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Indonesia's 3-way Islamic bank merger to build scale, raise competitiveness

Indonesia's planned merger of three state-owned Islamic banks will create an entity with scale comparable with the biggest local lenders and may give a fillip to Shariah-compliant finance in the world's biggest Muslim nation by population, analysts say.

The proposed merger between PT Bank BRIsyariah Tbk, PT Bank Syariah Mandiri and PT Bank BNI Syariah, announced on Oct. 13, will create an entity with between 220 trillion rupiah and 225 trillion rupiah in assets, Hery Gunardi, vice director of Bank Mandiri said at a press conference on Oct. 13.

Bank BRIsyariah will be the final entity after the merger, expected to be completed by February 2021. It will be Indonesia's seventh or eighth biggest bank by assets, Gunardi said. PT Bank Pan Indonesia Tbk was the seventh-biggest Indonesian bank with 211 trillion rupiah in assets as of June 30, according to S&P Global Market Intelligence data.

"The three state-owned Shariah banks are merging in order to create a better scale for the operations with a larger deposit base, as well as avoiding competition in the same space," said Angus Mackintosh, an analyst at Smartkarma. "It makes sense to merge the three banks as it creates scale and avoids duplication of branch networks, bringing significant cost savings to the merged entity."

The proposed merger comes at a time when demand for Shariah-compliant banking is rising in Indonesia, especially among the middle class, Mackintosh said. The merger would also work to solve staffing challenges in the Islamic banking space.

Getting the right talent has been an issue in the growth of Islamic banking in Indonesia, so a merger of the three state-owned Shariah banks "would help solve this problem," he said.

Indonesia, despite being home to the largest Muslim population in the world, has been trailing behind its neighbor Malaysia in Shariah-compliant capital markets. However, both countries are expected to witness a drop in issuance of sukuk, or Shariah-compliant bonds this year due to the pandemic.

Harry Su, head of equity capital markets at Samuel Sekuritas Indonesia, said the merger is in line with the vision of Otoritas Jasa Keuangan, or the financial services authority, to reduce the number of banks and to increase synergy among Shariah banks.

"The government and the financial services authority in the past few years have always encouraged banks to merge in order to reduce number of banks in Indonesia," he said. Since these three banks are all state-owned enterprises, it is easier for the government to push them to merge, he added.

PT Bank Rakyat Indonesia (Persero) Tbk, PT Bank Mandiri (Persero) Tbk, and PT Bank Negara Indonesia (Persero) Tbk, the parent organizations of the Islamic banks that are seeking to merge, didn't immediately respond to emailed requests for comment by Market Intelligence.

The three Islamic bank units "are underachieving in scale, in profit, and in loan growth. Consolidating them as a single entity can help focus management on the business," said Daniel Tabbush, founder at Tabbush Report, a provider of bank research and consultancy services. He doesn't expect the merged entity to pose a direct threat to the nation's biggest conventional lenders.

Analysts expect more M&A activity within the Indonesian banking space, mainly for smaller banks to remain competitive. Currently, the nation's biggest banks are PT Bank Central Asia Tbk, Bank Mandiri, Bank Rakyat Indonesia, and Bank Negara Indonesia.

"M&A in the banking industry, in general, will likely occur more often in the future, not only with Shariah banks," said Samuel Sekuritas's Su. "The widening gap between the big 4 and smaller banks' capital would force continued M&As in order for these smaller banks to remain competitive through the increased capital base."

As of Oct. 13, US$1 was equivalent to 14,770 Indonesian rupiah.