Indonesia

1
Indonesia

• Financial Sector reform Challenges

April 2003 William Haworth
2
Overview of Financial Sector Reform in Indonesia
3
Indonesias underlying financial weakness was
revealed by the 97 crisis

• Economic performance appeared strong until 97
• Strong GNP growth inflated by a massive bad
  debt bubble
• Apparently improved GDP per person and household
• 50 of the financial sector privatized
• The Asia Crisis and ensuing political turmoil
  reversed economic progress
• GNP shrunk, high inflation
• Vast hardship on many people with high levels of
  unemployment
• Financial sector collapsed and was nationalized
  
• Foreign Direct Investment turned negative
• Recovery has been slower than hoped, but
  Indonesia has proven to be both tough and
  resilient

4
The Indonesian Financial Crisis Was, First and
Foremost, a Debt Crisis Caused by Underlying
Structural Problems

• The Indonesian banks were riddled with bad debts
  that had been mounting for many years
• In addition, irresponsible international lending,
  much of it based in US s, exacerbated and
  deepened the crisis
• Political problems were both the cause and the
  effect of this financial crisis
• Ongoing political problems, caused in part by the
  economic crisis, discouraged foreign investment,
  deepening and prolonging the crisis
• Ultimately, our failed efforts at financial
  sector reform underlay a large part of the depth,
  breath and length of this crisis
• Leading us to ask what should we have done
  differently? What could we have done differently?

5
The Starting Point The Indonesian Banking Sector
Under Suharto (Personal Observations)

• The managing boards (president directors and
  directors) of the Indonesian state banks were
  direct presidential appointments
• There were often back-room deals that surrounded
  these appointments
• Political favours to the military, Suharto
  cronies, etc
• Positions were granted for contributions to
  charitable foundations, etc
• It was very common practice to supplement low
  compensation with Upati from customers,
  suppliers, and so forth, throughout the banks
• To a very large extent, there was no commercial
  credit process within the state banks
• Many loans were directed from the top down
  often Suharto would call and instruct a president
  director how much to lend to whom
• Many loans were granted for kick-backs with
  little real analysis or attempt to develop
  meaningful cash flow or security analysis
• Additional lines of credit were often extended to
  cover interest payments capitalization of
  interest was extremely common
• These abuses were most common on the largest
  loans and were less common on the smaller loans

6
Indonesian Banking Sector Under
Suharto.(Personal Observations)

• Asset values were grossly distorted due to
  capitalization of interest and other poor
  accounting and reporting practices
• Many of the largest companies in Indonesia, both
  state and private, were in very poor financial
  condition sometimes from mismanagement,
  sometimes from abuses
• The state banks had very weak internal controls,
  usually focused on tellers
• State auditors applied lax standards in their
  reviews, often encouraged, where necessary, by
  supplemental donations to their favourite
  charities
• Banking supervision was ineffective and often
  corrupted
• Based on information that I was able to glean by
  1989, I concluded that all of the Indonesia state
  banks had massive bad debt problems and huge
  capital shortfalls
• I believe that these problems were widely
  recognized and were behind the drive to improve
  the performance, and to deregulate and privatise
  the financial sector

7
Indonesian Banking Sector Under Suharto(personal
Observations)

• Offshore branches, bank pensions funds, and bank
  subsidiaries were also used to manage certain
  transactions, park funds, mask ownership, etc
• These problems were allowed to fester in fact
  the Suharto government encouraged these problems
  with specific policies issued by the MOF, BI and
  state audit agency
• While the world bank was aware of these problems
  and insisted on revised business plans to address
  these issues, the banks and the government
  actively enabled the problem to continue to build
• Financial collapse was only a matter of time

8
How Do We Deal With the Real Issues?

• The core issues in effective financial sector
  reform in most developing economies revolve
  around power and money controlled by an elite
  group
• The question is how do we alter this power
  structure and create a balanced set of incentives
  to encourage the development of a stable and
  productive financial sector?
• Not surprisingly, most failures occur around our
  ability to change the power allocation from the
  elites to an institutional structure that can be
  controlled through a workable political process
  (not just creating new elites)
• This was the main problem in Indonesia under
  Suharto and it remains a part of the problem
  today
• However, the collapse of the Suharto regime, the
  shift to democracy, and ongoing improvements in
  the regulatory and governing structures create
  opportunities that were not present before

9
Lessons Learned.

• Deregulation by itself does not enable market
  forces to create efficient economies Indonesia
  was the most deregulated market on earth for some
  time
• Privatization, in and of itself, does not correct
  the incentive problems in banking
• Mexico
• Venezuela
• Indonesia
• In fact, privatization and deregulation can cause
  even more destructive private sector behaviors
  than are possible in a state-owned, regulated
  economy
• Introducing private sector competition into a
  state controlled system can have very perverse
  effects
• Deregulation and Privatisation each require
  vastly stronger regulators and enforcement. We
  have consistently underestimated this challenge

10
Lessons Learned..

• New laws and regulations, by themselves, do
  little to change behavior in settings where there
  is a history of endemic corruption and weak
  enforcement you can still buy the judges
• Building skills, without changing the
  institutional context and culture, will have
  little impact on behaviors
• The better we understand the way a system really
  works, the better our chances are to change it
• Real, effective change, requires addressing the
  entire matrix of issues that impact the structure
  of a financial system legal, regulatory,
  political, skills, and incentives
• Failing to make significant progress on all
  fronts simultaneously so they reinforce each
  other usually results in a slow catastrophe

11
Trying to create a stable and productive
financial sector is difficult and
important.Why is it so difficult?

• Every banking system is complex, interactive,
  opaque and filled with incentive problems and
  competing interests . . . ? Depositors
  ?Owners ?Regulators
  ?Competitors ? Borrowers ?Managers ?Tax
  authorities ?Substitutes ? Financial
  ?Employees ?Auditors ?Acquirers
  Institutions
• . . . With major legacy issues . . .?Political
  ?Economic Structure ?Culturalal
  ?Legal ?Organizational/Operationa
  l ?Personal
  relationship
• Why is it so important? Cost to GDP of
  crisisUSA ? 5 Japan ?15?
  Venezuela ?35?Mexico ?20? Korea ?20?
  Indonesia ?50 ?

12
Do We Agree on the Ultimate Objectives ?

• First, a largely privatised financial sector,
  broadly held, profitable and well managed
• Able to gather deposits and employ these
  productively in building strong companies and
  create employment
• Able to facilitate trade and investment flows
• Able to manage risks through a variety of tools
  such as insurance, etc
• Able to operate transparent capital markets and
  provide underpinnings for economic growth based
  on equity
• Second, a strong supervisory structure and
  organization that effectively oversees the
  financial sector and maintains its strength and
  prevents abuses
• Thirdly, assurance and reporting organizations
  that provide transparent, complete and
  comparative views on the health and returns in
  the financial sector leading to sound investment
  decisions and capital allocation
• Fourthly, the legal infrastructure that underpins
  this financial sector, with laws and courts that
  support both the civil and criminal processes
  that facilitate business

13
A Possible Approach -- Creating a Change Master
Plan.

• Study the People and the culture, not just the
  institutions--
• Leadership matters - look at Singapore
• Understand the underlying relationships
• Understand the incentives
• Be objective
• Be opportunistic
• Seek out strong champions, nurture them, protect
  them
• Focus on changing the way the underlying
  relationships operate
• Study the incentives and disincentives to
  behavior change
• Recognize that we need to change systems,
  behaviors and incentives together
• Understand that we do not have enough power or
  influence to change things quickly we must be
  relentless and strategic -- using influence to
  shift behaviours, incentives, and institutions
  over time
• Understand that while the components of success
  are the same, the way that they can evolve and
  develop will be very different in different
  countries at different times

14
A Possible Approach

• Understand the real compensation levels and
  systems in the Central Bank, the commercial
  banks, the auditors and rating agencies and the
  government
• Look at the lifestyle indicators - cars, houses,
  trips, etc
• Make a judgment, is this a corrupt system
• If it is corrupt, we need to focus on programs
  that bring sunshine to the system, as well as
  programs that change the compensation and
  incentive structures, as well as building skills
• Start where we can elites wont give-up power
  willingly work where we can succeed, look for
  explicit trades that can be offered
• If we are working in a newly deregulated
  environment, watch-out for the poor risk
  management and destructive systemic competition
  that leads to asset bubbles
• requires a system-wide analysis of both borrowers
  and lenders
• involving both local and international players
• Usually new and demanding roles for regulators
  and government

15
Elites, Culture Change, Political Change Can
Privatisation Provide a Bridge?

• What is the alternative?

16
Privatisation Presents Two Broad Sets of
Challenges Sectoral and Institutional
Sectoral challenges affect the entire economy and
privatization process
Institutional challenges affect all companies
improving from state to share market ownership

• Sequencing
• Legal system
• Regulations
• Supervision and oversight
• Preparing industry segments for privatization/
  sale
• Sequencing the sale of individual firms within
  industry segments
• Balancing conflicting political agendas
• Balancing conflicting financial pressures
• Ensuring appropriate levels of competition
• Balancing price, percentage sold and timing
• Ensuring overall economic growth

• Ensuring reasonable price
• Ensuring responsible ownership
• Ensuring strong management
• Ensuring continuing capital investment
• Ensuring profitable growth and job creation

17
Review of the BNI Privatization Experience
18
The Market and Foreign Investors Remain Guarded
About Investing in Indonesian Banks in Part
Because of the BNI Experience
BNI stock performance has under performed the
market
BNI financial performance has deteriorated
significantly after financial crisis
Cost/Income ratio
BNI stock price
JSX index
Interest income/ total income
Net Interest Margin
ROA
Time of IPO Nov 1996
Stock price is closely linked to companys key
financial metrics
Source Bloomberg, A T Kearney analysis
19
BRI Could Be Easier to Privatize Than BNI
ROA
Cost/Income ratio(1)
Gov. Bond To Total Assets
Net Interest Margin
Note Figures as year 2000 (1) Operational
expenses/ (net interest income non-interest
income)
20
Privatization Experiences

• Mexico
• Commonwealth Bank Of Australia

21
The Recent Privatization Experience in Mexico
Illustrates the Possibility to Successfully
Privatize the Whole Banking Sector
Situation of Mexican Banking Industry after 1994
Peso Crisis
Re-privatization of Banking Sector
Implications

• Nationalization of Banks, 1982
• Rapid privatization 1991-92
• All 18 banks sold in 14 months
• Weakness in Industry
• Inexperienced and inappropriate management
• Insufficient regulation
• Mexican Peso crisis, Dec 1994
• Government intervention 1995
• Government took over 12 banks
• Lack domestic resources to re-capitalize banking
  industry
• Changed law to allow foreign purchase of all but
  three largest institutions

• 1995 response to Mexico banking crisis
• Government removed restrictions on foreign
  ownership
• By 1998 Mexican banking industry successfully
  undergone rapid privatization
• Bank of Montreal acquired 16 of Bancouver
• HSBC acquired 20 Serfin
• Central Hispario acquired 20 of Bital
• BBV acquired 70 Probursa
• Scotiabank acquired 55 Inverlat
• Santander acquired 75 Mexicano
• Citibank acquired 100 Confia

• Privatization offers opportunity for massive
  government debt reduction
• Privatization requires strong initial government
  regulation
• Experienced and appropriate management is vital
  for privatization success

22
Privatization Experiences

• Mexico
• Commonwealth Bank Of Australia

23
The Commonwealth Bank of Australia (CBA)
Performed at About Market Average Prior to
Privatisation
CBA History
Formed 1912 to conduct savings and trading business After WWII took on central banking role 1959 Reserve Bank of Australia established CBA took on increasingly commercial focus 1990 Australian Government established CBA as a company Purchased failing State Bank of Victoria
Pre-Privatization Cost-Income Ratios
Pre-Privatisation Situation
Australias 4th largest bank Revenue 1991 AU10B 51, 076 employees 1786 branches Weak operational efficiency Strong management strategy Experienced management team 3year privatisation preparation Limited services offered
Pre-Privatization ROE
Source Department of Finance, University of
Melbourne
24
The CBA Privatisation Was a Five Year Process,
With Benefits Only Being Realised After Full
Privatisation
CBA Privatisation Process
1991 Government sold 29.7 to private and institutional investors 230 million shares sold AU1.3B raised 1993 Further 19.6 CBA sold AU1.96B raised 1996 Government sold remaining 50.4 AU4B raised
Cost-Income Ratio, Partial and Complete
Privatization
Significant Changes
Partial privatisation limited success Transparent Management CBA became 2nd largest and most cost efficient bank From 1786 (1992) to 1162 (1999) From 41, 500 FTEs (1992) to 29, 000 (1999) Privatisation created new competitive market environment Expansion of CBA services
ROE, Partial and Complete Privatization
Source Department of Finance, University of
Melbourne
25
The CBA Privatisation Was a Clear Success, Which
Can Be Translated Across to BRI
Factors Key to CBA Privatisation Success
Pre-privatisation preparation Clear restructuring strategy Full privatisation Completed by 1997 Allowed CBA to triple initial stock price
BRI Is In A Similar Position To CBA Prior To
Privatization
CBA 1991 BRI 2000
ROA .34 .52
Cost-Income 63 91
Interest income as a percentage of total income 88 91
ROE, Partial and Complete Privatization
Source CBA Annual Reports, ASX
26
Challenges of Moving from Managing a State-Owned
Bank to a Private Bank
27
Privatisation Requires a Transition in Management
Focus
State Owned Bank
Privatized Bank

• Manage politically directed credit
• Sect oral
• Provincial
• Developmental
• Provide comprehensive service provision
• Widespread branch network
• Deposits
• Credit availability
• Maintain high levels of employment
• Balance political and commercial agendas

• Maintain depositor confidence
• Meet shareholder return requirements
• Ensure profitable growth
• Reporting detailed LOB results and discussing
  action plans
• Manage analysts and shareholder expectations

• Key Metrics
• Liquidity
• Employment
• Credit growth

• Key Metrics
• Return on equity
• Cost to income ratio
• Growth rate

• Branches maintained
• Rural lending extended

• LOB performance
• Acquisition targets
• New products/ services

28
Boards and CEOs in privatized banks are primarily
focused on two basic metrics that largely
determine share price
Share Price
Cost to Income Ratio
Versus Competitors
Growth Rate
29
Privatization Is Critical to Meeting Government
Budget Targets and Is Currently Behind Schedule
Announced/Planned Completed
Indonesia Privatization Timetable Excluding IBRA
Sales
?
2003
2002
2001
SOES NAME
Proceeds (Rp Billion)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q4
Q3
Q2
Q1
PT Indo Farma PT Kimia Farma PT Pupuk Kaltim PT
Wisma Nusantara PT Sucofindo PTPN III PT
Sarinah PT Socfindo PT Tambang Batu Bara Bukit
Asam PT Krakatau Steel PT Bank Mandiri PT Angkasa
Pura II PT Indocement PT Semen Gresik PT
Telkom PT Indosat PT Bank Rakyat Indonesia PT
Bank Negara Indonesia
125 125 3,000 967
?
IPO
?
Further Divestment
Delay?
Delay?
?
?
Source BUMN Review, Kompas
30
IBRAs Plan to Divest recapitalised Banks Is Also
Moving Slower Than Hoped
IBRA Bank Restructuring and Divestment
Bank
Plan Progress
BCA Niaga Danamon Bukopin BII Lippo Pat
riot, Artamedia, Bali, Prima Express, Universal

• Recently completed the divestment process of 51
  of BCAs shares
• Generated receipts of US 567 million
• Currently in bidding stage, but postponed due to
  lower-than-expected initial bids
• Plan to increase share divestment to 71 (20 of
  which offered to public)
• Completed recapitalisation program and merger
  process
• Divestment is still in planning stage
• Completed recapitalisation program
• Now considered to be healthy and has been
  repatriated to Bank Indonesia
• Recapitalisation program in progress
• In the process of rights issue
• Will be divested in near future, but discussion
  has not been initiated
• In a merger process

31
In the Banking Sector, There Is Likely to Be a
Strong Competition for Potential Investors Funds
Funds To Be Raised By Privatizing Indonesian
State-owned Banking Sector (2002-2003)
Privatizing Bank
Govt Ownership ()
To Be Sold( ()
Market Value of Equity(2) (Rp Trillion)
Value To Be Privatized/Raised (Rp Trillion)
Mandiri BNI BRI Danamon Niaga BII
100 99.12 100 99.35 97.15 56.78
30 30-60 51 51 Rights Issue
16 10 7 6 2 N/A
5 3-6 2 3 1 3
25
20
17
8
Amount To Be Raised
Total FDI 2001
Value of Non-Govt Bank Ownership 30/5/02
Amount To Be Raised
Rp 17 - 20 Trillion
BRI needs to stand out among the privatized banks
(In Rp Trillion)
32
Privatized banks also have a significantly more
demanding financial reporting process Adding
sunshine to the system

• Forward budget and earnings projections by
  quarter are released to stock market analysts,
  shareholders and public
• These projections are evaluated and the share
  price is affected based on projected earnings,
  growth, risks, etc., And credibility of
  management estimates
• Results are tracked quarterly any divergence
  from budget is reflected in immediate changes in
  share price
• In general, a privatized bank is punished for
  missing targets for volatility in earnings
• As a result, privatized banks expend a great deal
  of energy managing the budgeting and reporting
  processes

33
Experience to Date Shows That It Is Difficult to
Attract Qualified Investors Even at an Attractive
Price
Latest Banking Privatization/ Divestment Efforts
BCA Niaga Mandiri
Schedule / Timing Privatization planned since 2000 actual completion March 2002 Privatization planned since 2000 privatization launched Feb 2002 IPO planned since 2001 privatization launch has been delayed to year end 2002 could be further postponed to 2003
Bidding Process Four bidders to the final round Farallon Capital, Standard Chartered, GKBI, and Bank Mega Consortiums Two bidders passed BIs fit and proper test Farallon Capital and Standard Chartered Consortiums Three bidders to the final round Commerce Assets Holding Berhad, PT Bank Panin Fotrine/ANZ, and Batavia Management Investment Two bidders passed BIs fit and proper test Commerce Assets Holding Berhad and PT Bank Panin Fotrine/ANZ N.A.
Outcome/ Progress Farallon Capital won bid for the 51 stake of BCA worth US530 million despite StanCharts slightly higher price than Farallon Market has been showing positive sentiment since successful result of BCA divestment Privatization was postponed as bid price was lower than market price (target was 50 above market price) Plan to increase share divestment to 71 (20 of which will be sold to public) Conducted road show at end 2001 resulted with minimal investor interests IPO launch delayed due to several reasons Changes in Mandiris equity structure still require legal/formal settlement Decision has not been made on primary and secondary shares, and dividend distribution Annual shareholders meeting to decide on the banks budget has not been held
34
Building Privatized Bank Management and Reporting
Infrastructure Takes Time, and the Process Begins
Years Before the Offering Date
Share Issue Date
Corporatisation Phase
Privatization Phase
Business Strategy Development
Portfolio Alignment
Privatization IPO
Business Restructuring
2-3 months
3-12 months
6 months
Timing
Key Activities

• Conduct organization-wide diagnostic
• Assess competitive environment
• Generate and evaluate strategic options
• Develop new strategic direction
• Develop flight plan

• Develop new organization and governance
• Implement improvement initiatives
• Process quality and efficiency
• Performance measurement systems
• staff skills and capabilities

• Identify core and non-core businesses
• Spin-off non-core actions
• Consider to strengthen portfolio

• Structure share offering transaction
• Financial restructuring
• Due diligence and prospectus preparation
• Road show and investor communications
• Issue shares

A.T. Kearney
Investment Bank
35
Business Strategy Development Involves
Envisioning the Future Direction of the SOE in a
Competitive Environment
Corporatisation Phase Step 1 (Business Strategy
Development)
Develop and Prioritize Improvement Initiatives
Develop New Strategic Direction
Conduct Organization-Wide Diagnostic
Timing
2-3 weeks
3-6 weeks
2-3 weeks

• Conduct internal and external stakeholders
  interviews
• Identify distinctive capabilities and existing
  performance gaps
• Conduct staff surveys on overall readiness for
  change and on detailed values and behaviours
• Conduct interviews and surveys with operators and
  customers
• Survey other best practise organisations
• Conduct gap analysis

Key Activities

• Generate and evaluate strategic options
• Assess competitive environment
• Conduct strategic direction workshop to develop
  new core purpose, vision, strategic objectives,
  strategies and values
• Obtain hi-level stakeholders inputs on new
  strategic direction
• Finalise and communicate strategic direction

• Develop hi-level process maps of key business
  processes
• Develop detailed improvement initiative project
  plans, including objectives, scope, timing and
  resource requirements
• Develop prioritisation criteria and flight plan

Competitive Positioning Assessment
Project Flight plan
Strategic Direction
gt Industry
Q3
Q1
gt Industry
Q3
Q1
Average
Average
2002
2003
2004
Competitor A
Competitor A
Competitor C
Competitor C
Improve revenue growth
Expand operation to EU
Revenue Growth
Revenue Growth
Industry
Industry
Average
Average
Maximise shared services
Competitor B
Competitor B
Core
Vision
Enhance portfolio value
Purpose
Realign investment portfolio
Company X
Company X
lt Industry
lt Industry
Q2
Q2
Average
Q4
Average
Q4
Reengineer core business processes
Improve management and
lt
Industry Average
gt Industry
lt
Industry Average
gt Industry
operation efficiency
Industry
Average
Industry
Average
Profit Growth
1)
Profit Growth
1)
Average
Average
Bubble size indicates relative revenue
Bubble size indicates relative revenue
36
Non-core or Non-performing Assets Should Be
Divested While New Businesses With Strong
Potential Should Be Added to Strengthen the
Portfolio
Corporatisation Phase Step 2 (Portfolio
Alignment)
Consider Acquisitions Or Build New Business
Units To Strengthen Portfolio
Spin-off Non-Core or Loss Ridden Assets
Identify Core and Non-Core Businesses
Timing
Ongoing
1 month
2-11 months
Key Activities

• Review business units objectives and performance
  against business strategy
• Identify non-core or non-performing business
  units
• Identify gap between current assets and
  strategies to determine potential for new line of
  businesses

• Prepare non-core assets for divestiture
• Conduct valuation of non-core assets
• Identify prospective buyers
• Conduct negotiations and conclude deal

• Identify options for new business lines
  (acquisition vs. build)
• In case of acquisition
• Identify potential targets and conduct
  preliminary assessment
• Select target and conduct negotiation
• Conclude deal and perform post merger integration

Strategic Option Matrix
Portfolio Alignment
Independent Board
New Business
BU A
High
CEO
MA / Build
Defend
Non
-
Core
BU B
Market Attractiveness
Business
Business
Business
Business
Business
Unit A
Unit C
Unit D
Unit E
Unit B
BU E
Low

Consider divestiture or other options
Diversify
Harvest
New Business
BU C
BU D
Low
High
Core Competencies
37
Business Restructuring Needs to Be Centrally
Managed for Optimal Results
Corporatisation Phase Step 3 (Business
Restructuring)
Implement improvement initiative flight plan
Develop new organization structure
Timing
1-2 months
4 -10 months
Key Activities

• Conduct functional analysis
• Assess gaps to identify missing functions
• Develop organization guiding principles
• Design and finalize new organization structure
• Design required changes in organizational
  governance
• Implement new organization structure

• Establish program office
• Staff project teams
• Establish unit goals, plans, metrics, etc.
• Implement initiatives
• Monitor implementation progress and take
  corrective action as necessary

Court of Directors
Audit
Audit
Audit
Audit
Committee
Committee
Committee
Committee
Wave N
Governor
Public Relations Group
Internal Audit Group
Top Management
Top Management
Wave 3
Committee
Committee
Wave 2
FI Development
FI Development
MP Steering
MP Steering
Monetary Policy
Monetary Policy
HR Committee
HR Committee
Board
Board
Committee
Committee
Board
Board
Wave 1

Organisational and Process
Monetary Stability
Financial Sector Stability
Strategic Capabilities
Corporate Support Services
Money Market
Money Market
Improvement Roll
-
Out
Committee
Committee
Validation of Strategic
Organi
-
Monetary
Strategic
Human
Note
Printing
Financial
Financial
Supervision
Policy
Services
Resources
Board
Market
Sector
Direction/Roles and
sadditional
Group
Group
Group
Group
Operations
Policy
Group
Group
Note
Responsibilities
Redesign
Prepare
Implement
Prepare
Implement
Printing
Works
CDRAC
CDRAC
FIDF
FIDF
Finance
IT
Security
Operations
General
Data
Committee
Committee
Board
Board
Group
Group
Group
Financial Sector
Admin
Mgmt
Group
Group
Rehabilitation
IT/User Committee
IT/User Committee
Change Management
FIDF
CDRAC
Group
Group

Northern Region
Cheque
Note
HVP

Northeast Region
Clearing
Issuance
Settlement

Southern Region
Transferred to other
Transferred to other
System
Group
Group
Legal
Litigation
departments or out of BOT
departments or out of BOT

Central Region
Program Management
Group
Group
in due course
in due course
Note Detailed list of functions performed by
each department at
Note Detailed list of functions performed by
each department at
tached in appendix
tached in appendix
38
Maximizing Company Performance and Potential of
SOEs Often Requires Organizational Transformation
Potential Transformation Value Drivers
1. Develop Clear Business Strategy and Growth
Plans for New Environment
4. Improve Operating Efficiency and Cost Position
2. Align Business Portfolio
5. Improve Management / Employee Capabilities
and Prepare for Change
3. Reorganize Enterprise to Improve Efficiency
and Market-Orientation
6. Improve Reporting and Risk Management
Disciplines
While many SOEs go through the motions of
transformation prior to privatization, outside
perspectives and support are often needed to
drive real and significant change
Source A.T. Kearney analysis and experience
39
The value of a privatized Bank will be strongly
influenced by management actions taken over the
next two years
Key Determinants Of Privatization Value
Deal Structure and Sales Process
3
Company Performance and Potential
5
Key Areas of Management Focus
Financial Market Conditions
2
Industry Attractiveness
3
Areas of Govt. Policy Influence
Ability of Privatizing Government to Influence
Factors Within the Privatization Timeframe
5
High
1
Low/None
3
Moderate
40
Privatized Bank Management Focuses on Income and
Income and Growth
Guiding Rules
Goal

• Fundamental change not incremental change
• Sustainable platform for world class performance
  not short term, slash and burn
• Well targeted on key revenue and cost levers
  not uniform across the board
• Protecting long term strategic goals while
  recognizing links and interdependencies to
  current initiatives

Sustainable improvement in cost / income
plusgrowth
41
Basle II presents some interesting challenges for
Indonesian Banks
Credit Credit Market Operating
Measure Mitigation Market Operating
Standardized Simple Standardized Basic Indicator
Foundational Internal Ratings Compre-hensive Internal Models Standardized
Advanced Internal Ratings Institution Calculated Internal Models Internal Models
Simple
Intermediate
Increasing Sophistication
Decreasing Capital
Advanced
General intuition suggests that the advanced
approach will provide the most capital relief
42
Several Factors Will Influence the Strategic and
Financial Attractiveness of the Advanced
Measurement Decision
Internal
Holdings Holding Structure Current ERM Capabilities
External
Supervisory Interpretation Market Mandates
Cost/Benefit?
43
As Measurements Become More Granular, Capital and
External Ratings Become More Directly Linked
Comments
Credit ratings will become tightly aligned to both regulatory and economic capital Thus, driving funding avenues And, competitive positioning/pricing Market signalling will be more direct Business line specialization may become more common Geographic attractiveness will become more distinct
Traditional Economic Risk Capital Expectations Traditional Economic Risk Capital Expectations Traditional Economic Risk Capital Expectations Traditional Economic Risk Capital Expectations
Consumer Retail Commercial Capital Markets
Credit Medium Medium - High Low
Market Low Low-Medium High
Operating High Low Medium
Total economic capital Low/ medium Medium-high High
Credit rating A-AA AA-AAA AAA
44
Variations in Return Under Basle II May Drive
Foreign Banks Away From Indonesian Risk
Comparative Regulatory Risk Capital Comparative Regulatory Risk Capital Comparative Regulatory Risk Capital Comparative Regulatory Risk Capital Comparative Regulatory Risk Capital
Geography Business Line Standardized Foundational Advanced
US (AAA) Mortgage 8 N/A 1.60
US (AAA) Credit Card 8 N/A 5.76
US (AAA) Corporate 4 2.27 2.23
Indonesia (BB) Mortgage 8 N/A 18.72
Indonesia (BB) Credit Card 8 N/A 31.2
Indonesia (BB) Corporate 12 23.04 16.9

• Capital can be improved but only for higher
  quality portfolios
• Preferences for retail portfolios over corporate
  portfolios will be driven by mix and market