Just weeks into his new job running Indonesia's Bank Danamon, Francis Rozario decided to tackle one of the bank's weak spots, its funding costs, which were the highest of any major bank in the country. But in the two weeks after he first cut interest rates on $4.47 billion of deposits in July 2003, 10 percent of Danamon's deposits flowed into the vaults of rivals, some of whom were no doubt pleased that Rozario, an urbane international banker freshly arrived from Citibank in London, had badly misread the local market. Many of Danamon's employees, accustomed to paying generous rates to maintain market share, agreed.
Rozario held firm to his course, convinced that Indonesia's fifth-biggest bank didn't need to pay above-market yields because the banking system was awash in liquidity. In two months Danamon's president-director lopped a total of 250 basis points off its deposit rates, bringing his bank's pricing into line with that of bigger rivals Bank Mandiri, Bank Central Asia and Bank Negara Indonesia.
That's when the skeptics had to admit they had misread their own market and Rozario. It turned out that the seemingly naive newcomer had gotten it right, after all. Deposit outflows slowed; then money streamed back in. By year-end deposits had climbed back to their July levels. The big payoff came early this year, when first quarter net profit surged 86.3 percent, to $56.3 million, largely because of higher net interest income that resulted in good part from Rozario's bold move.
"He took a very brave decision," says Rizal Prasetijo, a banking analyst with J.P. Morgan Securities Indonesia in Jakarta. "People at the bank said, 'If we cut rates, deposits will run away.' But he was damn right."
Today even Rozario admits to having had a "few moments of doubt." But the rate cuts were about more than boosting margins -- they were the first salvo in an effort to change the bank's staid culture. "Our goal should be to be a low-cost producer, and if we always paid the highest rate, we could never be that," Rozario says. "These are the types of decisions that are turning points in an organization where people are forced to reckon with themselves and what they offer."
Hired by Singapore's Temasek Holdings, the huge, secretive government investment company that paid $347 million for a controlling stake in Danamon in April 2003, Rozario has become a force to be reckoned with -- both for his staff and his competitors. He has brought in more than a half-dozen former Citibankers to help transform a stodgy institution offering plain-vanilla loans into an all-purpose financial services company whose bankers can identify and satisfy a broad array of corporate and consumer needs. Within just a few months of Rozario's arrival, Danamon started offering its customers everything from cash management to foreign exchange to a variety of Internet banking services. In December, Rozario paid 850 billion rupiah ($95 million) for a majority stake in Indonesia's second-largest motorcycle finance company, Adira Dinamika Multi Finance, to accelerate the bank's drive into consumer banking.
So far his moves appear to be paying off: Danamon shares have more than doubled since he took the top job; in late July they were trading at 3,350 rupiah, or seven times earnings, higher than Mandiri's or Bank Internasional Indonesia's multiple and just behind Bank Central Asia's market-leading 7.8. That kind of performance is attracting investors like Ng Soo Nam, Schroder Investment Management's Singapore-based director of fund management, who bought Danamon shares last year because, he says, the success of its seasoned team of executives had made the shares a more accurate proxy for "the economy and the Indonesian market."
"People look at Francis Rozario as the most interesting manager in town," says J.P. Morgan's Prasetijo. "What he has done over the past nine months is absolutely fantastic."
So fantastic, in fact, that Jakarta, and Indonesia, may soon have to share the 51-year-old Rozario with the rest of Asia. In a recent interview with Institutional Investor, Rozario revealed that turning Danamon around is only part of his brief. He will likely take leave of the bank next year to help bang into shape Temasek's plans to expand across Asia.
"I am a great believer that you lead from the front," the native of India explains. "If we do not succeed in making Danamon work, then there will always be question marks about whether this regional strategy will achieve its potential or not. So I was prepared to jump in and take charge of Bank Danamon until I was satisfied it was firmly on the right track -- and then I could return to my broader responsibility."
That responsibility is much harder to define. In the past 18 months, Temasek, controlled by Singapore founder Lee Kuan Yew's People's Action Party and run by Ho Ching, who's married to Lee's son, soon-to-be prime minister Lee Hsien Loong, has accumulated small positions in three other major Asian banks: India's biggest private bank, ICICI; South Korea's third-largest lender, Hana Bank; and Indonesia's sixth-biggest, Bank Internasional Indonesia (in which it is a minority shareholder to South Korea's Kookmin Bank). In April it lost a bid for South Korea's KorAm Bank to Citigroup; Malaysian press reports have raised the possibility of a link between Temasek and Kuala Lumpurbased Alliance Bank Malaysia. Temasek has long owned a controlling stake in Southeast Asia's biggest native bank, Singapore's DBS Bank, the only Asian competitor for regional (ex-Japan) supremacy against foreign giants Citigroup, HSBC Holdings and Standard Chartered Bank. Temasek, whose portfolio includes controlling stakes in shipping line Neptune Orient Lines, Singapore Airlines, Singapore Telecommunications and a host of other public companies with a total market cap of $53 billion, has said little about why it was buying these stakes beyond stating its interest in having positions in a variety of Asian banks with solid commercial prospects.
Rozario himself is vague on details -- he won't say exactly what his role will be -- but confirms that Temasek wants to create a banking network by taking "strategic stakes in leading financial institutions across Asia, in all the leading economies and future developing economies. We are looking at the bigger economies first: China, Korea, India and Taiwan but also Thailand and Malaysia."
Bank analysts speculate that Temasek has decided that as Asian countries gradually open up their local markets to outsiders and the region's economies become more interconnected, it will have a long-term opportunity to build a cohesive pan-Asian bank capable of competing against Citi and HSBC and at the same time serve Singapore's long-stated aim of diversifying regionally to ensure the health of its domestic economy.
Realizing this grand ambition will require all of Rozario's skills. Right now Temasek has mostly relatively small stakes in a jumble of high-quality Asian banking assets. "The question is, are they going to be marginalized as a subscale player in all these markets with no real synergies, or can all the parts be brought into a core?" says a regional banking analyst who declines to be identified. "If the politics of these markets don't evolve to the extent anticipated, they could end up in the long run being stuck in underperforming investments. Integrating the parts into a synergistic whole is the challenge."
Can Rozario and his Temasek counterparts create a regional powerhouse? "Based on the results at Danamon, I think you'd be foolish to bet against him," says Paul Sheehan, who recently left his job as regional banking analyst with ING Financial Markets in Hong Kong, where he tracked both Temasek and Danamon. "The fact that they have somebody of his caliber is one of the best signs that Temasek really has a plan together."
TEMASEK CAUGHT ROZARIO AT JUST THE RIGHT moment early last year when it first talked to him about joining. The 29-year Citibank veteran was running a $10 billion-in-assets emerging-markets small- and medium-size enterprise and commercial lending business he had launched in the late 1990s. The giant bank had just decided to fold Rozario's group, which was applying consumer lending techniques such as credit scoring to emerging-markets small-business customers, into its global relationship bank. Rozario would have a key role at the global bank but his group would lose its autonomy.
"When Temasek approached me and suggested that I help them develop a financial services franchise across Asia, I was very excited about the thought," says Rozario.
Rozario joined Citi after graduating in 1974 from Bombay's elite Sydenham College of Commerce & Economics with a degree in economics, accounting and finance and quickly embarked on the globe-trotting career path of an international financier. He was posted first to Dubai as a credit analyst and four years later became head of corporate banking there. Soon after, he moved to Athens to groom Citi's new recruits at the bank's training school.
In 1981, Rozario, then 28, was appointed country head for Liberia. Subsequently, he was named to run a Citibank start-up, Nigeria International Bank, which he made into the country's most profitable bank in a little more than four years. But not without a fight, recalls Rana Talwar, an ex-CEO of Standard Chartered and a former Citibank executive. Nigeria International was a joint venture with a substantial local shareholding, and some senior Citibank officials didn't think it was worth the effort to put money into a bank that wasn't wholly owned. ThenCiti CEO John Reed and his "group of 15" senior executive council considered a proposal to sell the bank's position, says Talwar, who was a group member. The young Rozario put up a spirited argument for keeping the bank. "Francis dug in his heels, said, 'It was the wrong decision for the bank,' and said, 'I will take responsibility for building this into a good, profitable business.' It was brave of him, because he was a relatively junior guy in the bank," says Talwar, who today owns most of London-based private equity firm Sabre Capital Worldwide. "Francis made a convincing case, and Citi did hang in there. He rolled up his sleeves, put in all the hard work, and Nigeria is now Citibank's largest profit center in Africa."
Rozario went on to become Citibank's CEO for Colombia and Ecuador and in 1990 moved to New York to run Citi's global relationship bank, which was created to cater to huge corporate customers with cross-border financial needs. Previously, banking relationships were divvied up by country.
In 1993, Rozario took over the bank's commercial and investment banking operation in Taiwan, under Talwar, who ran the entire Asian unit. Rozario was particularly effective strengthening the corporate lending part of the bank, says Talwar, who describes him as "a big thinker and very ambitious." But what distinguishes him most in Talwar's eyes is willingness to take responsibility. "You get a lot of people who have big-picture stuff and then walk away," he says. "Francis has the big picture and takes responsibility." In 1996, Rozario moved to London to take up his last post with the bank.
Talwar explains that Rozario's idea was to redirect many of the automated processes that banks like Citi have used successfully to build strong consumer businesses toward small businesses in emerging markets. Rather than depending on personal banking relationships, these consumer lending groups rely on technology to assess a potential customer's creditworthiness. Although the concept worked in some markets, such as India, says Talwar, it didn't get much traction elsewhere. "In many of these markets, analyzing balance sheets of local companies and making credit decisions based on that doesn't necessarily work, because balance sheets don't always tell you what is really happening," he explains. Eventually, Citi decided to reabsorb Rozario's group into its global banking operation. Rozario declines to discuss the switch other than to say there was "a change in thinking at Citigroup" at the time he started speaking to Temasek. Whatever his feelings about this change, the Danamon chief says he had "fallen in love with Asia" during his three years in Taiwan and had often wondered whether it would be possible to create a regional banking network from scratch. Temasek offered him the chance, and he quickly decided to head for Jakarta.
FOUNDED IN 1956 AS BANK PERSATUAN NASIONAL, Danamon was acquired in 1976 by property tycoon Usman Admadjaja, who gave it the name of his network of affiliated companies. Members of Danamon Group soon became the bank's biggest customers. In the midst of the Asian financial meltdown in 1997, Danamon suffered a liquidity crisis when many of its big corporate customers who had borrowed in U.S. dollars were unable to repay their loans because of the devalued rupiah. The Indonesian Bank Restructuring Agency, the government entity created to clean up the country's banks, took it over. By 1999, IBRA had merged Danamon with eight other troubled banks and recapitalized the combined institution by issuing it $3.6 billion in government bonds.
Postcrisis, under Rozario's predecessor, former president-director Arwin Rasyid, the bank successfully unified the nine companies' operations and began to diversify its loan portfolio. "It was a big surprise to me that the bank had a modern operating platform," says Rozario. "Danamon was fortunate to have had good leadership."
Danamon today has a more balanced portfolio than most of its biggest rivals because Rasyid had moved aggressively to exploit newly emerging consumer and SME lending opportunities as Indonesia's economy gradually began to recover and consumer spending surged. These new markets offered the chance to cut the bank's dependence on big corporate borrowers. Consumer lending accounted for 35.2 percent of Danamon's portfolio last year, SME and commercial loans 34.8 percent and large corporate credits 30 percent. By contrast, about 50 percent of Mandiri's much larger portfolio is still devoted to the slower-growing corporate marketplace. Moreover, notes ABN Amro Asia Securities Indonesia research chief Stephan Hasjim, Danamon's 25 biggest borrowers represented only 15 percent of its portfolio at the end of 2003, versus 23 percent at both Mandiri and Bank Internasional Indonesia. Its nonperforming loan ratio was 6.8 percent, compared with Mandiri's 8.6 percent.
The recapitalized bank also boasts a strong balance sheet. Net income surged 61.3 percent last year, to $171.9 million, as net interest margins, bolstered by Rozario's cuts in the rates on deposits, increased from 3.8 percent in 2002 to 5.8 percent. Its net interest margin, 31.4 percent return on equity and 3.3 percent return on assets were each the second highest among major banks in Indonesia in 2003, behind those of the country's fourth-biggest overall lender, Bank Rakyat Indonesia. About 94 percent of Danamon's revenue comes from interest income; the rest comes from fees, most of which are generated by the bank's treasury activities.
But like many of Indonesia's surviving banks, Danamon continues to lean heavily on its government bond portfolio, which contributed 31 percent of interest income last year and makes up 40 percent of its assets. But it has made progress in cutting those figures: In 2002 the bonds kicked in 33 percent of interest income and made up 51 percent of assets. Still, everyone -- analysts, the government and the bank itself -- agrees that it needs to lessen its dependence on this income.
Rozario's solution is his "all-purpose bank," which is intended to offer "world-class product" to consumers, SMEs and companies. Indonesia's banking business, he says, is sufficiently big and mature that "all the segments in the country have enough critical mass for us to build specialized business models for them." The best example of Rozario's approach can be seen in the SME market. Until last year Danamon made only loans; today, after bringing in expertise from foreign banks and reorganizing its staff, it offers cash management, foreign exchange, trade finance, working capital finance, capital expenditure finance and equipment finance products and services.
Analysts see Danamon's relatively big exposure to the fast-growing consumer and SME markets as its key advantage. In fact, the bank has a larger market share (8.5 percent in SME and 7.1 percent in consumer) than the bigger Mandiri and Bank Central Asia, according to ABN Amro's Hasjim. "The bank's consumer loan portfolio of 7.9 trillion rupiah in 2003 was more than double those at Mandiri and BCA, which have total assets three to five times larger than Danamon," Hasjim notes. Auto and motorcycle lending makes up 64 percent of the bank's consumer loans, home mortgages 29 percent and credit cards 7 percent.
And Rozario is pushing Danamon even deeper into that booming consumer finance marketplace. Auto lending alone is growing at more than a 50 percent annual clip. His purchase of a 75 percent stake in motorcycle financier Adira Dinamika, he says, won't be his last acquisition as he tries to more than double Danamon's 7.1 percent consumer share over the next five years. Adira's attractions are clear: Its loan portfolio has surged 110 percent a year for three straight years, and under the purchase agreement, Danamon's branches will be able to expand their product list to include motorcycle loans. Indonesia's motorcycle business is growing by more than 20 percent per year, and outstanding loans now total $8.7 billion. The acquisition also adds 105 branches to Danamon's existing network of 489. Rozario's goal is to get the bank's total number of branches and stand-alone ATMs, known collectively as "touch points," up to about 1,000 within three years. With Adira in the fold, it now has more than 800.
The purchase also served another purpose: It was a clear shot across the bow of Bank Rakyat Indonesia, the country's largest consumer lender, with an estimated 16 percent share. In March, Rozario followed up his Adira purchase by starting a savings and loan unit aimed directly at Indonesia's estimated 45 million self-employed and manual laborers, a key customer segment for BRI. The S&L, known as Danamon Simpan Pinjam, offers savings accounts and loans for insurance and home improvements. With the bank's lower-cost funding, it can pursue these small accounts more aggressively than before.
ROZARIO'S VISION IS FOR DANAMON TO BECOME a top-notch relationship bank whose staff can size up customers' needs and then sell them the right product. To achieve that goal, however, Danamon will need to undergo a dramatic cultural change. "It's a different mind-set, it's a different organizational business model, it's a different product strategy, it's a different pricing strategy," says Rozario. "Everything changes once you decide whether you want to be relationship- or product-positioned."
The Danamon chief acknowledges that replacing the bank's "fairly reactive culture" with a more dynamic sales-driven organization is his toughest challenge. "They've got to get the right people and quickly build up their human resources capability while at the same time controlling risk," says an analyst. "This is not an easy task."
To expedite the process, Rozario has tapped a familiar source, Citibank, for senior executives. Among them are vice presidentdirector Emirsyah Satar, who was most recently finance director at national airline Garuda Indonesia and worked as a corporate banker during the 1980s at Citibank Indonesia; SME and Islamic banking (Syariah) business head Jerry Ng, who began his career at Citibank Indonesia in 1986 as a consumer banker and went on to become deputy president-director of Bank Central Asia and deputy chairman of IBRA; integrated risk and special asset manager Tejpal Singh Hora, who oversaw risk management for Citibank's Asian private banking group; head of treasury and capital markets Lam Kun Kin, who oversaw Citi's regional financial markets trading as head of corporate banking and financial institutions; and corporate banking and financial institutions head Rene Burger, who was most recently head of country risk for Citi. (Danamon declined to make any of these new executives available for interviews.)
Even a better-trained and managed staff can't control all of Danamon's risks as it drives into consumer and SME lending. The Indonesian economy is forecast to grow 4.5 percent in 2004, and President Megawati Sukarnoputri is credited with stabilizing the economic and political environment, but the country is still a tough place to do business. During and just after the Asian crisis six years ago, nearly 150 lenders were wiped out, and another 70 or so were later merged out of existence or recapitalized. The country has an estimated 3.5 million citizens with more than $60,000 in assets, which makes its consumer market appealing, but it also counts about 40 million of its roughly 240 million residents as unemployed. And security is a concern in a country where terrorist bombings allegedly tied to al-Qaeda killed more than 200 people in Bali in 2002 and 12 others in Jakarta last August. Creating more uncertainty: In July, Megawati lost the first round of voting in the presidential elections; she will now face pro-reform candidate and former general Susilo Bambang Yudhoyono in a September runoff.
What's more, with virtually all of Indonesia's biggest banks looking to cut their reliance on recapitalization bonds and corporate lending, there's been a mad rush into the consumer and SME markets. Bank Central Asia, Bank Negara Indonesia and Mandiri, as well as foreigners like Citibank, HSBC and Standard Chartered, are all devoting substantial resources to try to unseat market leader BRI. "The new game in town is consumer banking," says Richard McHowat, CEO of HSBC's Indonesian businesses. "I don't know a bank that doesn't think it can be a big credit card player. Before the financial crisis Indonesian banks were corporate banks that garnered deposits and lent them to companies, and the consumer got a raw deal. Now that has changed, and attention has turned to the big opportunity in consumer banking."
Cultural issues and political risks notwithstanding, Danamon's immediate financial prospects are bright. In 2004 it will benefit from a full year of lower deposit rates, which should help its margins still further, say analysts. "Danamon will maintain its earnings growth momentum," says ABN Amro's Hasjim, who projects the bank's net profit will increase by 25 percent, to $215 million, this year, thanks largely to its acquisition of Adira and increased penetration of the consumer lending market. Hasjim is also optimistic about Danamon's inroads into the SME market, where it has built a substantial infrastructure to make high-yield loans. He doesn't think rivals will be able to catch up in this area very quickly.
IF DANAMON'S RECENT TRAJECTORY CONTINUES, Rozario should be able to turn over the reins to a successor in the latter half of 2005 and take on his broader role for Temasek, which Singapore created 30 years ago to hold stakes in strategic industries such as telecommunications and banking and to nurture companies in promising sectors. Because of its tiny home market, Singapore decided it needed a regional presence to continue growing. Building this "external wing" has long been a central tenet of Singapore Inc.'s economic strategy.
Temasek has thus far declined to offer more than the barest details about its plans. Former ING researcher Sheehan hypothesizes that it will try to build an Asian bank that will eventually be domiciled in Singapore. If the group were managed by experienced international bankers like Rozario and adhered to the high corporate governance standards upheld by the respected Monetary Authority of Singapore, it might be able to achieve a stock market valuation much higher than any of its constituent banks would receive in their home markets, says Sheehan. A rough template, he suggests, could be London-based Standard Chartered, most of whose business is in Asian emerging markets.
"StanChart has a very high multiple, and yet it owns assets in all sorts of horrifically low-multiple countries," Sheehan says. "People think of it as a U.K. stock with Western management and will pay 20 times earnings for it." (Temasek holding DBS and Standard Chartered held unsuccessful merger talks several years ago.)
As provocative and ingenious as this strategy is, it's also complicated to execute. For instance, one interesting acquisition target for Rozario is just across town -- Bank Internasional Indonesia, the country's sixth-biggest lender, with $4 billion in assets and a solid consumer business. BII also happens to be a part of Temasek's portfolio, which would seem to make a union even more likely. But Rozario says that such a merger probably won't happen anytime soon. BII is controlled by Sorak Financial Holdings, a consortium headed by South Korea's Kookmin. (Temasek has assembled several of its Asian acquisitions under a vehicle known as Asia Financial Holdings, though Danamon was purchased by a separate entity, Asia Financial Indonesia.) "BII is run very independently, and it's a different consortium. Temasek is a minority and Kookmin is in the driver's seat," Rozario says. "There are no predetermined plans for a merger. If it ever happens, it will be because it makes sense, like it would make sense if we merged with anyone else."
But analyst Sheehan thinks keeping the two banks separate is a waste of resources. "They've sworn they're not going to merge these banks," he says. That would be a mistake, he says, "because the industry is consolidating and neither one of those banks is the largest, and if you own two banks, you might as well put them together." Kookmin, however, would be the decision-maker on such a move, which it might not deem in its best interests. Kookmin declined to comment. A further complication: Temasek owns 3 percent of Kookmin's domestic rival, Hana (and has said it would like to increase that stake) and earlier this year made a bid for another competitor, KorAm, which later was acquired by Citibank.
The idea that Temasek can fashion all these stakes "into one entity is a stretch, because in cases where they are a minority shareholder, the majority will not suddenly give up their brand, their local management and governance in order to build a sort of Asian Standard Chartered or Asian HSBC," says one seasoned Asian banker. Finessing such conflicts will require a deft political touch.
There are plenty of other potential snags, says Sheehan. The biggest is that the banks in Temasek's stable offer few immediate synergies because, with the exception of Danamon and BII, they operate in different markets. (Temasek has also expressed interest in buying another Indonesian bank, state-owned Bank Permata, with about $3 billion in assets, which is about to be auctioned off.) And no one seriously expects Asian governments to bind their markets much closer together in the next decade. The only cross-border synergy evident right now is that customers of Danamon and Singapore-based DBS can access their accounts through either bank's ATMs -- hardly a major breakthrough.
Some of these problems might be easier to resolve if Temasek worked through $96 billion-in-assets DBS, which could roll its acquisitions up under its own name and more quickly realize the potential efficiencies of a larger entity. In fact, the city-state's biggest bank has already expanded across Southeast Asia, buying banks in Hong Kong, the Philippines and Thailand. But DBS stubbed its toe in April 2001: It paid $5.8 billion, or a rich 3.2 times book value, for Hong Kong's Dao Heng Bank Group. Shareholders were shocked at the price, and DBS stock fell 10 percent once the deal was announced. Since that brouhaha, the bank, which has also had to take write-downs in Thailand, has refrained from major deals; Temasek has stepped into the void with its own direct investment program. "Singapore's long-term strategy is to make its banks regional players, and Temasek is willing to underwrite some of the financial risk," says a banking analyst.
As one of Asia's best known banking names, DBS remains the obvious candidate to act as the regional group's core. At the time of the Danamon purchase, analysts speculated that Temasek was merely "warehousing" the bank until DBS was ready to absorb it. But at least one analyst now says he's convinced that Temasek will go ahead on its own without including DBS in its expansion. Temasek has said only that DBS may or may not play a future role in its Asian investments.
In the meantime, Rozario says he will continue to hammer away at "creating the right business models and the right disciplines" at Danamon so that the bank is on solid footing when he leaves. Making the bank into a first-rate competitor, he says, "will stand us in very good stead as we approach the big picture." Which, he might add, is a little blurry right now.