A proposed three-way merger involving PT Bank BRIsyariah Tbk (BRIS, BB+/AA(idn)/Stable), PT Bank Syariah Mandiri (BSM) and PT Bank BNI Syariah (BNIS) – state-owned subsidiaries of three of the four largest Indonesian banks – has the potential to create a national sharia banking champion that can compete with other large conventional banks, says Fitch Ratings.
This would provide a significant boost to the sharia sector, which remains a small contributor to the overall banking industry (around 6% of system assets) with financial performance that has typically lagged its conventional peers, despite significant growth potential.
Fitch believes that the merger has significant potential to improve efficiency and boost the banks’ competitiveness, helped by a stronger company profile and synergies.
Operating cost efficiencies that may be generated include marketing and IT expenses, and branch rationalisation in locations where two or three of the banks are represented.
Even allowing for some streamlining, the merger should result in a wider branch network and stronger deposit franchise, helping to lower funding costs and enable the new bank to offer more competitive products and services to customers.
Other synergies may emerge from the combination of BRIS’s mostly SME customer base with BSM’s and BNIS’s largely corporate-dominated financing portfolios.
The merger – scheduled for completion in 1Q21 – seeks to consolidate Indonesia’s Islamic banking sector with the aim to better serve the largest Muslim population in the world.
A successful merger would create Indonesia’s seventh-largest bank with assets of around USD14.5 billion, accounting for about 2% of system assets. The new entity would become the dominant Islamic bank in the sector, with around 40% of total sharia banking assets.
The performance of Indonesia’s Islamic banks has generally been weaker than their conventional peers, dragged down by higher funding costs, inefficient operations, weaker underwriting standards, and frequently poor knowledge of available products and services among prospective customers.
Indonesian borrowers have typically focused on cost – rather than religious principle – in their choice of offering, with the large conventional banks that have much stronger deposit franchises enjoying a significant advantage over their sharia counterparts as a result.
BRIS’s ratings are support-based, reflecting Fitch’s expectation that the bank would benefit from extraordinary support from parent PT Bank Rakyat Indonesia (Persero) Tbk (BRI; BBB-/AA+(idn)/Stable/bb+), if needed.
We believe BRIS is strategically important to its parent as it plays a key role in expanding BRI’s sharia business in Indonesia, and we believe that BSM and BNIS are likely to be of similar importance to PT Bank Mandiri (Persero) Tbk (Mandiri; BBB-/AA+(idn)/Stable/bb+) and PT Bank Negara Indonesia (Persero) Tbk (BNI; BBB-/AA+(idn)/Stable/bb+), respectively.
The surviving entity of the merger will be publicly listed BRIS, but Mandiri is likely to be the largest shareholder in the new bank with around 51%.
Fitch believes BRIS will continue to benefit from institutional support after the merger, but we are likely to view Mandiri as the primary support provider, given its expected majority ownership. The change in the source of support should not result in a change in the subsidiary’s ratings as both Mandiri and BRI have the same ratings.
Source Fitch Ratings