MICROCAPITAL STORY: Key Indonesia Microfinance Player Bank Danamon Raises USD 362m In Capital

In April, Bank Danamon, Indonesia’s fifth largest lender, completed a USD 362 million stock offering, the largest ever bank stock offering in Indonesia. Citigroup Global Markets Singapore and Morgan Stanley Asia were joint standby purchasers on the deal. Danamon has a very active microfinance division called Danamon Simpan Pinjam (DSP). Although Danamon experienced 30.2 percent drop in year over year first-quarter net profit in 2009, its Capital Adequacy Rating (CAR) increased to 22 percent from 15.4 percent due to the stock offering. In an interview with The Asian Banker, Danamon’s President Director and former Citigroup executive, Sebastian Paredes, stated, “After this capitalisation, Bank Danamon is probably going to be one of the highest capitalised banks in the world.”

Apart from this infusion of capital, Danamon has also experienced growth in its microfinance program. Mr. Paredes claims that micro-lending accounts for 65 percent of Danamon’s profit and that Danamon has an 8 percent market share in microfinance loans. DSP was launched in 2004 as the bank’s official microlending program and, in 2005, offered an average loan of USD 1,877. Microfinance has gradually become a more prominent part of Danamon’s operations. Mr. Paredes tells The Asian Banker,“This transformation is very relevant because these areas offer higher level of returns and interest rate yields, thus giving Danamon the capacity to sustain higher volatility and also higher levels of cost of credit.” He adds, “The area that has been most resilient to the downturn is actually the micro-lending space.” Microloans have grown 20 percent (see note below) for the past one year, reaching USD 1.02 billion and accounting for 17 percent of Danamon’s total loans. In 2008 alone, DSP granted USD 225.25 million in loans.

Overall, Danamon’s performance improved in 2008 and the bank continues to experience growth, albeit curtailed, in the first quarter of 2009. In 2007, Danamon reported assets of USD 83.9 billion. In 2008, Danamon opened 54 conventional branches, 116 DSP branches, and 121 ATMs, and in addition, hired 10,000 employees in Indonesia. Net profit, after tax, stood at USD 140.8 million for 2008 and USD 36.9 million for the first quarter of 2009. Loans increased 25 percent in 2008 compared to 2007 and funding grew 24 percent in that time period. In the same time frame, the loan to funding ratio was 74 percent and the loan to deposit ratio, 86 percent. As of March 2009, the loan to deposit ratio dropped to 81.4 percent. Total loan growth year over year from 2008 to 2009 was 13 percent. Total loans stood at USD 5.91 billion at the end of March. Danamon also faced two lawsuits in 2009 over derivative contracts. One lawsuit is pending whereas the other was settled out of court.

In 1997, during the Asian financial crisis, Danamon faced liquid insolvency and was recapitalized by the Indonesian Bank Restructuring Agency (IBRA). During the financial crisis, 82 commercial banks closed and 13 were nationalized, but Bank Danamon managed to survive. The IBRA sold 51 percent of Danamon shares in 2003 to Asia Financial Indonesia (AFI), a consortium in which Asia Financial Holdings (AFH) holds an 85 percent stake and Deutsche Bank, 15 percent. AFH itself is owned by Temasek Holdings, an investment company owned by the government of Singapore. AFI now owns a 70 percent stake in Bank Danamon while public stockholders have a stake in the remaining 30 percent.

Danamon is not a large a player in microfinance compared to the state-owned Bank Rakyat Indonesia (BRI), which had the largest gross loan portfolio in microfinance in Indonesia among the 42 MFIs in the country that report to the MIX. In fact, BRI was the most profitable microfinance company in the world as of 2003. The Asian Banker reports that Bank Danamon is most active in urban sectors because BRI dominates in rural areas. BRI was founded in 1895, like Danamon, was restructured during the Asian financial crisis. It became a publicly listed company in 2003 and 43 percent of its shares are currently owned by the public. In the first quarter of 2009, BRI , Indonesia’s third largest lender reported a 22 percent increase in year over year net profit compared to the 30 percent drop, mentioned above, that Danamon experienced. However BRI’s CAR decreased to 14.91 percent from 16.52 percent this year. In April, BRI shares grew 21 percent while Danamon. shares grew 16 percent. According to the MIX, BRI lends to 3,515,812 active borrowers and possesses a gross loan portfolio of USD 3.47 billion. The BRI also supervises the Badan Kredit Desa (BKDs), village-owed banks offering commercial microcredit that were founded over a century ago and currently number 5,000. Danamon has far less reach than the BRI despite the growth of its microfinance operations.

Nonetheless, there is still a tremendous need for microfinance in Indonesia. According to research conducted by Danamon, 20 million households in Indonesia earn a monthly fixed income from USD 35.4 to USD 234.6 and 80 percent of these households state that they do not use banks. Nearly 40 million low-income people in Indonesia do not have access to financial credit and over 70 percent of them live on less than USD 1 per day. In addition, there are 19.5 million micro and small enterprises, 94 percent of which need loans but only 36 percent of which borrow from BRI and other commercial banks. Bank Indonesia, the central bank, defines microcredit as a loan below USD 5,373. There are 50,000 existing MFIs in Indonesia.

Additional Resources:

“Danamon Gears Up For Microfinance Push”, Interview by Emmanuel Daniel, Written by Peter Hoflich, Published by The Asian Banker, April 2009

Bank Danamon

Bank Rakyat Indonesia

Danamon News

Danamon Board of Commissioners

MIX Market: Indonesia

Asia Resource Center for Microfinance

International Finance Corporation: 2005 Bank Danamon Project

Danamon Financial Highlights 2005-2007

Danamon Simpan Pinjam (DSP)

“BRI Posts Highest Q1 Profit”, Published by Tempo Interactive

“Bank Danamon ready to face EKN lawsuit over derivatives”, by Ika Krismantari, Published by Jakarta Post, March 2009

“Troubled Indonesia derivatives spark angst, lawsuits”, By Gde Anugrah Arka and Dicky Kristanto, Published by Forbes, April 2009

“Indonesian Bank Share Ratings Raised at Goldman Sachs”, By Berni Moestafa and Shiyin Chen, Published by Bloomberg, April 2009

“Indonesia’s Danamon Q1 net profit down 30 pct”, Published by Reuters

Micra Indonesia: Microfinance in Indonesia

Note: Danamon’s 2008 annual financial results and Q1 2009 financial results were obtained through the News and Events section of Danamon’s website. The link is broken, but the articles can still be accessed through Danamon’s main page.

By Goda Thangada, Research Assistant

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