IN MARCH 2000 PETROCHEMICALS INDUSTRY executive Edward Neloe was summoned to Istana Merdeka, Indonesia’s colonnaded neoclassical presidential palace in downtown Jakarta. There, newly elected Indonesian president Abdurrahman Wahid, frail and nearly blind, got straight to the point.
“Do you want to run Bank Mandiri?” Wahid asked. “And if I appoint you, what will you do?”
Neloe, a banker by trade who had been running Chandra Asri Petrochemical Center for two years, did not hesitate. “This is the largest bank in the country. I will use it as a vehicle to reintroduce the country to the world’s capital markets,” he declared, adding that he would upgrade Mandiri’s technology platform and turn the giant corporate lender into a universal bank with a powerful consumer franchise.
Two months later Neloe was named Bank Mandiri’s new chief executive.
Neloe may have pleased the president, but, at least initially, he had a tougher time persuading others that he was the right man to run a state-owned bank cobbled together from four institutions that had collapsed during the Asian financial crisis in 1998. A soft-spoken bureaucrat, he was replacing Mandiri’s well-respected chief, Robby Djohan, a Citibank veteran who had done a superb job of merging the banks in just ten months after he took over late in 1998. (Earlier that year he had successfully turned around the national airline, Garuda Indonesia.) Neloe had spent much of his career at one of those insolvent state-run institutions, Bank Dagang Negara, working his way up from posting clerk in 1966 to managing director in 1991 before leaving to run Chandra Asri in 1998.
In banking circles Neloe cut a much less imposing figure than Djohan, a colorful CEO who had a garage full of Harley-Davidson motorcycles, and in some quarters he was seen as a less effective executive -- unable, perhaps, to prevent Bank Mandiri from being used for state purposes or to push forward needed business reforms. Wahid has never explained his reason for replacing Djohan, but the abruptness of the switch suggested that he was doing what Indonesian presidents have often done: meddling in the affairs of a state-owned business. On the day that Djohan departed, Wahid replaced the heads of seven government-affiliated companies.
“I thought Neloe’s appointment was good because he’s an expert, very experienced professional,” says a veteran local banker. “But life as a banker at a state-owned bank in Indonesia is not only about being professional. It’s related to political contributions and your political network. It’s very complicated. It wasn’t clear that he had this network.” Indeed, shortly after Neloe took over, the country’s central bank, Bank Indonesia, snubbed him by refusing to roll over an emergency loan it had given the bank just a few months before. Several years later Neloe acknowledged publicly that Mandiri didn’t get the loan because “my relations with the central bank were not good.”
Wahid is no longer president, but four years later Neloe, 60, is delivering on the promises he made. In October he put the finishing touches on a new technology platform designed to speed Mandiri’s push into Indonesia’s fast-growing consumer markets. Working closely with Western-affiliated financial institutions like Axa Asia Pacific Holdings, Citibank Indonesia, Deutsche Bank and GE Capital, the now-profitable Mandiri has toughened its lending standards while diversifying into small-business loans, credit cards, bancassurance, mutual funds, mortgages and debit cards. Slowly, the bank has begun to chip away at its near-total dependence on lending to other big state-owned entities.
Neloe made good on his promise to tap the world’s capital markets in December 2001, when Mandiri sold $125 million of floating-rate notes listed in Hong Kong -- the first Indonesian state-owned entity to do so since the 1998 crisis. In May 2003 the bank became the first major Indonesian company to issue bonds in the international markets postcrisis. And last July it reopened the country’s long-dormant equity capital markets by raising $327 million in an IPO in which the government sold a 20 percent stake in the bank, more than 70 percent of it to foreigners. Share prices have almost doubled, to 1,175 rupiah (13 cents), since then.
These achievements have emboldened Neloe. By 2007 he wants Mandiri -- already twice the size of its nearest competitors, Bank Negara Indonesia and Bank Central Asia -- to grow its assets from $20 billion to $50 billion and become “a domestic powerhouse” with the top market share in corporate, commercial, consumer, investment and Islamic banking. Looking beyond Indonesia’s borders, Neloe envisions Mandiri growing into “a regional champion” with branches serving high-net-worth customers in several Southeast Asian countries. “We want to become somebody in the region,” he says, voicing an ambition that manages to be simultaneously heady and modest.
Neloe, however, still faces many skeptics. Mandiri remains a state-owned lender that must consider loan requests from affiliates of its government, headed since July 2001 by President Megawati Sukarnoputri. The state retains a 70 percent stake (it sold another 10 percent of the bank in a secondary offering in March) and holds veto power over candidates for Mandiri’s controlling board of commissioners. Some of the bank’s investments have raised questions among analysts. In 2002 the company shelled out more than $500 million to buy distressed assets at an auction run by the Indonesian Bank Restructuring Agency (IBRA), the government authority created after the financial crisis, which wiped out about 150 local lenders. A substantial number of those assets have already had to be written down, pushing Mandiri’s nonperforming-loan ratio up to 8.6 percent last year from 7.3 percent in 2002.
“It’s still a typical state-owned company,” says a Jakarta-based banking analyst who does not want to be identified. “I’m afraid a lot of the loans they bought will haunt them sometime in the future.”
Indeed, nearly half of Mandiri’s assets are invested in government recapitalization bonds, which the state issued to local banks as part of its massive 1998 bailout or closure of more than 70 financial institutions. Almost half of Mandiri’s impressive $515 million profit in 2003 -- a 27.9 percent gain -- came from selling these bonds.
“Mandiri’s book value is a function of how government bond prices move and also how much [of the bonds] management decides to allocate for sale,” says another local banking analyst. “It’s a moving target.” Adds former Finance minister Bambang Subianto, now a partner at accountant Ernst & Young in Jakarta, “If the Republic of Indonesia is okay, if the state budget is okay, then Bank Mandiri will be okay.”
Although Mandiri remains the country’s dominant lender to big corporations, it faces tough competition for the consumer assets it wants to attract. In Indonesia’s highly fragmented marketplace (with 138 banks in all), Mandiri is tied for fifth place in consumer lending. Bank Rakyat Indonesia holds the biggest share with 16 percent; Bank Tabungan Negara is second with 12 percent; and Bank Danamon is next with 8 percent, followed by BNI with 6 percent. Citibank and Mandiri each have roughly 5 percent, according to private estimates. “The market is up for grabs,” says David Nellor, senior resident representative for the International Monetary Fund in Jakarta.
More broadly, Mandiri’s prospects are clouded by Indonesia’s enormous economic challenges and volatile politics. Tensions have eased somewhat under President Megawati. She is widely credited with implementing sound fiscal policies that have jump-started the country’s economy, which is growing at an estimated 4.5 percent annual clip after a 4.1 percent gain in 2003. But Indonesia’s GDP is only this year expected to approach its precrisis size. Per-capita GDP rose from $684 in 2001 to $969 last year, still well below the $1,153 of 1996. An estimated 40 million of the country’s 240 million citizens are unemployed, up sharply from 28 million in 1997. And security remains a major concern in Indonesia, a vast archipelago of more than 13,000 islands: Terrorist bombings allegedly tied to al-Qaeda killed more than 200 people in Bali in 2002 and 12 others in Jakarta last August. Separatist movements, particularly in the northern provinces, have repeatedly threatened Indonesia’s political union.
With presidential elections getting under way next month, Indonesia’s plans to meet these challenges are in flux. Says Subianto, “We don’t know who will be the next minister of Finance or what will be his new policies.” Any new government, he adds, “must try to reduce the level of uncertainty, to improve security, law and order, to improve the implementation of regional autonomy, to set a better balanced labor policy and seriously to fight corruption.”
Neloe realizes that he hasn’t yet persuaded the doubters who believe that Mandiri will eventually slip up by making ill-advised, government-influenced loans and will fail to complete its transformation into a diversified local giant with a regional identity. “People still question Bank Mandiri,” he concedes. His response? “Concentrate on our performance and progress. Sooner or later people will accept us.”
MANDIRI HAS CERTAINLY MADE PROGRESS SINCE October 1998, when it was created from the combination of Bank Bumi Daya, Bank Dagang Negara, Bank Ekspor Impor Indonesia and Bank Pembangunan Indonesia; the four state-owned institutions primarily lent money to corporations and government entities, and their poorly trained staffs often paid scant attention to repayment prospects. Before the banks merged, their aggregate losses of $13.2 billion in 1998 nearly matched their total assets of $13.3 billion. Their combined nonperforming-loan ratio was 70 percent.
To meet the conditions of Indonesia’s $43 billion IMF bailout in October 1997, the government dissolved all four banks and formed a new entity, Mandiri, which means “self-reliance” or “independence.” Roughly $11.6 billion of bad loans from the four premerger institutions was handed off to IBRA, and later an additional $2.9 billion was off-loaded from the new Mandiri. In 1998 the government injected $20 billion into the new bank, which used the money to buy the government recapitalization bonds. These bonds are structured like typical debt obligations that pay regular interest. In effect, the bonds replaced the banks’ nonperforming-loan portfolios and continue to give them a relatively stable source of interest income.
Djohan, who had worked 12 years at Citibank, came to Mandiri from Garuda Indonesia. (Before that he had fashioned Bank Niaga, a tiny local institution, into the country’s second-biggest private bank.) Djohan rejected adviser Deutsche Bank’s proposal that he merge the four failed banks into two and eventually combine those two. Instead, he tackled all four at once. He cut deeply into staffing, letting go 12,000 of the bank’s 26,000 employees and retaining just nine of the 185 senior managers who had overseen the four banks. In an interview with Institutional Investor in 1999 (he declined to speak with II for this story), Djohan described the prevailing culture as “four tribes” incapable of fixing a badly deteriorating loan portfolio. “The very skeptical attitude of senior management,” he said, “made things even worse.”
Djohan, who went outside the four banks for several of the bank’s key officers, streamlined its branch system and launched its information technology overhaul; he also introduced more modern, quantitative risk management techniques to replace a lending system that had been based on personal and political relationships. Immediately after the merger Mandiri worked with Deutsche Bank to revamp all of its lending controls, implementing the “four eyes principle,” which separates business development staff from those scrutinizing credit risk and thus allows the bank to review each loan from two different perspectives.
Neloe has carried forward many of Djohan’s initiatives. In November 2001 he launched what he called the “three noes” -- “no delays, no errors, no special payments” -- putting employees on notice that Mandiri would not tolerate the lackadaisical performance typical of a big government bureaucracy. In case workers didn’t get the message, Neloe publicly posted the number of firings and warnings issued for performance shortcomings. (Last year 54 employees were dismissed and 321 were given warnings to improve their work.)
Today Mandiri limits its exposure to any one industry to less than 15 percent; it restricts loans to single customer groups (multiple companies owned by one entity) to less than the equivalent of 20 percent of capital. Any loan over $112 million must go to the bank’s board of commissioners for approval. Every loan is subjected to Mandiri’s proprietary corporate credit rating system, which assesses a company’s historical financial performance and industry outlook, among other factors. As a result of the stricter standards, Mandiri’s portfolio of loans to big state-owned entities like oil giant Pertamina, electric utility Perusahaan Listrik Negara, cement maker Semen Gresik and Telekomunikasi Indonesia declined from $4.51 billion at the close of 2002 to $4.29 billion at year-end 2003. Big corporate borrowings have declined from 87 percent of Mandiri’s total loan portfolio at the end of 1999 to about 50 percent today, the bank says. Neloe has pushed hard to diversify the bank’s lending to include more small and medium-size enterprises; these now account for roughly 43 percent of all loans.
Critics nonetheless worry about the bank’s loan portfolio. “They are under pressure [from the government] periodically to make loans,” says a foreign banker familiar with Mandiri. In 2002 the bank led ten different consortia to bid successfully at IBRA auctions for distressed loans. In all, Mandiri supplied $429 million of the $500 million the ten bidding groups paid for loans with a face value of nearly $2.6 billion. (The bank also directly and indirectly acquired $118 million of distressed loans from IBRA in 2002.) These loans, contends the foreign banker, “need a lot of work.” Indeed, 59 percent of the loans Mandiri wrote down last year came from IBRA’s auctions, a fact that heightens outsiders’ suspicions that the bank was helping the government clean out the last of its agency’s distressed assets, he says. (IBRA disbanded at the beginning of this year.)
But the loan purchase that raised the most eyebrows was the October 2002 acquisition of $191 million of the assets of pulp and paper company Kiani Kertas, formerly owned by Bob Hasan, a crony of disgraced former president Suharto who had spent four years in jail for defrauding the state. Mandiri has had to write down this loan. More than anything else, says the banking analyst in Jakarta, “The fact they bought Kiani Kertas [debt] shows” that Mandiri hasn’t changed as much as it contends.
Mandiri maintains that the Kiani Kertas purchase was based on commercial considerations and that it received the approval of the bank’s account and risk management officers as well as its board of commissioners. The bank says it is currently negotiating with foreign investors interested in acquiring the Kiani Kertas assets. Mandiri investor relations head Jonathan Zax says that the company’s prospects are improving and that the bank should recover some of its investment.
At Mandiri’s July IPO foreign and local institutional investors jumped at the chance to buy the stock of a bank with a 26 percent return on equity whose offering was priced at just 1.08 times book value. They submitted $2 billion in bids for the $296 million institutional tranche. Among Mandiri’s stockholders as of March 31 is Fidelity Investments, according to Standard & Poor’s; others are said to include Morgan Stanley and the Government of Singapore Investment Corp.
These investors are keeping a close eye on whether the bank properly oversees its loans or whether it strays from its promised lending reforms. Although Henderson Global Investors, which manages about $4 billion in Asian equities, bought Mandiri stock at the initial offering, Singapore-based fund manager Arlene Goh says that the firm later sold its position at a profit because she wanted “to sleep well” and other Indonesian banks afforded a better opportunity to rest easy. “With Mandiri, you might get problems with nonperforming loans,” she says. “I wouldn’t rate them right at the top in terms of conservativeness.” Instead, Henderson bought Bank Danamon, the Jakarta-based private bank controlled by Singapore’s Temasek Holdings.
NELOE’S MAJOR EXPANSION HAS BEEN IN AN AREA where Mandiri’s state ownership is less likely to create potential conflicts of interest: Indonesia’s booming consumer markets. It’s a tempting growth opportunity, says Jakarta-based consultant Laurence Berger, who runs the local office of McKinsey & Co., which has worked with Indonesia’s central bank to identify the country’s key growth sectors. “The demand for personal financial services in Indonesia will be amongst the fastest growing in East Asia over the next three to five years,” Berger says. The Indonesian central bank estimates that overall mortgage lending has expanded by an compounded annual growth rate of 20 percent since 1999, credit and multipurpose cards by 63 percent, auto finance by 54 percent and other nonbank consumer financing by 47 percent.
With 730 branches, Mandiri boasts one of the biggest distribution networks in Indonesia, and its 7.1 million accounts offer a huge captive market for cross-selling credit cards, bancassurance, securities and mutual funds. It must use these advantages to build its consumer business, says Neloe.
The bank is spending about $11.2 million a year on advertising, particularly to the middle- and upper-income classes and high-net-worth consumers. Local bankers estimate that approximately 20 million to 30 million Indonesians are potentially profitable customers. The country has as many as 3.5 million citizens with assets of more than $60,000. Mandiri’s campaign -- “One heart. One nation. One bank” -- seems to be working. Market research firm ACNielsen says that Mandiri’s brand awareness has jumped from seventh among Indonesian banks in 1999 to second in 2003. “They are spending money like there is no tomorrow,” says one foreign competitor. “It has made a big impression. It looks and feels like a foreign bank.”
Overseeing the consumer drive is Omar Anwar, who spent eight years at Citibank and a year at ABN Amro Bank in Jakarta before joining Mandiri at Djohan’s request in 1999. Anwar has hired 16 experienced consumer bankers to head key operations within Mandiri’s consumer division, which now has 600 employees.
Mandiri’s first priority in building a consumer business was to upgrade and streamline the nine legacy IT systems that came in with the merger. Neloe, who had headed consumer and retail banking and technology at BDN, initially spent $23 million creating an integrated platform that was completed in March 2001. Then he, IT head Andreas Susetyo and a group of Western consultants drew up a new system, which was rolled out last August. In all, the bank has spent $173 million on technology upgrades under Neloe. The new Enterprise Mandiri Advanced System, or EMas, can support Internet, phone banking and call centers as well as product development, risk management and more detailed financial analysis software that can pinpoint profitability by product, client and business unit.
In 2001, Mandiri began to set up so-called priority banks for high-net-worth customers; it now operates 18 of them in ten Indonesian cities. These offer customers with deposits of more than $56,000 exclusive premises to conduct their transactions and dedicated personal bankers who provide financial advice on products ranging from basic savings and loans programs to financial planning, estate management, mutual funds, pension plans and insurance products.
Meanwhile, Anwar’s team has been busy rolling out new products. This year Mandiri expects to expand its current roster of three mutual funds to 23, with new offerings (most of them fixed income) from ABN Amro, Danareksa Investment Management and Schroders. Through a joint venture with Axa created in December -- Axa Mandiri Financial Services -- Mandiri has begun to sell life insurance, health, market-linked, accident and pension products to individuals and corporations.
Mandiri has been markedly successful in the credit card segment, thanks to a cooperative agreement with GE Finance Indonesia, an affiliate of GE Consumer Finance. From a standing start in November 2000, the bank became the country’s fourth-biggest card issuer in 2003, with 338,200 cards distributed. A mere 5.8 million credit cards have been issued to Indonesia’s population of 240 million, leaving plenty of room for growth. One caveat: Many new cardholders will have to come from lower income groups, because the country’s small group of wealthy citizens already has credit cards.
Will this expansion succeed in making Mandiri a local consumer powerhouse? It’s still too early to judge the results, but it’s clear that the bank has a long way to go. Although consumer lending roughly doubled in 2003 over the year before, it is still less than 5 percent of the bank’s total loan portfolio. And Mandiri’s overall 5 percent consumer share lags that of much smaller competitors, like BNI.
One major obstacle is the robust competition from both local and foreign rivals. “Everybody is eyeing this segment, but I don’t think consumer loan prospects are there for them all,” says a local banking analyst. “Some banks are already reviewing their strategies on consumer loans because the competition is quite keen,” says the researcher, who questions the ongoing profit potential in this segment for all but a few major contenders.
Anwar dismisses the threat of costly price competition and vows that Mandiri will continue to grow its share. “There’s still plenty of cake to go around,” he says. “I don’t think the war has even started, other than in credit cards. And anyway, just to cross-sell to 7 million accounts gives us massive potential to grow. " His argument has some merit: Last year Mandiri’s mortgage issuance grew 109 percent, to $31.7 million; unsecured employee loans jumped 142 percent, to $202.4 million, and collateralized personal loans grew more than fivefold, to $36.8 million.
Neloe badly needs the consumer business to take hold if he is to complete the bank’s transformation. Mandiri’s Islamic banking business is among the top three in Indonesia but generates just $20 million of the bank’s more than $3 billion in annual turnover. And its investment banking efforts are negligible: It ranks a lowly 15th locally in equity trading volume. In the interim, profits will continue to rely heavily on the performance of Mandiri’s $13.8 billion portfolio of government bonds. The bonds, which amount to 49.3 percent of the bank’s assets, accounted for 60.6 percent of total interest income in the last quarter of 2003, a decline from 74.9 percent in 2000 but still extremely significant to Mandiri’s financial health.
For Mandiri, “everything is dependent on the capacity of the government to keep its promise” and keep making its scheduled interest payments, says former Finance minister Subianto.
There is, of course, the risk that Indonesia’s three-year run of economic and political stability could come to a quick halt. “The Republic faces a daunting task: how to suppress geopolitical and security risks, revive investment and tackle severe domestic economic, social and regional development issues,” Morgan Stanley’s Southeast Asia economist, Daniel Lian, wrote in a recent report. Next month the first round of presidential elections begins. (If no one gets 50 percent of the vote, a runoff between the top two vote-getters occurs in September.) In early May, Megawati was lagging in the polls, raising the possibility of an unsettling change in government.
The uncertainties haven’t affected Mandiri executives’ still-vague regional ambitions. “We are lucky to be positioned in a big market, a market with huge upside potential” that can help fund expansion, says Mandiri’s well-regarded CFO, Keat Lee, another Djohan recruit. “We might not be as big [as some regional competitors] right now, but what we feel is our advantage is that we are sitting in this huge market.” Neloe is eager to push abroad and wants to purchase overseas banks. “We have to think about mergers and acquisitions,” the CEO says. “If we depend on organic growth, it takes too much time.”
The skeptics would prefer that Neloe attend to his problem loans and fledgling consumer business before worrying about foreign ventures. Asks one banking analyst, “How on earth are they going to compete with HSBC or DBS or Citibank” in foreign markets? Indonesia’s biggest bank is barely one third the size of a potential regional rival, Singapore’s DBS Group Holdings, and dwarfed by HSBC Holdings and Citi. “The fact that they want to increase their assets through mergers to become an international bank is typical of a state-owned enterprise; they always have the idea that bigness is the best,” says the researcher.
His suggestion: “Focus on healthy, manageable growth in Indonesia, where margins are also much higher than elsewhere in the region.”
