IT HAS certainly been an impressive performance. Bank Mandiri, the largest in Indonesia in terms of assets, is fast becoming the darling of the country’s investors. Created through the amalgamation of four ailing government- owned banks in October 1998, the shares in this once struggling bank are now among the most sought after on the Jakarta Stock Exchange.

With more than 8.7 million depositors, Bank Mandiri has one of the largest customer bases in Indonesia. “It is our top pick in the banking sector,” noted UOB Kay Hian in a research paper issued in July. Shares in Bank Mandiri have climbed more than 46 per cent since the beginning of this year, more than the impressive 42 per cent rise in the Jakarta Composite Index.

Not surprisingly, Bank Mandiri plans to take advantage of the situation by raising as much as 14 trillion rupiah (S$1.95 billion) from a rights issue as a means of further strengthening its capital base and reducing the cost of funds. The bank’s capital adequacy ratio (CAR) stands at 14 per cent, slightly below the average 16.6 per cent of Indonesia’s banks, but still well-above Bank Indonesia’s (central bank’s) 8 per cent minimum.

Having written off the equivalent of S$4.78 billion in bad loans since 2001, the bank certainly seems to have put its troubles behind it. In a financial presentation to local analysts late last month, Bank Mandiri executives sought to underline the point by highlighting improvements in several key indicators in the first nine months of this year.

The bank’s gross non-performing loan ratio now stands at 2.6 per cent, while its net interest margin (the difference between the interest a bank pays on deposits and what it gets from borrowers) has increased. Earnings after tax for the first nine months of this year also jumped 38 per cent.

Much of the credit for the turnaround has been given to Mr Agus Martowardojo, the hard-driving banker who was named president director in 2005. Appointed Finance Minister in May this year, he has been succeeded at Bank Mandiri by Mr Zulkifli Zaini, the bank’s technology and operations director.

Current bank strategy is focused on raising the number of micro loans (below 50 million rupiah). These loans, which make up around 3 per cent of total outstanding loans, have a wider interest margin than the corporate loans that comprise the bulk of the bank’s lending. They are therefore more profitable.

Bank executives also have plans to improve fee-based income and reduce the cost of funds by growing savings and current accounts.

Look beyond the hype, however, and the picture that emerges is one of a bank still struggling to shake off the baggage of the past. As a result of a recapitalisation exercise at the time of its creation, about 20 per cent of Mandiri’s capital remains tied up in low- interest-bearing government bonds. This pulls down the bank’s asset yield. So while Mandiri’s net interest margin has improved recently, it is still one of the lowest among the country’s financial institutions.

The role of the NPL write-offs in the current situation cannot be ignored either. Although removed from the books, political imperatives oblige the bank to continue to spend resources pursuing defaulters. Sometimes, as in the case of flag carrier Garuda Indonesia’s 1.3 trillion rupiah outstanding debt, and another 1.6 trillion rupiah owed by Domba Mas (a subsidiary of well-connected Bakrie Plantations), these efforts are successful. As a result, these latter assets will soon be placed in the accounts once again, producing one-off boosts to profit margins that make it difficult for casual observers to assess the bank’s current performance.

More serious, perhaps, are statistics on fresh loans issued since 2005, which show that more loans have been downgraded to NPL status than have been upgraded. This suggests that despite the reforms introduced in recent years, the bank still lacks strict operating procedures when it comes to lending.

In other words, the rehabilitation of Bank Mandiri is by no means complete, and Mr Zulkifli has a more difficult task ahead of him than many analysts in Jakarta are willing to admit.

Under Mr Agus, Bank Mandiri was the only major Indonesian financial institution not to lend to the Bakrie Group in the years before this influential conglomerate got into financial difficulty in 2008. Although well-regarded in financial circles, it is uncertain how impervious Mr Zulkifli will be to similar pressures. As head of loan risk management in state-owned Bank Bapindo when the latter was merged with four other ailing banks to form Mandiri, however, Mr Zulkifli is no doubt aware of the importance of rejecting requests for special treatment.

Meanwhile, impressive as the bank’s past performance has been, much more remains to be done.

Copyright © 2010 Singapore Press Holdings Ltd