S&P puts Bank Negara Indonesia on watch

Standard & Poor's said it placed its B long- and short-term ratings on Bank Negara Indonesia Tbk. P.T. on CreditWatch with negative implications.

The move comes after Indonesia's state minister for economics said the government, as 99% shareholder of the bank, intends to call an extraordinary general meeting to consider replacing senior members of the bank, following possible fraud involving letters of credit purportedly issued by the bank.

The loss stemming from the letters of credit, estimated by the bank at Indonesia rupiah (Rp) 941 million (U.S. $110.7 million) of a face value of Rp1.7 trillion, has been recognized in the bank's third quarter to September 2003 results.

In a worst-case scenario, S&P said a write-off of the entire Rp1.7 trillion would represent about one-half the bank's likely operating profit for 2003, implying that the bank would be able to absorb such a significant loss without substantially eroding its capitalization position.

Nevertheless, the minister's call, while commendable in terms of strengthening accountability and therefore corporate governance, raises questions as to whether the purported fraud might have been executed by more than just middle managers of the bank, as earlier reported. If so, this would imply a far more significant breach of risk controls than previously indicated.

Resolution of the CreditWatch will follow S&P's assessment of the likely overall impact of the case, and whether or not it undermines the bank's credit profile.

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