Barclays is the largest sovereign bond underwriter in Indonesia. Now it wants to just as big in investment banking.
Built from scratch eight years ago, PT Barclays Capital Securities Indonesia is now the undisputed leader in the country’s debt market, by far the largest underwriter of Indonesian government bonds as well as corporate bonds. It underwrote 25% of the $11.5 billion government bonds issued last year, and this year to August has underwritten 15% of $6.3 billion, according to data from Dealogic. Its next largest rivals are Deutsche Bank and JP Morgan. Barclays is one of the few international firms that consistently meets the government’s stringent requirements for underwriters of global issues, says Rahmat Waluyanto, the director of debt management office at the Ministry of Finance .
Today is a far cry from 2002, when Barclays Capital first set foot in Indonesia, after studying the market since 2001. Started with a representative office consisting of three people in Jakarta, it now has a head count of six, and recently appointed Ferdinand Sadeli as director to the team. It office is only in Jakarta. This office was a key step, says Barclays Capital Indonesia CEO Sity Leo Samudera.
“When Barclays hired me, the first thing I requested was to establish an office in Jakarta. To me that is the most important thing, if you want to do business here you need a local presence. You cannot cover Indonesia from offshore, otherwise you’re like a circus, coming to town from time to time only to leave again. It lacks the kind of commitment you want to show to your clients,” says Sity.
It was only natural that Barclays focused initially on bonds. Globally, Barclays Capital, the investment banking arm of London-based bank Barclays PLC, is the world’s biggest debt underwriter in international issue. It has underwritten $212 billion in bond deals worldwide this year to September, well ahead of number two Deutsche Bank with $186 billion according to Dealogic, the authoritative industry source for debt capital market information.
The debt focus is proving to be a smart move for Barclays. Dealogic has named Barclays as the number one Bookrunner year to date for G3 Sovereign Debt in Asia (excluding Japan). Barclays is the only company which has underwritten four sovereign bonds this year for Philippine, Vietnam, Malaysia, and Indonesia. For one, the corporate debt markets in Asia are still relatively underdeveloped as compare to the more established markets in the U.S. and Europe. Also, Asian companies rely mostly on loans, equity (public and private) or internal sources when it comes to generating funds. In contrast, the Indonesian government has been a fairly regular issuer of sovereign debts in the past decade. For instance, the 2010 Indonesian state budget forecasts that the government income would only cover Rp 992.4 trillion – mostly from taxes and dividends from state companies — of country’s total Rp 1.1 quadrillion expenses. The rest has to come from debt, including Rp 41.4 trillion marketed to international investors. Indonesia had the largest growth in debt issuance, in percentage terms, of any ASEAN nation, in the period from 1996 to 2009, notes Fitch Managing Director Vivek Goyal, based in Singapore.
In terms of local currency bonds issuance, sovereign and corporate, Managing Director Head of Business and Relationship Management Group Fitch Asia Pacific Vivek Goyal says Indonesia scored the biggest growth among six ASEAN countries (Singapore, Malaysia, Thailand, Philippines, Vietnam) that is 1.186% from only $7 billion in 1996 to $90 billion in 2009. By comparison, Singapore recorded 500% growth from $25 billion to $150 billion in the same period. According to him, one third of the total debt and syndicated loan transactions in Indonesia are done in US dollars, and another two third done in rupiah. The total outstanding in rupiah issuance is growing rapidly and therefore has overtaken the US dollar issuance.
“We expect this continue to grow. It may reach $100 billion in 2010 and $110 billion in 2011.” The growing issuance happens very similar to any other market in Asia, although in Indonesia is setting a higher record of growth. Still, Goyal says, the whole ASEAN’s outstanding debt issuance is still smaller compare to that of India and China, and the US dollar market debt absorption is a lot smaller.
Sity has big plans for Indonesia. Building off its base in bond underwriting, she plans to develop Barclays Indonesia to become one of the country’s largest investment banks within three years. First she looks to expand into mergers and acquisition advisory over the next two years, and into equity brokerage over a longer term, including a seat on the Indonesia Stock Exchange. Barclays already acquired the necessary investment banking license in March 2004.
“We would like to offer the full suite of products to our clients. We are ready to compete with other foreign houses, which are bigger domestically than us. We want to be in the top five and then the top three,” says Sity.
It should be easy to understand the logic behind these service expansions. Mergers and acquisitions, as well as equity trading, are similarly just as lucrative of an industry – if not more — as Barclays has found in bond underwriting. Indonesia, home to some of the world’s most valuable mining and mineral deposits with a fast-moving consumer-driven economy, is increasingly becoming a hot destination for merger and takeover deals by international heavyweights. Bloomberg says this year to September, mergers and takeovers in Indonesia amounted to $20.3 billion, about half of the $40.8 billion worth of such deals in Southeast Asia. On equity trading, Indonesia is one of the best markets to go to. The Indonesia Stock Exchange (IDX) main index has risen this year to September by 38.15%, making it Asia’s second best performer. In 2009, the index was the world’s second-best performer, up by 85%. Given that Indonesia has become increasingly active in mergers and acquisitions, and the Indonesian stock market is one of the region’s best performing this year, Sity is going after two prime targets.
Now, what makes Sity think Barclays Indonesia is up for the job? For one, the expertise in debt underwriting is similar to what a firm needs to succeed in other forms of investment banking such as mergers, acquisitions and equity trading. And that should not be a problem for Barclays as it has a strong platform worldwide, including a broad global distribution network and deep research capability. The key, though, is adding value for the clients, she notes. “It’s not just the Indonesian government, but any kind of clients. Once you close a transaction for instance it’s very important that you continue to service the client. For example, we regularly call domestic clients and investors on the market, to update them on the latest changes in government and corporate sectors. We make sure to keep communications alive as well with international investors. All this after sales services is very important and the key to developing the business,” Sity explains.
Another element is human talent. Samudera, 46, brings sound experience to the job – she spent eight years heading investment banking division for Barclays Capital in Jakarta from September 2001 before being named CEO of Indonesian operation in January 2008. Previously she had about two decades experience in various financial firms in the country. She insists: “I do believe I’ve got the right track record to expand our franchise in Indonesia given my experience in the financial services industry. I know and understand the business challenges.”
Speaking about the meaning behind her three words name, she mentioning some big things which is Sity for earth, Leo for lion, and Samudera for ocean. “Big names but comes in a tiny lady with big responsibility,” told this Medan, North Sumatra-born business woman.
One challenge is knowing when to be selective. In March, Barclays closed down its retail operation in Indonesia, operated under the Bank Akita brand. Barclays had acquired the bank just two years earlier, in 2008, and said at the time that the acquisition was in line with its strategy of “increasing exposure over time to emerging markets with good growth characteristics.”
In line with Sity strategy, the focus will be institutional not retail, explains Clare Williams, head of corporate communications, Asia Pacific for Barclays Capital. The investment bank continues to view Indonesia as an attractive market for financial services. This institutional-focused activity doesn’t require a branch network. As a result, the decision was taken to exit the Bank Akita platform. Now, she said, they are working closely with the central bank to manage that process.
Another priority is to keep building the Indonesian operations–against the backdrop of tough conditions in some other parts of the world for Barclays. In the US, the Justice Department has ordered the bank to pay a fine of $ 298 million after conducting illegally transactions on behalf of customers from Cuba, Iran, Sudan and other countries sanctioned in programs administered by the Office of Foreign Assets Control (OFAC). Worldwide it has said it may lay off 400 staff following a review. But Williams says the bank will continue to “hire selectively in areas where the business is growing, particularly in Asia, including Indonesia, where we have added significantly to our headcounts in investment banking (M&A, advisory) and in equities. I can’t give you details, but we will shortly be announcing a new hire within investment banking in Indonesia.”
Sity says another factor works in Barclays way – the acquisition of U.S. giant Lehman Brothers in 2008 also helped, which collapsed and helped trigger the wave of global financial meltdown. Lehman had a strong presence in equities and mergers and acquisitions. Barclays has already benefited from that. After focusing on integrating the Lehman capabilities in Barclays operations in the U.S. and Europe, now it is looking to do the same in Asia, including Southeast Asia. Along those lines, Samudera says, as it expands its equity franchise in the region Barclays would eventually like to gain a seat on the Indonesia Stock Exchange. Getting one would allow the bank to trade stocks directly on the exchange, which is another important requirement for Barclays Capital to build its presence as a complete investment bank here.
What’s the timetable, if any, for Barclays to achieve its ambitions? Especially if taken into account the presence of other investment giants in Indonesia – say UBS, JPMorgan, Bank of America Merrill Lynch, Credit Suisse, DBS, Standard Chartered, Deutsche Bank and Citi who are already offering the same investment banking services to investors in Indonesia and beyond. Well, not that long, within three years to be exact, fearless Samudera claims. “In terms of building our operations throughout Asia, Indonesia has all the potential to make Barclays Indonesia a full service investment bank.”
* This story appears in December 2010 issue of Forbes Indonesia magazine. The grey highlight is additional for the blog.