISP Account Officer (Face-to-face interview)“I and my friends join NISP because they comeand offer the loan products to our shops.”Owner of house-ware shop3Source: Customer interviews; mystery shopping
  22. 22. FURTHERMORE, PRODUCTS CAN BE MORE TAILOREDTO SPECIFIC CUSTOMER NEEDS* May have borrowed through BPR previouslyRocketers• Typically younger, 2-3 years inbusiness• Rent premises• First time bank borrowers*• Not price-sensitive• Borrows mostly for– Growth working capital– Investment in expanding businessOrbiters• Typically older, 5-20 years in business• Own premises• May have borrowed from banks before• Slightly more price-sensitive• Borrows mostly for– Overdraft for emergencies– Short-term loans for predictablebusiness cycles (e.g., Hari Rayapeaks)4
  23. 23. • Opportunities in the Small Business market• Developing the model to capture opportunities inthe Mass Market and Small Businesses• Next steps• AppendixCONTENT
  24. 24. * Excluding credit classRequirements to serve mass*and small business segmentsprofitably• Location close tosmallbusinesses• Low-costinfrastructure• Options1 Acquire existing goodBANKs and turn them around• Lower cost of funds• Lower operating cost• Enhance revenue2 Build Prospective Bank• Units greenfield• Set up infrastructure• Recruit good staff locally• Gradually build customerbase and presenceInfrastructure• Community knowledgeandnetwork• Simple and fastprocesses• Flexible collateralrequirementsBusiness systemSource: McKinseyTO SERVE MASS* AND SMALL BUSINESS SEGMENTS,A FUNDAMENTALLY NEW DELIVERY MODEL IS REQUIRED
  25. 25. OverheadsBack-officeFront-lineTeller AccountofficersInitialeconomics• Assets IDR 5.5billion• PBT IDR 563million• 550 loan accountsILLUSTRATION OF A TRADITIONAL BANK
  26. 26. OverheadsBack-officeFront-lineTeller Accountofficers8 Charging of feesfor otherservices7 Improvedinter- bankfunding cost6 Lowerdepositrate1Streamlineoverheads2Streamline back-office5 Improvedeposit mixfrom TD tosavings3 Replace leastproductive AO4 Increaseaccountloading from 110 to180 (BRI unit desabenchmark is 400)PROSPECTIVE BANK CAN PULL 8 LEVERS TOIMPROVE UPON THE TRADITIONAL BANK
  27. 27. OverheadsBack-officeFront-lineTeller AccountofficersBranchmanagerCreditofficerClerkNeweconomics• Assets IDR 16.4billion• PBT IDR 2.9billion• 900 loan accountsTHE RESULT IS A STREAMLINED AND EFFICIENTPROSPECTIVE BANK UNIT, 3x ASSET SIZE AND 6x MOREPROFITABLE
  28. 28. Source: HCI analysisECONOMICS OF TURNAROUND ACQUIRED BPRCASH FLOW VALUATION (million IDR) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5Residual(bn IDR)NPV(bn IDR)Net cash flow from operation Year 0 1,045 1,748 2,561 3,019 3,019Investment (3,377) 21.56 15.15NET CASH FLOW (2,333) 1,748 2,561 3,019 3,019Profit & Loss Statement (million IDR) Year 1 Year 2 Year 3 Year 4 Year 5Interest income Year 0 2,497 3,290 4,481 5,174 5,174Interest expense 865 1,032 1,426 1,731 1,731Fee income 25 66 157 259 259Gross income 1,657 2,324 3,212 3,702 3,702Operating expense 595 505 521 521 521Provisions 134 191 276 328 328NET INCOME BEFORE TAX 929 1,628 2,414 2,853 2,853Balance Sheet (million IDR) Year 1 Year 2 Year 3 Year 4 Year 5Loan balance 5,500 7,850 11,200 16,400 16,400 16,400Cash 1,650 2,355 3,360 4,920 4,920 4,920Deposit balance 4,895 5,070 7,620 8,670 8,670 8,670Borrowings 1,766 4,628 6,178 11,783 11,783 11,783Capital 490 507 762 867 867 867Key Assumptions Year 0 Year 1 Year 2 Year 3 Year 4 Year 5# of account officers 5 4 5 5 5 5# loan accounts- < IDR 50 million 550 575 700 800 800 800- IDR 50 - 200 million - 25 50 100 100 100# deposit accounts 2,675 3,855 3,855 5,790 5,790 5,790Loan-to-Deposit Ratio 112% 155% 147% 189% 189% 189%Cost of Fund n/a 10.6% 8.8% 8.3% 8.5% 8.5%Load 110 150 150 180 180 180ECONOMICS OF ACQUIRING AND TURNINGAROUND A “GOOD” BANK
  29. 29. Source: McKinsey AnalysisOVERALL ECONOMICSCASH FLOW VALUATION (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 70 Residual(tn IDR)NPV(tn IDR)Net cash flow from operation 20 175 562 1,088 1,521 1,722 1,762Investment (178) (312) (284) - - - - 12.59 7.70NET CASH FLOW (157) (137) 277 1,088 1,521 1,722 1,762Profit & Loss Statement (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Interest income 80 473 1,201 2,029 2,684 2,992 3,053Interest expense 28 156 380 642 874 995 1,021Fee income 2 11 33 70 115 145 153Gross income 54 328 855 1,457 1,924 2,141 2,184Operating expense 40 157 278 319 324 326 327Provisions 5 27 71 124 168 189 194NET INCOME BEFORE TAX 10 144 506 1,014 1,433 1,626 1,664Balance Sheet (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Loan balance 339 1,489 3,360 6,147 8,471 9,676 9,676Cash 102 447 1,008 1,844 2,541 2,903 2,903Deposit balance 230 1,036 2,215 3,546 4,478 5,115 5,115Borrowings 188 795 1,931 4,090 6,086 6,952 6,952Capital 23 104 222 355 448 512 512Projected Market Share 0.68% 2.98% 6.72% 12.29% 16.94% 19.35% 19.35%CORRESPONDING OVERALL ECONOMICS
  30. 30. Acquisition of goodBANKsProConRecommendedshare of total• Leverageexisting marketknowledge• Existingcustomer baseand loan book• Local franchise• Potentiallyexpensiveacquisitionpremium• Lack of qualitycandidates willingto sell• Lack oftransparency• Difficulty to preventprevious owners torestart and poachcustomer base1/3Greenfielddevelopment ofProspectiveBank Units• Avoidacquisitionpremium• No cultureshock• No legacyNPLs• Take time tobuild customerbase• Challenge inrecruiting skilledaccount officers2/3Estimated NPV(IDR billion)15.216.9ROLLOUT OF PROSPECTIVE BANK UNITS SHOULD COMBINEBANK ACQUISITIONS AND GREENFIELD DEVELOPMENT
  31. 31. • Opportunities in the Small Business market• Developing the model to capture opportunities inthe Mass Market and Small Businesses• Next steps• AppendixCONTENT
  32. 32. We recommend Prospective Investor to take the following no-regret / low-risk steps to:INVEST …!•Launch quantitative market research (will be done by AAB)– to confirm customer preferences, segmentation and price sensitivity– to refine the economic model•Select a target market and scan for potential Bank acquisitions (for example by askingAAB to recommend potential targets) :– Develop acquisition criteria– Identify high-potential candidates and conduct due-dilligence•Prepare a business case for discussion with the BoardIn about 2 months, Prospective Bank Management should be in position to make the firstGo/ No Go decision to proceed with building Prospective Bank Unit pilots and acquiring asmallnumber (e.g., 3-5) pilot BANKs.About 4 months later, Prospective Bank Management should review the progress ofthese 2 initiatives, update the business case and make the definitive Go / No Go decisionto proceed with the overall rollout of the Mass Market strategy.IMMEDIATE NEXT STEPS
  33. 33. • Opportunities in the Small Business market• Developing the model to capture opportunities inthe Mass Market and Small Businesses• Next steps• AppendixCONTENT
  34. 34. Industry splitNumber of entitiesGeography splitNumber ofentitiesTrading,59 hotel,andrestaurant100% =700,000ProcessingindustryTransportation andcommu-nicationServicesMining anddiggingConstructionJava100% =700,000SumatraBali andNusaTenggaraSulawesiKalimantanMalukuandPapuaPercentage6615116 2117121011Source: BIRO; BPS; USAID; Asian Demographics; HCI analysisSMALL BUSINESS SEGMENT IS CONCENTRATED IN JAVAAND SUMATRA AND ARE MAINLY IN TRADING
  35. 35. MISBusinessdevelopment4CreditMarketingHR & Training1IT&OperationProduct/PricingBranding/AdvertisingCluster#1Cluster#2Cluster#n…………Per cluster office:• 1 cluster salesmanager• 1 credit officer• 1accountant1 1 1 111Prospective BankunitProspective BankunitProspective BankunitPerunit:• 1 branch manager• 1 credit officer• 1 clerk• 1-2 tellers• 3-5 accountofficersSales ClusterManagement3Mass MarketBusinessDivision HeadX# ofFTE+ 15supportstaff#1 #2 #15A CENTRAL TEAM WILL BUILD AND SUPPORTTHE ENTIRE MASS MARKET NETWORK
  36. 36.  The upper end of the Indonesian banking sector is relatively concentrated, with the top 10 banks accountingfor more than 60% of total assets and credit. However, with 130 commercial banks in all, the sector as awhole is overcrowded. Many of the smaller institutions are poorly capitalised. The government is therefore seeking to promote consolidation and strengthen capitalisation through a policyframework known as the Indonesian Banking Architecture (API). The API includes new capital tiers forbanks that wish to operate internationally, nationally orregionally. Underpinning the API is the Single Presence Policy (SPP), which would prohibit shareholders from having acontrolling stake in more than one bank by the end of 2010. The SPP would have the particular benefit of enhancing regulatory oversight by reducing the number ofseparate entities that need to be supervised, especially the extensive array of multiple stakes held byconglomerates. The Indonesian government and Bank Indonesia also recognise the importance of improved transparency,governance and risk management in winning the confidence of investors. Recent reforms include tighter controls on lending, greater nonexecutive scrutiny, the requirement to haveformal risk committees in place and mandatory good corporate governance standards, along with curbs onthe number of related family members that canhold board-level positions. 2008 marked the beginning of the introduction of Basel II in Indonesia. Ultimately, the embedding of robuststandards of governance will come down to the culture of the organisation as much as regulatorysupervision.Sources: „Indonesian Banking Statistics‟, Bank Indonesia – May 2007.Bank Indonesia Regulation Number 8/16/PBI/2006. Bank Indonesia Regulation Number 8/4/PBI/2006. Investment prospects in the Indonesian banking sectorRegulation and Consolidation
  37. 37.  Although still small in relation to the size of the population, While product choice anddistribution options on the the Indonesian banking sector is already generating a strongconsumer side are still relatively limited, development return on assets is beginning togather pace. For example, Bank Mandiri, Indonesia’s largest bank, has built a successful Bankingsector overview (May 007) bancassurance platform. Assets US$188 billion Having beensubdued in the aftermath of the 1997 crisis and subsequent global downturn in 2002 and2003, corporate Deposits US$142 billion banking in Indonesia is now coming back tolife. Proposed Loans US$90 billion initial public offerings include Adaro Indonesia, one of theNumber of banks 130 world’s largest producers of thermal coal, which if it goes ahead willbe the country’s biggest ever flotation. Other Number of offices 9,110 opportunities opening up as the economy gathers speedGross non-performing loans 6.1% range from derivatives to help control the volatility ofthe Capital Adequacy Ratio 22% Rupiah and interest rates, to the fast-growing demandforReturn on assets 2.98% SME credit and advisory services.Source: Bank Indonesia „Indonesian Banking Statistics‟, May 2007. in what is the world‟s largest Muslim country. However, a number of providers are lookingto extend therange of Sharia-compliant products. The resurgence of the economy is leading to an acceleration in creditdemand.Market Environment
  38. 38.  M&A activities Many of Indonesia’s leading banks, including Bank Mandiri, in Indonesia over the next fiveyears. Among respondents are state-owned, though the government from Indonesia itself, 56% expect toundergo significant appears keen to renew privatisation. Prospective entrants include private equity and other financial buyers. International groupsthat have banking subsidiaries in In May 2007, for example, US private equity company TPGIndonesia include Rabobank, DBS Bank, Commonwealth (formerly Texas Pacific Group), agreed to acquire amajority Bank of Australia and the Australia and New Zealand stake in Bank Tabungan Pensiunan Nasional,a niche bank Banking Group. A number of international groups, including that mainly serves retired people. HSBC, Citibank, ABN Amro andStandard Chartered have also established branch operations. Renewed interest from regional and globalgroups is now evident as the economy and creditmarkets continue to grow. For example, a survey of 230 financial executives from across – Significant foreign investment in bankingsector: Bank Central Asia 2002 51% Farallon Capital Bank Niaga 2002 51% Commerce Asset Ventures Sdn Bhd Bank Danamon 2003 51% Temasek/Deutsche Bank Internasional Indonesia 2003 51% Temasek/Kookmin Bank Lippo 2004 52% Swiss Bank Consortium Bank NISP 2004/05 71% OCBC Bank Buana 2004/05 61% UOB Bank Permata 2004 51% Standard Chartered/Astra Bank Lippo 2005 83% Khazanah Nasional Bhd.Ownership and Investment Indonesia
  39. 39.  Companies looking to control a banking operation in Indonesia have three main options: establishing a new bank, Acquiring an existing institution opening a branch of a foreign bank or acquiring an existing Acquisition (up to 99% foreign ownership permitted) offers institution. Investors need to weigh up a number of regulatory an established customer base, existing operational systems andoperational factors before choosing which route to take. and distribution channels. While target identification through Option 1 todue diligence, negotiation and sale can take four to six months,this is still considerably less than the greenfield Establishing a new bank route. Bank Indonesia is also far more likely to grant approval. Greenfield entry (up to 99% foreign ownership permitted) naturallyprovides the flexibility of starting afresh and On the flip side, buyers run the risk of taking on unwanted eliminates the risk ofliabilities from past activities. However, liabilities from the past.Moreover, acquisition prices have companies must provide more than US$330 million in paid-up been running at 2.5 to 3 timesnet book value, reflecting the capital, which could be a sizeable disincentive. Establishing increasing demand for banks across this fast-growth region a new business also tends to be more time-consuming than and, within Indonesia itself, the shortage of available supply acquisition. Now, studies, licence applications (120 days at least), recruitment, however, both privatisation and theimpact of the Single IT and marketing development. Even then, gaining approval Presence Policy areadding to the supply of potential for a new start-up may be difficult at a time when Bank targets. The relatively fast turnaround ofprivate equity Indonesia is looking to reduce the number of banks. In this investment could also mean that recently acquiredentities respect, it is notable that no new banking licences have could soon be back on the market. Developments in price beenissued since 1999 and availability may encourage more acquisitions as an alternative to greenfield start-ups. Option 2 Opening a branch of a foreign bank If the bank is one of the global top 200, by assets, it can open a branch inIndonesia. This route does away with the need to find a local partner and comes with no risk from past activities. However, thepaid-up capital requirement (US$330 million) is the same as greenfield entry. The nature, extent and time needed to complete theoperational and regulatory preparations are also similar. Although current regulations permit this approach, the fact that BankIndonesia has issued no new branch licences since 2003 would suggest that gaining its approval may be difficult.Entry Strategies
  40. 40.  The Indonesian banking sector is set to be transformed over thosespearheading investment and development are likely the next few years asthe number of banks decreases, to include financial buyers, capable ofturning around under- foreign investment continues to increase andinstitutions performing institutions ready for selling on to more long-termrespond to the impact of the API, Basel II and other pressing acquirers. The longer term investors are likely to include the regulatorydevelopments. The result is likely to be a more key regional and, increasingly, globalplayers attracted to the competitive market, marked by heightenedpressure to huge potential of what is set to become one of the world’simprove efficiency, drive down payroll and other costs, andbiggest banking markets. generate greater product and service differentiation.The Way Forward
  41. 41. I• The economy grew by 6.2% in 02-2010. The whole year it forecasted to grow within the range of 5.5%-6.0% by the end of2010, and estimated to reach the upper limit projection, bolstered by Indones ias external sector performance, investment , andconsumer spending .• The latest macro economic indicators supported us to believe that the economy , in line with the development in the globaleconomy, is steadily moving on an upward trend accompanied by financia l system stability . It bolstered Indonesias externalsector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely onconsumption. The optimism also supported by latest deve lopment in the perception indicators such as an upgrade toinvestment grade, yield spread , CDS, CRC-OECD , etc. An assessment of economic developments during July 2010 points toimprovement in the domestic economy amid persistent risks of global uncertainties.• On July 13th 2010,Japan Credit Rating Agency (JCR) upgraded Indonesias sovereign rating to Investment Grade , from BB+ toBBB-.This upgrade was the first investment grade for Indonesia in 13 years . Currently,the Republic of Indonesias sovereign rating BB+/Stable from Fitch , BB+/Stable from R&l, BB/Positive from S&P, and Ba2/positive from Moodys.• The latest Board Meeting convened in A ugust 2010 resolved to hold the 81 Rate at 6.5%. For the time being, the current rateconsiders adequate to safeguard future inflation expectations. However, Bl is taking careful note of the recent onset of higherinflationary pressure and will pursue the necessary monetary and banking policy actions to ensure that future inflation remains on trackwith the established target at 5% :1% for 20 10 and 201 1. Bl w ill soon respond w ith measures to tighten liquiditymanagement without disruption to the bank intermediation function, implemented through changes in the statutory reserverequirement.• Regarding prices, the Board of Governors is closely monitoring the onset of rising inflationary pressure. July 2010recorded fairly brisk CP I inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary pressure was driven mainly by higher inflation in thefoodstuffs category and particularly rice, due to seasonal uncertainties. In contrast , pressure from core inflation has been kept atmodest levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchangerate.Executive Summary
  42. 42. • Overall, banking industry remains in a stable condition and convince d to be run prudently, which is reflected inthe well- maintained Capital Adequacy Ratio of 17.4%, and safe level of Non-Performing Loans at 3.3% , as of end ofJune 2010 . By end of 2010 , lending growth is projected to reach 22%-24%. Up to July 20 10, banking industry hasreached the remarkable lending growth at 19.6%. Improved market confidence also bring more optimism tofurther banking intermediation function . Going forward, Bl will keep a close watch on bank lending growthto keep it within the range envisaged in the Bank Business Plans. Special efforts will be devoted to increase creditfor productive purposes. The purpose of these measures is to ensure that deman d-side increase will be adequatelyoffset on the supply-side and thus not generate excessive inflationary pressure.• Balance of payments has posted a significant surplus over 02-2010 at US$5.4 billion. The surplus wascontributed from both the current account and capita l and financial account. The current account posted a US$1.8 billionsurplus , bolstered from upbeat performance in non-oil/gas trade balance, the gas trade balance and the currenttransfers balance. The ongoing world economic recovery has strengthened non-oil/gas exports w ith growthoutperforming non-oil/gas imports. The capital and financial account recorded a US$3.3 billion surplus distributedfairly among all major components . renewed growth in capital inflows in response to the upward revision of the creditrating outlook and more upbeat internationa l perceptions .• International reserves position at 30 July 2010 reached USD78.8 billion, equivalent to 6.03 months of imports andservicingof official external debt. This helped the rupiah to maintain stable movement throughout July 2010 with an appreciatingtrend.• In May 2010. the parliament approved 2010 revised budget proposed by the government . The revision isperceived as a necessary measure to adjust the current economic conditions especially changes m themacroeconomic assumptions . The proposed budget adJustment would mcreased deficit from 1.6 to 2.1%, inorder to contain increasing subsidies figures due to rising commodity prices mainly from oil.IExecutive Summary
  43. 43. IBusiness Model
  44. 44. ITarget in US$
  45. 45. IAssumptions
  46. 46. IProjection & Growth
  47. 47. ISales Pipeline
  48. 48. IUnique Value PropositionWe will combined the two objectives to achieve:1. An increase in the number of AAB Locations by 20,000 in 20152. An increase in the foot traffic visiting AAB Locations3. A mutual increase in transactions due to these strategic changes4. Continuing expansion as new outlets5. Incentive programmes and value adds that will attract and retaincustomersWe will combined the two objectives to offer:1. Special discounts from PP2. Rewards provided by both AAB and Prospective Partner3. Targeted voucher campaigns by MDF4. Over the counter campaigns by MDF5. Raffles and give aways by AAB6. Customer protection7. Membership cards