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Southeast Asia

Indonesian banking: Mandiri shows the way

Bank Mandiri’s chairman and chief executive tell Asiamoney how Indonesia and their bank will weather the coronavirus pandemic.

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Bank Mandiri is no stranger to managing crises. Indonesia’s biggest bank by assets got its start in October 1998, five months after violent protests drove the authoritarian ruler Suharto from power. It was the product of a shotgun wedding, arranged in desperation and haste – the kind that almost never works.

At the height of the Asian financial crisis, with stressed-out International Monetary Fund technocrats looking on, Jakarta faced a tough decision: what to do with four troubled state-owned banks, one more fragile than the next?

It fell to the newly created Indonesian Bank Restructuring Agency, IBRA, to clean things up. The plan was to build a financial Frankenstein of sorts: mash together four balance-sheet-challenged institutions with few clear synergies at the very moment southeast Asia’s biggest economy was crashing.

Talk about a bank almost created to fail. Out of the gate, the new organization with 39,000 employees navigated one geopolitical minefield after another. There was IMF austerity, which made the economic crisis worse. Then came the September 11, 2001 attacks in the US, the 2002 Bali bombing, the 2008 Lehman Brothers shock, the 2013 “taper tantrum” in emerging markets – all of which led to market turmoil – and most recently, US president Donald Trump’s trade war with China, which upended Asian supply chains.

With so many threats, Bank Mandiri could have drifted into debt and obscurity. Instead, it confounded the naysayers. There were plenty of stumbles, and moments when non-performing loans looked like they might get away from bank management. But two-plus decades on, Bank Mandiri has emerged as a top institution with a proven track record not just in lending to corporate and state-owned enterprises, but also in consumer and auto loans, mortgages, the securities business and asset management.

I’m not saying that the situation is easy, but I would say that compared to other emerging economies, I’m quite optimistic about it
Muhamad Chatib Basri
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It has also been a bit of a trailblazer. It was the first Indonesian bank to issue securities offshore, to deal in offshore Indonesian rupiah or “komodo” bonds, to underwrite international credit and to launch infrastructure-themed mutual funds. And Bank Mandiri has big ambitions to compete in the digital banking space.

The bank now faces an unprecedented crisis, however, as the Covid-19 pandemic is likely to mean a sharp economic contraction this year.

The crisis has hit at a time when Bank Mandiri’s CEO, Royke Tumilaar, is still relatively new in the job. He replaced Kartika Wirjoatmodjo in December. Many find it comforting that Royke has been with the bank from the start. He worked at Bank Dagang Negara, one of the four state-owned banks jammed together to create Bank Mandiri.

And equally encouraging is the fact that battle-tested chairman Muhamad Chatib Basri is just an office away to help the bank navigate around the biggest crisis in its history, one whose true damage and virulence have yet to show themselves.

Daunting challenges

Basri, chairman of the board since February, is a former finance minister and one of the only people in Jakarta with an inkling of what the current holder of that job, Sri Mulyani Indrawati, is going through. Basri says he does not envy Indrawati’s daunting challenges in 2020.

“As someone outside of government, I can see the big picture from a distance and become more objective,” Basri says. “But I can immediately say my good friend Sri Mulyani must be very tired in this kind of situation.”

Basri gets it. He ran one of Asia’s most event-rich economies at the height of the 2013 taper tantrum, which had global punters yanking tens of billions of dollars out of five emerging economies.

Along with Indonesia, those unfortunate enough to be on Morgan Stanley’s ‘fragile five’ list were Brazil, India, South Africa and Turkey. It made for some tense discussions with the Indonesian president, as ratings companies swooped into capitals around the globe to see whether Morgan Stanley had a point.

This was nine years into president Susilo Bambang Yudhoyono’s 10-year tenure as the nation’s great reformer. In 2009, the halfway point of Yudhoyono’s presidency, Jakarta was ranked 129th in the World Bank’s annual survey about the ease of doing business in economies around the world. Today it ranks 73rd, thanks to current president Joko Widodo maintaining Yudhoyono’s good-governance reforms.

Whereas the Asian financial crisis of 1997 to 1998 was a catastrophic balance of payments shortfall that savaged currency and debt markets, today’s Covid-19 pandemic threatens to be something much bigger: a health crisis causing the human equivalent of a credit crunch that could trigger a balance of payments shortfall. The 5.32% contraction year on year in second-quarter gross domestic product was the economy’s worst performance since the late 1990s.

Bank Mandiri has been consistently improving its asset quality with meaningful declines in non-performing loans and the cost of credit
Royke Tumilaar
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“I don’t think any country has been prepared for this,” Basri says. “I recall I was at the World Economic Forum in Davos in January and I still remember that when we spoke around the table we still believed that the global economy in 2020 will be better than 2019. And all of a sudden because of the outbreak in Wuhan, the global landscape changed immediately. So, I don’t think any country had been ready for this.”

President Widodo, who’s usually known to Indonesians as Jokowi, is doing his best to reassure investors that a recovery is afoot and that a post-Covid-lockdown revival can be expected in household consumption and wages. Yet, the evidence of weakness is everywhere in recent data releases, which show sharp deteriorations from a year ago; exports declined 11.66%, private consumption dropped 5.51%, gross fixed capital formation plunged 8.61% and government spending fell 6.9%.

“Household consumption and investment are the biggest sources of our GDP growth, so we should put much more effort for these components to perform better in the next quarters,” Suhariyanto – the head of the Indonesia Statistics Agency, who like many Indonesians goes by one name – said at a press conference in August.

The trick for Bank Mandiri and its peers is to batten down the hatches. Here’s where Basri comes in.

As one industry contemporary put it, the 55-year old is “that senior adviser you want who’s been in battle before and knows how to protect the operation.”

Jakarta’s 'sherpa'

Basri studied economics at the University of Indonesia and got his masters and PhD from the Australian National University in Canberra. His initial stint in government was as a coordinating minister for economic affairs and then as an adviser in international trade negotiations.

But the fun really began during his role as a deputy to finance minister Indrawati from 2006 to 2010.

During that time, Basri was Jakarta’s “sherpa,” or the president’s point person, at G20 and other international gatherings and summits. That, of course, was when Wall Street’s crash threatened to take the global financial system down with it.

At the time, Basri remarked that “sound macroeconomic and financial fundamentals, plus quick and forceful fiscal policy responses” contributed to Indonesia’s “economic recovery in the aftermath of the global financial crisis.”

They were policies that Basri and his finance ministry team helped devise.

Indonesia avoided the worst of the Lehman Brothers shock. But in 2013, Jakarta was not so lucky. After five years of holding rates at zero through quantitative easing, the US Federal Reserve signalled it was keen to begin normalizing policy.

All hell broke loose in emerging markets. Selling pressures accelerated in the months after Morgan Stanley’s fragile five worries coursed through the markets.

But by December 2013, the investment bank’s team pointed that, of the lot, the “brightest prospects shine on Indonesia,” partly because of hopes that Jokowi would take over as president from Yudhoyono and keep the nation on the reform path.

The biggest problem for the banking system now is not about the liquidity but the credit crunch
Muhamad Chatib Basri

In his own 2013 autopsy, presented in a research paper published by Australian National University, Basri argues that Indonesia and India “handled the problem in the shortest time – about seven months – and achieved macroeconomic stabilization, as indicated by a decrease in their current account deficits and the stabilization of their financial markets.”

By early 2014, capital inflows were returning in earnest to Indonesia. In its own playback in May 2015, the IMF also gave Basri’s team kudos for having “taken significant steps to strengthen policy and reserve buffers”. Thanks to “enhanced policy credibility and global push factors, external inflows to Indonesia” have turned “supportive.”

It was around this time that Basri honed his ready-for-battle skills. His team had to fight to reduce budget-busting diesel subsidies, to curb financial losses at state power grids and get runaway government expenditures under control.

That created the fiscal space to drain excess liquidity from the banking system and ease restrictions on capital controls. Ultimately, Basri thinks he and other officials in Jakarta succeeded because they “reduced their external imbalances and strengthened their policy buffers.”

Three-point plan

The question now, of course, is how well Bank Mandiri and Indonesia’s other banks can withstand the turmoil. Around the time that Basri was in Davos, last January, Mandiri’s CEO Royke was back in Jakarta getting to work on the bank’s three-point plan, one befitting an executive who had spent recent years as director of corporate banking.

The first, Royke says, is to “cement the collaboration between the wholesale and the retail sectors”. Second, step up the bank’s digital transformation, both to better serve customers and cut operational costs. Third, support the commercial sector, particularly the micro, small and medium-sized enterprises.

“We will help fund those businesses as long as they have expansion potential in this economic situation, especially those in (Covid-free) green zones,” following the introduction of social distancing measures, Royke says.

It helps that Bank Mandiri entered the year on a sound footing. It ended 2019 with record earnings and net profit, the latter totalling Rp27.5 trillion ($1.9 billion). During the global financial chaos of the early Covid-19 days, the bank still managed a net profit of $536 million in the first quarter, a 9% increase from the year-ago period.

“Bank Mandiri has been consistently improving its asset quality with meaningful declines in non-performing loans and the cost of credit,” Royke explains.

Loan growth increased 10.7% in 2019, and another 14.2% in the first quarter of 2020. Non-performing loans ended 2019 at 2.3%, down from 2.7% in 2018 and 3.26% in 2017. These figures are all at, or below, the industry average. But maintaining this solid performance is becoming harder with each passing month.

Finance minister Indrawati is taking no chances. In late June, her team shifted more than $2 billion into four state banks – Bank Mandiri included – to support lending activity and the economy.

“We hope with the funds’ low interest rate, the state banks can take steps that would support the real sector through expansion of credit at a lower lending rate,” Indrawati said.

The state bank crowd is adopting a tag-team approach. Royke says Bank Mandiri will be paying special attention to the trade and tourism sectors. Bank Rakyat Indonesia plans to home in on lending to farmers, food processors and medical equipment businesses, Bank Negara Indonesia on labour-intensive industries and Bank Tabungan Negara on mortgage lending.

Such manoeuvres could become the norm – and increase exponentially in size – as businesses face shrinking export markets and coronavirus fallout and feel pressure to shed workers.

Key mistake

In general, Basri thinks Jokowi’s government has responded appropriately to the coronavirus crisis. Jakarta, though, can always do better. He outlines three steps the government should take: allocating more money to healthcare, increasing the social safety net for those unable to work and supporting businesses that are struggling to stay afloat.

He says a key mistake made in the wake of the financial crisis was giving money to banks without ensuring they would lend it out, robbing nations of the so-called multiplier effect.

“The idea is to provide a credit guarantee,” Basri says. “Because the biggest problem for the banking system now is not about the liquidity but the credit crunch. They don’t want to lend because the risk is so huge. That is why I do believe that the government should step in by providing the credit guarantee.”

Basri adds that “once the appetite to borrow money or lend money is back to normal, then probably the government can step out. Fortunately, I would say that the Indonesian government has been focusing on these issues.”

Only time will tell if Bank Mandiri is sufficiently focused on its own problems as the economy stumbles. But there is reason for optimism.

The bank has long displayed flashes of ingenuity: embracing new niches, welcoming digital disruption, taking on retail competitors in the Philippines, Vietnam and elsewhere. It has shown time and again that the best ideas emanate from adversity.

The pandemic tearing up Jakarta’s 2020 plans requires a nimbleness for which state banks are rarely celebrated. Bank Mandiri’s vast network of 2,582 branches, 18,298 ATMs and 10 subsidiaries faces unanticipated coronavirus alterations.

At the very least, Basri notes, those customers who were averse to digital banking in the past are now having to adapt. The trick, he says, is to smoothly facilitate the uptick in digital transactions. One change worth noting: the launch of online onboarding for new saving accounts.

There’s also the balancing act of helping middle class Indonesian households maintain the gains made since the late 1990s, while also supporting the development of a tech “unicorn” sector that is outpacing even Japan, Singapore and South Korea – a field where the bank hopes to find many more customers among the entrepreneurs. Not surprisingly, Bank Mandiri is on the lookout for opportunities in the fintech space.

In this way, Bank Mandiri’s year is really a microcosm of the broader economy. And on that score, Basri, despite the difficulties in Jakarta’s way, can’t help but see the glass half full.

“I’m not saying that the situation is easy, but I would say that compared to other emerging economies, I’m quite optimistic about it,” he says.

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