Indian banks run into high valuation wall in Indonesia

SBI delays acquisition plan, Union Bank still negotiating.

Indian banks looking for a presence in Indonesia through acquisitions have run into the high valuation wall.

At least two state-run banks — State Bank of India (SBI) and Union Bank of India — are planning to acquire banks in Indonesia. While Union Bank is currently negotiating with two-three Indonesian banks, SBI, which was looking at acquiring a bank last year, has put its plans on the backburner due to high valuations, according to sources.

In 2005, SBI had acquired 76 per cent stake in a small Indonesian bank, PT bank IndoMonex. At that time, the bank was valued at 2.7 times its book value.

Similarly, PT Bank Swadesi, slightly larger than IndoMonex and valued at 2.5 times of its book value, was acquired by Bank of India.

Now, these banks are finding valuations higher compared to other markets.

“They (valuations) were high in our opinion. That is why we did not buy. But, whether they have gone still higher I do not know since I do not have the data,” said SBI Chairman OP Bhatt.

Union Bank of India, which has shortlisted a few banks in Indonesia, also feels that valuations are on the higher side.

“Valuations in Indonesia are slightly higher compared to other markets,” said MV Nair, chairman and managing director of Union Bank of India.

Last year, Hongkong and Shanghai Banking Corporation (HSBC), through its wholly-owned subsidiary — HSBC Asia-Pacific Holdings (UK), acquired 88.89 per cent of PT Bank Ekonomi Raharja for $607.5 million in an all-cash deal. According to market estimates, the deal was done at four times Ekonomi’s book value.

However, Bank Ekonomi with more than 100 branches is much larger than what Indian banks have acquired or are looking to acquire now. For example, Union Bank of India is on the look out for a bank with 10-45 branches.

Indonesia has turned out to be attractive for the Indian corporate sector, resulting in Indian lenders making a beeline to that country. Large companies such as Larsen & Toubro, Steel Authority of India and Coal India to name a few are eyeing Indonesian coal mines for acquisition.

Besides, Indonesia also gives Indian banks access to Australia, where a sizeable Indian population lives.

“The India-Indonesia bilateral trade has touched the level of $10 billion per year. With a lot of Indian companies trying to establish base in Indonesia and also looking for assets there, it gives Indian banks a good business opportunity,” said a senior executive of a public sector bank, who is involved with the bank’s inorganic growth plans in Indonesia.

In Indonesia, Indian banks find entry barriers steep for setting up a subsidiary or opening a branch. For a bank which is planning to open a subsidiary should have a paid-up capital of $200 million. That leaves acquisition a relatively cheaper entry route.