Mandiri's firefighter spearheads Indonesian banking transformation
WATARU SUZUKI, Nikkei staff writer
JAKARTA -- "I'm used to dealing with trouble," said Kartika Wirjoatmodjo, the president and chief executive of Bank Mandiri, Indonesia's largest lender by asset, after less than two months in the top positions.
That is just as well as he has already found trouble with a steep decline in profits and the company's stock price slipping. Wirjoatmodjo was speaking on Monday, May 16, at the bank's headquarters in Jakarta, flashing smiles and laughing as he strode confidently towards a room full of analysts.
The mood inside was anything but cheerful with plenty of explaining needed. Over the weekend, Mandiri had announced that its first quarter profits were down 26% year on year with nonperforming loans ballooning. As if to highlight the bank's woes, its two closest competitors, Bank Rakyat Indonesia and Bank Central Asia, were both basking in profits.
Mandiri has a larger corporate loan book compared to its rivals, and hence suffered from the decline in the credit quality of companies mostly in commodity sectors such as oil, gas and coal. Provisions for bad loans tripled to 4.59 trillion rupiah, and gross non-performing loan ratio surged by nearly one percentage point to 3.18%.
When the doors shut behind Wirjoatmodjo, the visiting analysts knew that Mandiri's shares had shed another 3% since morning. "There are cycles, and I have come at the end of a cycle," he said. "So I have to deal with bad loans and all -- but that is okay."
Still in his early 40s, Wirjoatmodjo's nickname is Tiko. He is unusually young to be chief executive of an Indonesian state-owned enterprise, but his involvement in earlier pivotal moments at Mandiri has won him respect as a professional banker with no political strings attached. Those qualities are said to have caught the eye of President Joko Widodo, who is on a mission to reform all state-owned enterprises.
"The president did not want this position to be used politically," an economic advisor to the government told the Nikkei Asia Review. The Ministry of State-owned Enterprises -- Mandiri's majority shareholder -- appointed him on March 21.
"I have quite a detailed understanding of how the bank evolved during the last 15 to 16 years," Wirjoatmodjo told the analysts with no need for false modesty. "I hope with that I can give you more background on how we transformed the bank, and how we see ourselves developing into one of the most important institutions in ASEAN."
Wirjoatmodjo carried on with the meeting in the same bold vein. Bank executives who had braced themselves for a harsh grilling were pleasantly surprised when the analysts gave their boss a round of applause after he wrapped up the proceedings.
Mandiri's new chief executive has always had a certain star quality. He graduated from the elite University of Indonesia with a degree in economics and accounting, and took his masters of business administration at Rotterdam's Erasmus University in the Netherlands.
Wirjoatmodjo started his career as a financial consultant, and in 1996 became an analyst at the Industrial Bank of Japan, which is today Mizuho Bank. When the Asian financial crisis struck the following year, Indonesian banking was thrown into turmoil. Wirjoatmodjo moved to Boston Consulting Group and worked on the merger of four banks that needed to be bailed out. Bank Mandiri was the end product.
Wirjoatmodjo was tapped to lead strategy and financial analysis at the new bank. Plenty of new problems came over the horizon. In 2005, Mandiri's nonperforming loan ratio surged from 7% to 25% as economic conditions deteriorated. Net profit was down nearly 90%. On the watch of President Agus Martowardojo, who is today the central bank governor, Wirjoatmodjo was instrumental in a sweeping restructuring of the Mandiri loan book.
In 2014, Wirjoatmodjo was put in charge of Indonesia Deposit Insurance Corporation, which had been established after the financial crisis to protect depositors in bank collapses. His biggest headache was finding a buyer for Bank Mutiara, the former Bank Century, which had been bailed out in 2008 at the height of the global financial crisis. That stirred controversy because the government needed to inject 6.7 trillion rupiah -- a substantial amount for a middling lender. Wirjoatmodjo assured bidders worried about political implications that the bank was now healthy, and Mutiara was sold to Japan's J Trust in November 2014 for about 4.4 trillion rupiah. Although this was below the bailout cost, it was a premium valuation -- 3.5 times Mutiara's book value.
His stint at the head of Mandiri is likely to be Wirjoatmodjo's biggest challenge yet. This year's first quarter profit slide was due to nonperforming loans kicking up, but at 3.18% so far they are much lower than in 2005. Wirjoatmodjo expects economic recovery to take some time, which means many bad loans are going to linger, even until early 2017. There is ample room for operational improvements, however. "We admit that we have to fix some of our basic banking practices, especially in credit and portfolio management," he said.
To stanch further bad loans and sort out existing ones, Wirjoatmodjo has formed a new directorate that specializes in restructuring and collecting repayments. It is to be staffed by senior managers reporting directly to him. One big target is sorting out a 1.5 trillion-rupiah loan made to a bottled water company in Bandung, which has struggled against larger players. "Their manufacturing standard is good," said Wirjoatmodjo. "What they need to do is find a buyer."
Cleaning up the bank is not his only job. President Widodo wants lenders to lower interest rates to revive economic growth. Indonesia's central bank has already cut the policy rate three times this year, and said after its last board meeting in May that there is further room for monetary easing.
In response to the central bank's moves, Mandiri plans to lower lending rates that stood around around 12% at the end of 2015 to single digits this year. The potential squeeze on its profits concerns investors. The bank's market capitalization is hovering around $15 billion, far below its target $55 billion for 2020.
Wirjoatmodjo has also been charged with growing Mandiri regionally. With only eight operations overseas, it is well behind counterparts in Malaysia and Singapore.
"If we look at maybe the next five years, we want a substantial presence in the regional market," Wirjoatmodjo said. He has been travelling, looking for possible acquisitions in high-growth markets like the Philippines, Myanmar, and Vietnam. "We need to be sure that the growth rate and profitability is equal or bigger than the Indonesian market," he said.
One of Indonesia's broader challenges is transforming its fragmented banking industry. Loans to the private sector are less than 40% of GDP, compared to over 100% in Malaysia, Singapore, and Thailand.
With limited sources of funds, large Indonesian banks can charge high, which makes them the most profitable in the region. Net interest margins -- the difference between lending and borrowing rates -- are higher than 5%, compared to under 2% in Singapore, according to S&P Global Ratings. This has given Indonesian banks little motivation to expand abroad, where profits are more elusive.
Wirjoatmodjo is certainly full of confidence, and has proven his ability to make changes at difficult times, but can he take this higher? He has been looking for a strategic partner to develop the bank's Islamic unit, Bank Syariah Mandiri, which has been putting a brake on overall performance.
"2016 will be a tough year," he said. "But we will still push the business for a high growth rate -- we believe Mandiri is well positioned in terms of revenue growth."