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- 2. EXECUTIVE SUMMARY 1. Bankin Indonesia is facing an opportunity to double its market capitalization by building a dominant presence in the Indonesian Mass Market 2. We completed our assessment of the Mass Market by mapping the Rp50-200 million Small Business loan segment. This segment is very attractive: • The size of the market is significant (revenue pool of ~IDR8 trillion, to be added to the IDR50 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 deposit revenue 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
- 3. EXECUTIVE SUMMARY 4. Tocapture the Mass Market opportunity, We needs to build a fundamentally new delivery 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 run prudently, which is reflected in the well-maintained CAR and safe level of NPL. Improved market confidence also bring more optimism to further Banking Intermediation function, Going forward, BI will keep a close watch on bank lending growth to keep it within the range envisaged in the Bank Business Plans. Special efforts will be devoted to increase credit for productive purposes.
- 4. Introduction OverviewIndonesia is set to be one of the economic powerhouses • Indonesia’s banking sector has stabilised, ready for rapid of the twenty-first century • 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 sheet quality has improved; minerals (including gold, copper and the world’s largest tin • By 2050, Indonesia’s economy could be bigger than projected domestic credit is expected 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 Indonesian banking sector is VERY PROMISING through the sale could prove a relatively quick and 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 in banking sector: 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. Financial Services Investment prospects in the Indonesian banking sector
- 5. Having largelyrecovered from the impact of the Asian • The corollary of this immense economic potential will be financial crisis of 1997, the Indonesian economy is now transformational long-term growth in demand for banking pushing forward into a period of strong and sustained services • PricewaterhouseCoopers research indicates that growth. GDP expanded by 5.5% in 2012 and is expected to by 2050, Indonesia will have developed a banking sector increase by an average of 5.8% until the end of the decade comparable in scale to a major European economy such as • Inflation has fallen from a high of 18% in late Greek or Italy Source: Economist Intelligence Unit, „Country Profile‟ Indonesia, 21.05.012 Investment Environment
- 6. • Opportunities inthe Small Business market • Developing the model to capture opportunities in the Mass Market and Small Businesses • Next steps • Appendix Content
- 7. OVERVIEW OF INDONESIA’SBANKING SEGMENTS ROUGH ESTIMATE Target segment Affluen t Mass affluent Mas s Unbankable s Segment s Commercia l banks BRI and BPRs Annual house- hold income threshold IDR million No. of household s Millions Potential loan range IDR millions ~0. 5 +15 0 ~2 ~50-150 (+ credit cards) ~4 1 ~1- 50 ~1 2 – ~40 0 ~15 0 ~5 Target segment consist of approximately ~40 million households Source: Asian Demographics; team analysis
- 8. Busines s Individua l Small business Credit class • Profile: Smallshop owners • Profile: Middle-working class (typically white collar) • Household income: IDR 25- 150 million • Loan range: IDR8-10 million • Typical products: Credit cards, Debit cards, unsecured loans • Household income: IDR25- 150 million • Loan range: IDR30-40 m • Typical products: Small loans, for investments, working capitalMicro business Lower mass • Profile: Stall owners, small traders, farmers • Profile: Government servants, blue collar workers • Household income: IDR5-25 million • Loan range: IDR1-2 million • Typical products: Emergency loans, small consumption credit loans • Household income: IDR5-25 million • Loan range: IDR 3-5 million • Typical products: Working capital, smallloan s ~15 0 ~2 5 ~5 EXAMPLE S Annual household income threshold (in IDR million) Source: Team analysis; site visits MASS SEGMENT CAN BE FURTHER BROKEN DOWN IN FOUR DISTINCTIVE SUB-SEGMENTS
- 9. Number of loanaccounts between IDR50-IDR200 million Thousand of businesses or accounts Most banks have "commercial lending" approach which makes serving Small Businesses inefficient •Cumbersome processes and long turnaround time (typically 53 7 70 0 Total number of loans IDR 50-200 million • Stringent collateral requirement • High operating cost Market is only 25% penetrated BPRs and BRI unit desas do not go beyond IDR50M loan size 163 • BRI holds ~19% market share • Bank has ~17,000 loan accounts in this segment (~6% market share) Source: Asian Demographics; BPS; US AID; Bank Indonesia; team analysis Total number of businesses Untapped businesse s >2 weeks) THE SMALL BUSINESS SEGMENT IS CURRENTLY UNDER-PENETRATED …
- 10. • Small business • Credit class •Micro business • Lower mass Segmen t No. of HH/business Million units 2.5 2.9 16. 3 19. 2 Annual revenue poolsize IDR trillions ~23.0- 31.0 ~7.0- 9.0 ~15.0- 25.0 ~6.0- 12.0 Current players • BRI, BPR • BCA, Mandiri, BNI, Danamon, BII, othe r banks and non- bank FIs (e.g. GE Capital) • BRI, BPR • BRI, BP R ~41 million household s IDR 50-80 trillion p.a. ROUGH ESTIMATE Key question: How much potential can we capture? Source: Asian Demographics; annual reports; site visits; team analysis OPPORTUNITIES ARE HIDDEN IN THE LOWER INCOME SUB-SEGMENTS WITH FEWER COMPETITORS
- 11. ROUGH ESTIMATE Number of loanaccounts IDR 50 million Million households/accounts 26. 0 15. 0 3. 1 1. 8 10. 1 41. 0 Source: BI; annual reports; site visits; team analysis Total no. Untapped Total no. BRI BPR BPD, of HH in potential of loans commer- mass IDR 50 cial segment million banks ROUGHLY 26 MILLION HOUSEHOLDS IN MASS SEGMENT CURRENTLY UNTAPPED
- 12. * For securedlending; assumptions: mortgage rate currently at approx. 15%, deposit interest rate at approx. 7% ** For good BPRs, NPLs as low as 2-4% Player s 23 22 BRI BPR (overall industry) Interest spread for loans IDR 50 millions Percent 1.6 ~9* * NPL ratio Percent ~8*Industry average ~7 Source: Annual reports; field visits; team analysis MASS MARKET HAS ATTRACTIVE ECONOMICS WITH LOW NPL LEVELS POSSIBLE
- 13. Previously reviewed New segment explored Small busines s Profes - sionals Unbankabl e Micro busines s Credi t class Turnoverof IDR350-1,000 million Small family-owned businesses, mainly in retail and trading, typically with <20 employees Loan size IDR millions 20 0 50 5 1 Low - Middle working class (white collar workers) Governmen t servants, blue collar workers Lowe r mass SME, commercial , corporate Affluen t Household income IDR millions 150- 400 25- 150 5- 25 Self - employed Employee s Turnover of IDR10-350 million Micro enterprises, mainl y stall owners & petty traders >40 0 Affluen t Source: Asian Demographics; Bank Indonesia; BPS; team analysis Mass affluen t Mas s Unban - kable MASS MARKET SEGMENTATION OVERVIEW
- 14. Number of entities Millions * Lowertarget spread are for current tapped market. Assume that banks can charge a higher rate for untapped customers ** Includes micro and what was formerly known as small businesses (turnover IDR50 – 350m) in earlier progress review Average loan size IDR millions Total loan potential IDR trillions Loan spread Percent Revenue pool IDR trillions E M P L O Y E E S Credi t class Lowe r mass S E L F E M P L O Y E D Small busines s Micro business* * 2.9 19. 2 ~0. 7 18. 8 1- 2 ~8 4 7- 9*** 19- 38 ~5 8 123- 180 32 % 9%- 15%* 27%- 32% 36- 53 8- 10 23- 29 32 % 7- 9 6- 12 ~8 SMALL BUSINESSES ADD IDR8 TRILLION REVENUE TO THE IDR50 TRILLION OF THE REMAINING MASS SEGMENTS
- 15. * BNI built76 micro-banking units to attack loans IDR50 million ** Play through Swamitra (196 units to Indonesia) 5,00 0 1,00 0 20 0 50 * ** Mandiri BN I BC A BR I BII Bukopi n NIS P Lipp o Buana Danamon BPR s Low focus High focus SUCH SMALL BUSINESS LOANS ARE NOT THE FOCUS FOR MOST BANKS
- 16. * In bracketis proportion of the project that can be financed by bank ** Can make exceptions and loan up to 15 years Source: Branch Visits/Interviews BRI BNI Bukopin NISP Buana Danamon • Product name Kredit Ritel Kredit Produktif Kredit Usaha Kecil KRK (WC), Kredit Aksep (Inv.) KRK (WC), Angsuran (Inv.) KAB & KRK (micro) • Size of Loan 50 – 5 billion 50 million – 5 billion 100 million – 1.5 billion 50 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 – Interest 17-19% 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) secondary collateral • Credit Process – In branch Branch 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 for profitably for 2 years. Only borrow 2 years 2 years. business 2 years years from BNI experience. • Distribution point Lending Branch (larger branches) Retail business centers (e.g. only Regional office Limited branch Regional office 170 lending branch four in Jakarta) MARKET LANDSCAPE : NO ONE HAS A REAL DISTINCTIVE OFFERING FOR THEM
- 17. Both potential andexisting customers prefer simplicity over price * Clearly unaware that 16% flat rate is approximately equivalent to 29% effective “Which of the hypothetical packages do you prefer?” Percent respondent (by group) Potential customers “I am thinking of switching to BRI. They have a product offering interest 16% flat, while in Indonesia is 19% effective”* “I make more money than the interest payments. I get a loan – I make money. Just by being able to pay cash to my suppliers, I may have recouped the interest expenses.” “When I borrow money, it is typically because of cash-flow problem. I don’t mind paying a bit more if they give me money faster.” Package 1 •1% monthly rate •Cumbersome loan process and requirements 14 % 86 % Package 2 •1.5% monthly rate •Simple loan process** and requirements Current customers 40 % 60 % Quotes from customers Source: Customer interviews; mystery shopping SMALL BUSINESS CUSTOMERS ARE NEITHER SOPHISTICATED NOR PRICE SENSITIVE
- 18. Deposit needs already fulfilledby BCA and other commercial banks Gap in Loan Needs Deposi t • Savings account • Current account Credi t • Loa n– Working Capital – Investment MOREOVER, THERE IS POTENTIAL TO CAPTURE THE WHOLE WALLET BY FULFILLING THE LOAN GAP
- 19. – Head ofretail 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‟s Key success factor • 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 35 customer interviews conducted 20 branches visited 6 other interviews conducted – 2 in Indonesia branch managers 1 2 3 + + 4 Source: Team interviews, mystery shopping FURTHER STUDY INTO THIS SEGMENT REVEALS 4 KEY SUCCESS FACTOR
- 20. USER FRIENDLY DOCUMENTATIONAND FAST TURNAROUND “When I need to borrow, I‟d rather pick a bank that can process my loan application faster” * 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 months Business Document •Application form •Tax registration (NPWP) •Company registration (TDP) •Business operation registration (SIUP) •Location approval (Surat domisili) •Incorporation letters* •Personal identification •Current account records •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 requirements by banks are daunting and process is slow Check list: “I never do a cash flow or balance sheet statements. My income statement is also incomplete. If I have to do these documentations, I will not apply for a loan.” Customers demand simple documentation and fast turnaround . . . Typical turn- around time >2 weeks*** 1 Source: Customer
- 21. 20 ACCESSIBLE AND SIMPLECOLLATERAL REQUIREMENTS * Tanah Helikopter is ancestral land and is not located by the street (a major requirement for many banks) ** Buana accepts hak Pakai as 70% collateral, HGB as 80%, and Hak Milik as 100% Source: Customer & branch interviews Customers often have different collateral… Accepted as collateral by commercial banks “I want to borrow but I have only Hak Pakai (Right to use - for the shop). Banks cannot accept this as collateral. Thus, I cannot borrow” “Many of the potential customers have houses on Tanah Helikopter*. To cover these customers, we must accept their simpler collateral” Danamon Branch Manager Full ownership Lease Not accepted as collateral by commercial banks … than those accepted by banks • Hak Guna Bangunan is more common in Jakarta • Hak Pakai is more common outside Jakarta (e.g. Kotamadya Surabaya predominantly issues Hak Pakai) “We have to take Hak Pakai because this is the only collateral most of these people have.” Bank Buana Account Officer 2 Sertifikat Hak Milik •Certificate of ownership •No time-limit •Only available for Indonesia citizen Hak Guna Bangunan(HGB) •“Right-to-use” issued by the government •20-30 years duration •Can be extended Tanah Adat •“Ancestral land” •No time-limit •More common outside Java Hak Pakai** •“Right-to-use” typically issued by SOEs and provincial governments •20-30 years duration •Can be extended
- 22. CONVENIENT ACCESS TOBRANCHES AND BANK STAFF “I need the bank to be near my customers (small clove sellers in the market).” A clove trader “I have to man this shop. I do not have people I can 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 the bank to be near the shop” Owner of a gold shop, Bekasi “We go out to the shops to visit customers and get the business. They cannot leave their shops during business hours.” NISP Account Officer (Face-to-face interview) “I and my friends join NISP because they come and offer the loan products to our shops.” Owner of house-ware shop 3 Source: Customer interviews; mystery shopping
- 23. FURTHERMORE, PRODUCTS CANBE MORE TAILORED TO SPECIFIC CUSTOMER NEEDS * May have borrowed through BPR previously Rocketer s • Typically younger, 2-3 years in business • Rent premises • First time bank borrowers* • Not price-sensitive • Borrows mostly for – Growth working capital – Investment in expanding business Orbiter s • 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 predictable business cycles (e.g., Hari Raya peaks) 4
- 24. • Opportunities inthe Small Business market • Developing the model to capture opportunities in the Mass Market and Small Businesses • Next steps • Appendix CONTENT
- 25. * Excluding creditclass Requirements to serve mass* and small business segments profitably • Location close to small businesses • Low-cost infrastructure • Options 1 Acquire existing good BANKs and turn them around • Lower cost of funds • Lower operating cost • Enhance revenue 2 Build Prospective Bank • Units greenfield • Set up infrastructure • Recruit good staff locally • Gradually build customer base and presence Infrastructur e • Community knowledge and network • Simple and fast processes • Flexible collateral requirements Busines s system Source: McKinsey TO SERVE MASS* AND SMALL BUSINESS SEGMENTS, A FUNDAMENTALLY NEW DELIVERY MODEL IS REQUIRED
- 26. Overhead s Back- office Front- line Teller Account officers Initial economics • AssetsIDR 5.5 billion • PBT IDR 563 million • 550 loan accounts ILLUSTRATION OF A TRADITIONAL BANK
- 27. Overhead s Back- office Front- line Teller Account officers 8 Chargingof fees for other services 7 Improved inter- bank funding cost 6 Lower deposit rate 1 Streamlin e overhead s 2 Streamlin e back- office 5 Improve deposit mix from TD to savings 3 Replace least productive AO 4 Increase account loading from 110 to 180 (BRI unit desa benchmark is 400) PROSPECTIVE BANK CAN PULL 8 LEVERS TO IMPROVE UPON THE TRADITIONAL BANK
- 28. Overhead s Back- office Front- line Teller Account officers Branch manager Credi t office r Cler k New economics • AssetsIDR 16.4 billion • PBT IDR 2.9 billion • 900 loan accounts THE RESULT IS A STREAMLINED AND EFFICIENT PROSPECTIVE BANK UNIT, 3x ASSET SIZE AND 6x MORE PROFITABLE
- 29. Source: HCI analysis ECONOMICSOF TURNAROUND ACQUIRED BPR CASH FLOW VALUATION (million IDR) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Residual (bn IDR) NPV (bn IDR)Net cash flow from operation Year 0 1,045 1,748 2,561 3,019 3,019 Investment (3,377) 21.56 15.15 NET CASH FLOW (2,333) 1,748 2,561 3,019 3,019 Profit & Loss Statement (million IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Interest income Year 0 2,497 3,290 4,481 5,174 5,174 Interest expense 865 1,032 1,426 1,731 1,731 Fee income 25 66 157 259 259 Gross income 1,657 2,324 3,212 3,702 3,702 Operating expense 595 505 521 521 521 Provisions 134 191 276 328 328 NET INCOME BEFORE TAX 929 1,628 2,414 2,853 2,853 Balance Sheet (million IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Loan balance 5,500 7,850 11,200 16,400 16,400 16,400 Cash 1,650 2,355 3,360 4,920 4,920 4,920 Deposit balance 4,895 5,070 7,620 8,670 8,670 8,670 Borrowings 1,766 4,628 6,178 11,783 11,783 11,783 Capital 490 507 762 867 867 867 Key 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 5,790 Loan-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 110 150 150 180 180 180 ECONOMICS OF ACQUIRING AND TURNING AROUND A “GOOD” BANK
- 30. Source: McKinsey Analysis OVERALLECONOMICS CASH FLOW VALUATION (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 0 Residual (tn IDR) NPV (tn IDR)Net cash flow from operation 20 175 562 1,088 1,521 1,722 1,762 Investment (178) (312) (284) - - - - 12.59 7.70 NET CASH FLOW (157) (137) 277 1,088 1,521 1,722 1,762 Profit & Loss Statement (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Interest income 80 473 1,201 2,029 2,684 2,992 3,053 Interest expense 28 156 380 642 874 995 1,021 Fee income 2 11 33 70 115 145 153 Gross income 54 328 855 1,457 1,924 2,141 2,184 Operating expense 40 157 278 319 324 326 327 Provisions 5 27 71 124 168 189 194 NET INCOME BEFORE TAX 10 144 506 1,014 1,433 1,626 1,664 Balance Sheet (bn IDR) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Loan balance 339 1,489 3,360 6,147 8,471 9,676 9,676 Cash 102 447 1,008 1,844 2,541 2,903 2,903 Deposit balance 230 1,036 2,215 3,546 4,478 5,115 5,115 Borrowings 188 795 1,931 4,090 6,086 6,952 6,952 Capital 23 104 222 355 448 512 512 Projected Market Share 0.68% 2.98% 6.72% 12.29% 16.94% 19.35% 19.35% CORRESPONDING OVERALL ECONOMICS
- 31. Acquisitio n of good BANKs Pr o Co n Recommended shareof total • Leverage existing market knowledge • Existing customer base and loan book • Local franchise • Potentially expensive acquisition premium • Lack of quality candidates willing to sell • Lack of transparency • Difficulty to prevent previous owners to restart and poach customer base 1/3 Greenfield developmen t of Prospective Bank Units • Avoid acquisition premium • No culture shock • No legacy NPLs • Take time to build customer base • Challenge in recruiting skilled account officers 2/3 Estimated NPV (IDR billion) 15. 2 16. 9 ROLLOUT OF PROSPECTIVE BANK UNITS SHOULD COMBINE BANK ACQUISITIONS AND GREENFIELD DEVELOPMENT
- 32. • Opportunities inthe Small Business market • Developing the model to capture opportunities in the Mass Market and Small Businesses • Next steps • Appendix CONTENT
- 33. We recommend ProspectiveInvestor 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 asking AAB to recommend potential targets) : – Develop acquisition criteria – Identify high-potential candidates and conduct due-dilligence •Prepare a business case for discussion with the Board In about 2 months, Prospective Bank Management should be in position to make the first Go / No Go decision to proceed with building Prospective Bank Unit pilots and acquiring a small number (e.g., 3-5) pilot BANKs. About 4 months later, Prospective Bank Management should review the progress of these 2 initiatives, update the business case and make the definitive Go / No Go decision to proceed with the overall rollout of the Mass Market strategy. IMMEDIATE NEXT STEPS
- 34. • Opportunities inthe Small Business market • Developing the model to capture opportunities in the Mass Market and Small Businesses • Next steps • Appendix CONTENT
- 36. Industry split Number ofentities Geography split Number of entities Trading ,59 hotel, and restauran t 100% = 700,000 Processin g industry Transportatio n and commu- nication Service s Mining and digging Constructio n Jav a 100% = 700,000 Sumatr a Bali and Nusa Tenggara Sulawes i Kalimanta n Maluku and Papua Percentag e 66 15 11 6 21 17 12 10 11 Source: BIRO; BPS; USAID; Asian Demographics; HCI analysis SMALL BUSINESS SEGMENT IS CONCENTRATED IN JAVA AND SUMATRA AND ARE MAINLY IN TRADING
- 37. MI S Business development 4 Credi t Marketin g HR & Training 1 IT &Operatio n Product /Pricin g Branding /Advertisin g Cluste r #1 Cluste r #2 Cluste r #n … … …… Percluster office: • 1 cluster sales manager • 1 credit officer• 1 accountant 1 1 1 1 1 1 Prospecti ve Bank unit Prospecti ve Bank unit Prospecti ve Bank unit Per unit:• 1 branch manager • 1 credit officer • 1 clerk • 1-2 tellers • 3-5 account officers Sales Cluster Management 3 Mass Market Business Division Head X # of FTE + 15 support staff #1 #2 #15 A CENTRAL TEAM WILL BUILD AND SUPPORT THE ENTIRE MASS MARKET NETWORK
- 38. The upperend of the Indonesian banking sector is relatively concentrated, with the top 10 banks accounting for more than 60% of total assets and credit. However, with 130 commercial banks in all, the sector as a whole is overcrowded. Many of the smaller institutions are poorly capitalised. The government is therefore seeking to promote consolidation and strengthen capitalisation through a policy framework known as the Indonesian Banking Architecture (API). The API includes new capital tiers for banks that wish to operate internationally, nationally or regionally. Underpinning the API is the Single Presence Policy (SPP), which would prohibit shareholders from having a controlling 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 of separate entities that need to be supervised, especially the extensive array of multiple stakes held by conglomerates. 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 have formal risk committees in place and mandatory good corporate governance standards, along with curbs on the number of related family members that can hold board-level positions. 2008 marked the beginning of the introduction of Basel II in Indonesia. Ultimately, the embedding of robust standards of governance will come down to the culture of the organisation as much as regulatory supervision. 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 sector Regulation and Consolidation
- 39. Although stillsmall in relation to the size of the population, While product choice and distribution options on the the Indonesian banking sector is already generating a strong consumer side are still relatively limited, development return on assets is beginning to gather pace. For example, Bank Mandiri, Indonesia’s largest bank, has built a successful Banking sector overview (May 007) bancassurance platform. Assets US$188 billion Having been subdued in the aftermath of the 1997 crisis and subsequent global downturn in 2002 and 2003, corporate Deposits US$142 billion banking in Indonesia is now coming back to life. Proposed Loans US$90 billion initial public offerings include Adaro Indonesia, one of the Number of banks 130 world’s largest producers of thermal coal, which if it goes ahead will be the country’s biggest ever flotation. Other Number of offices 9,110 opportunities opening up as the economy gathers speed Gross non-performing loans 6.1% range from derivatives to help control the volatility of the Capital Adequacy Ratio 22% Rupiah and interest rates, to the fast-growing demand for Return 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 looking to extend the range of Sharia-compliant products. The resurgence of the economy is leading to an acceleration in credit demand. Market Environment
- 40. M&A activitiesMany of Indonesia’s leading banks, including Bank Mandiri, in Indonesia over the next five years. Among respondents are state-owned, though the government from Indonesia itself, 56% expect to undergo significant appears keen to renew privatisation. Prospective entrants include private equity and other financial buyers. International groups that have banking subsidiaries in In May 2007, for example, US private equity company TPG Indonesia include Rabobank, DBS Bank, Commonwealth (formerly Texas Pacific Group), agreed to acquire a majority 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 and Standard Chartered have also established branch operations. Renewed interest from regional and global groups is now evident as the economy and credit markets continue to grow. For example, a survey of 230 financial executives from across – Significant foreign investment in banking sector: 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
- 41. Companies lookingto 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 and operational factors before choosing which route to take. and distribution channels. While target identification through Option 1 to due 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) naturally provides the flexibility of starting afresh and On the flip side, buyers run the risk of taking on unwanted eliminates the risk of liabilities 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 times net 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 the impact of the Single IT and marketing development. Even then, gaining approval Presence Policy are adding to the supply of potential for a new start-up may be difficult at a time when Bank targets. The relatively fast turnaround of private equity Indonesia is looking to reduce the number of banks. In this investment could also mean that recently acquired entities respect, it is notable that no new banking licences have could soon be back on the market. Developments in price been issued 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 in Indonesia. This route does away with the need to find a local partner and comes with no risk from past activities. However, the paid-up capital requirement (US$330 million) is the same as greenfield entry. The nature, extent and time needed to complete the operational and regulatory preparations are also similar. Although current regulations permit this approach, the fact that Bank Indonesia has issued no new branch licences since 2003 would suggest that gaining its approval may be difficult. Entry Strategies
- 42. The Indonesianbanking sector is set to be transformed over those spearheading investment and development are likely the next few years as the number of banks decreases, to include financial buyers, capable of turning around under- foreign investment continues to increase and institutions performing institutions ready for selling on to more long-term respond to the impact of the API, Basel II and other pressing acquirers. The longer term investors are likely to include the regulatory developments. The result is likely to be a more key regional and, increasingly, global players attracted to the competitive market, marked by heightened pressure to huge potential of what is set to become one of the world’s improve efficiency, drive down payroll and other costs, and biggest banking markets. generate greater product and service differentiation. The Way Forward
- 43. I • The economygrew by 6.2% in 02-2010. The whole year it forecasted to grow within the range of 5.5%-6.0% by the end of 2010, and estimated to reach the upper limit projection, bolstered by Indones ia's external sector performance, investment , and consumer spending . • The latest macro economic indicators supported us to believe that the economy , in line with the development in the global economy, is steadily moving on an upward trend accompanied by financia l system stability . It bolstered Indonesia's external sector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on consumption. The optimism also supported by latest deve lopment in the perception indicators such as an upgrade to investment grade, yield spread , CDS, CRC-OECD , etc. An assessment of economic developments during July 2010 points to improvement in the domestic economy amid persistent risks of global uncertainties. • On July 13th 2010,Japan Credit Rating Agency (JCR) upgraded Indonesia's sovereign rating to Investment Grade , from BB+ to BBB-.This upgrade was the first investment grade for Indonesia in 13 years . Currently,the Republic of Indonesia's sovereign rating BB+ /Stable from Fitch , BB+/Stable from R&l, BB/Positive from S&P, and Ba2/positive from Moody's. • The latest Board Meeting convened in A ugust 2010 resolved to hold the 81 Rate at 6.5%. For the time being, the current rate considers adequate to safeguard future inflation expectations. However, Bl is taking careful note of the recent onset of higher inflationary pressure and will pursue the necessary monetary and banking policy actions to ensure that future inflation remains on track with the established target at 5% :1% for 20 10 and 201 1. Bl w ill soon respond w ith measures to tighten liquidity management without disruption to the bank intermediation function, implemented through changes in the statutory reserve requirement. • Regarding prices, the Board of Governors is closely monitoring the onset of rising inflationary pressure. July 2010 recorded fairly brisk CP I inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary pressure was driven mainly by higher inflation in the foodstuffs category and particularly rice, due to seasonal uncertainties. In contrast , pressure from core inflation has been kept at modest levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchange rate. Executive Summary
- 44. • Overall, bankingindustry remains in a stable condition and convince d to be run prudently, which is reflected in the well- maintained Capital Adequacy Ratio of 17.4%, and safe level of Non-Performing Loans at 3.3% , as of end of June 2010 . By end of 2010 , lending growth is projected to reach 22%-24%. Up to July 20 10, banking industry has reached the remarkable lending growth at 19.6%. Improved market confidence also bring more optimism to further banking intermediation function . Going forward, Bl will keep a close watch on bank lending growth to keep it within the range envisaged in the Bank Business Plans. Special efforts will be devoted to increase credit for productive purposes. The purpose of these measures is to ensure that deman d-side increase will be adequately offset 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 was contributed from both the current account and capita l and financial account. The current account posted a US$1.8 billion surplus , bolstered from upbeat performance in non-oil/gas trade balance, the gas trade balance and the current transfers balance. The ongoing world economic recovery has strengthened non-oil/gas exports w ith growth outperforming non-oil/gas imports. The capital and financial account recorded a US$3.3 billion surplus distributed fairly among all major components . renewed growth in capital inflows in response to the upward revision of the credit rating 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 and servicing of official external debt. This helped the rupiah to maintain stable movement throughout July 2010 with an appreciating trend. • In May 2010. the parliament approved 2010 revised budget proposed by the government . The revision is perceived as a necessary measure to adjust the current economic conditions especially changes m the macroeconomic assumptions . The proposed budget adJustment would mcreased deficit from 1.6 to 2.1%, in order to contain increasing subsidies figures due to rising commodity prices mainly from oil. I Executive Summary
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- 50. I Unique Value Proposition Wewill combined the two objectives to achieve: 1. An increase in the number of AAB Locations by 20,000 in 2015 2. An increase in the foot traffic visiting AAB Locations 3. A mutual increase in transactions due to these strategic changes 4. Continuing expansion as new outlets 5. Incentive programmes and value adds that will attract and retain customers We will combined the two objectives to offer: 1. Special discounts from PP 2. Rewards provided by both AAB and Prospective Partner 3. Targeted voucher campaigns by MDF 4. Over the counter campaigns by MDF 5. Raffles and give aways by AAB 6. Customer protection 7. Membership cards