Indonesian banks may tap foreign investors for fresh capital as new rule looms

Smaller Indonesian banks will likely turn to foreign investors for fresh funding to meet the country’s new capital requirements, analysts said.

Under new requirements introduced in 2020, commercial banks will lose their licenses to provide current account services, foreign exchange activities and insurance if they do not have at least 3 trillion rupiah of Tier 1 capital by the end of 2022. If banks fail to meet this threshold, they face being classified as a rural bank, and as such, their customer base will be limited to a specific province and they will not be allowed to issue credit cards.

As of March 31, 14 of 39 listed banks in Indonesia had yet to meet that minimum requirement, according to S&P Global Market Intelligence data. Among all 107 banks in the country, 30 of them did not meet the new capital requirement as of the end of the first quarter.

“The smaller Indonesian banks will likely have to seek foreign investments or merge amongst themselves to meet the 3 trillion rupiah of capital requirements,” said Ivan Tan, a banking analyst at S&P Global Ratings. “We believe that foreign investors will be drawn to Indonesia. It is one of the largest unbanked populations in the world and offers good growth prospects and high margins.”

Indonesia is one of the top destinations in Southeast Asia among overseas lenders due to the archipelago’s relatively high net interest margins and unbanked population. Banks from Japan, Singapore, South Korea and Thailand have been among the most active foreign investors in Indonesia in recent years.

Indonesia’s Financial Services Authority, or OJK, in March 2020 announced the requirement to have Tier 1 capital level of 3 trillion rupiah, or roughly $207 million, by the end of 2022. The rule was applied in stages: banks needed to have Tier 1 capital of 1 trillion rupiah by the end of 2020, 2 trillion rupiah by the end of 2021 and 3 trillion rupiah by the end of 2022.

Foreign interest

The new capital rule has prompted more banks to increase their capital via mergers or fundraising on their own. Fourteen M&A deals have been completed since the new rule was announced, in which five non-Indonesian investors were involved.

In 2020, Bangkok Bank PCL completed its acquisition of PT Bank Permata Tbk, while South Korea’s Line Financial Plus Corp. acquired a 20% stake in PT Bank KEB Hana Indonesia in 2021.

Some banks might also have to give up a majority of their ownership to a foreign investor to meet the capital requirements.

“Just look at the case of PT Bank Maspion Indonesia Tbk. It had to resort to selling 67.5% of its stake to Kasikornbank PCL, a Thai bank, recently,” said Harry Su, head of equity capital markets at Samuel Sekuritas Indonesia, referring to a transaction announced May 30.

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