Special Report: Indover: An expensive bridge from yesterday to tomorrow

Manggi Habir ,  The Jakarta Post   |  Mon, 10/27/2008 11:34 AM  |  Headlines

Indover Bank, is a unique Indonesian bank with an interesting past. It is the only commercial bank, wholly owned by the country's central bank, Bank Indonesia (BI).

It is also the only Indonesian bank, based in a foreign city, in this case, Amsterdam, with offices in Hamburg, Hong Kong (formerly Summa Finance Ltd), a marketing office in Singapore and a representative office in Jakarta.

And, as its bailout is being put into action in the coming weeks, it will be the first Indonesian bank to be hit hard by the tidal wave of today's global financial tsunami.

Indover likes to portray itself as a bridge linking East Asia and Europe, a title it often uses in its annual report. And, although its role in bridging East Asia and Europe has been arguably limited, the bank's journey through time paints the picture of an interesting bridge linking colonial times with the early years of independence and ultimately, with today's more globalized and volatile markets.

Indover was established back in 1891, when Indonesia was still a Dutch colony, as the Amsterdam branch of the Jakarta (or Batavia)-based, Javasche Bank. The Javasche Bank, set up in 1828, was the main commercial bank operating in the Netherlands East Indies at that time.

In 1951, about six years after Indonesia's independence and with mounting tension with the Netherlands over West Irian, De Javasche Bank was nationalized and converted into BI.

It was only 15 years later, in 1965, that the branch office in Amsterdam, changed status to become a bank head office, incorporated in the Netherlands, and also changed its name to NV De Indonesische Overseesche Bank or Indover.

With no branch network and limited size, Indover has always operated as a wholesale bank focusing on niche products and markets. To fund its business, it relies heavily on interbank borrowings, a significant portion coming from BI, and the top three state banks, Bank Mandiri, Bank Rakyat Indonesia and Bank Negara Indonesia (BNI).

Judging from its balance sheet, these funds are then placed mostly into three asset categories, bank placements, loans and debt securities.

Leading up to the 1998 financial crisis, there have been occasional reports over Indover's large non-performing loans to Indonesian companies.

And, during that time, these bad loans were cleaned up, by setting them off against a pledge of deposits. Under this asset downsizing plan, the bank's loan portfolio was brought down drastically from 388.4 million euros at end-2000 to only 21 million euros by end-2002.

Since then, Indover has continued to streamline. It cut staff from 184 in 2003 to 111 in 2007. Total assets declined by 10 percent to 737.8 million euros during the same period.

Although the bank still recorded losses from 2004 to 2006, in 2007, they were able to turn round and make a profit.

By end-2007, Indover's earning assets, totaling 694.8 million euros, consisted mostly of debt securities (57 percent), followed by bank placements (27 percent) with the rest in loans (16 percent).

This was funded largely by interbank borrowings totaling 539.8 million euros.

It is this interbank borrowing that shrunk in the last few months, as banks, facing tight liquidity, pulled back their borrowings. To pay for this, Indover was forced to liquidate its debt securities, which had considerably dropped in value. Not being able to fulfill its obligations, the bank was taken over by the Dutch monetary authorities and all transactions were frozen.

Banks that have loans outstanding to Indover, were worried about the possibility of only getting a part of their funds back and it is these banks, that have been pressurizing BI for a rescue operation. The government also realized that not addressing these requests would hurt its credibility and its sovereign ratings, thus making the cost of borrowing for all Indonesian entities more costly.

This is what is behind the government's efforts to seek parliamentary approval to inject 545.6 million euros to sustain Indover. This amount is needed to settle its liabilities and hopefully allow time for the markets to recover, thus allowing the sale of the bank's assets at prices that could cover a larger portion of its liabilities.

With depressed markets and a possible prolonged recession, the immediate aim would be to minimize the government's loss.

The government has been trying to divest itself of Indover since 1999. Not finding any serious overseas buyer, the government focused its attention at home. First on BNI, then on Bank Ekspor Indonesia and lately on Bank Mandiri. But all declined to buy.

Indover, it was argued, was too much a niche market wholesale bank, generating too thin a profit. As a result, it continued to rely on funding from its main shareholder, Bank Indonesia.

Potential buyers were concerned, that without BI, the bank would not be an attractive buy.

Under current regulations, BI is required to dispose of all its commercial holdings by January 2008. Perhaps, when the government realized that there was limited interest in Indover, they should have considered the option of just closing it down.

If they had done this much earlier, then asset prices would have not dropped that far. Everything, of course, is easier with hindsight. The difficulty now, though, is the expensive price to pay for maintaining one's credibility, especially when everyone else's is falling.

The author is the staff writer of The Jakarta Post.

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