Francis Rozario, the new President Director of Bank Danamon, is a man with a mission. A 29 year veteran of Citibank, who ran the global SME business line, he is now imposing his unique vision on Danamon. The results have already started to show. The net income of the bank was up 72% in 2003 to $181 million, and with a fresh infusion of equity from Temasek and Deutsche the bank was greatly strengthened. Here Rozario tells us about the franchise he wants to create and how his business model will position Danamon as Indonesia's premier bank.

Can you talk about changes you have implemented at Bank Danamon, and your strategy?

Our numbers are now substantially better. Since the new management took over in July, we have done a number of things that have strengthened the performance of the institution. Most notably we realised there was an opportunity to benchmark our cost of funds to BCA. We felt we were overpaying and took the risk of lowering our cost of funds and found the market responded reasonably well and accepted that we are a good credit risk. The lower rate helped to improve our margins.

We also addressed the credit issues right from day one. We were able to provide for loans that we would not have chosen to have made, and were an overhang from the past. By year end we were able to fully provide for questionable exposures and that made us feel more confident about the strength of the bank. We also created a general reserve to cover some of the SME and consumer portfolios.

Throughout last year we spent a fair amount of time building a strategic plan for the bank. We tried to understand the opportunities in Indonesia and the products and taking a view of how they were evolving. We thought through the wallet size of each of our businesses. We looked at how we could differntiate Danamon, and the financial models that would allow us to achieve predictable returns.

All that was done between July and early January. We concluded it with a strategic offsite in Bali.

Our intent is that within the next five years we will have 10% share of the total banking opportunity in Indonesia.

What did you decide to do based on this plan?

In consumer banking there are 45-50 million households at the lower income levels, and we will spread out across the country to be a national bank. We want to support the lower income consumer. The purchase of Adira Finance very much helps us to get a strong foothold in that market, because they are largely financing motorcycles and the attractiveness of this segment is they pay decent interest rates, and their credit experience is quite reasonable. In spite of the crisis in 1997-98, the performance of portfolios in the lower income segment has been quite favourable.

So we are committed to the mass consumer market - via the right business model. The middle income consumer makes up only five million households and everyone is competing for this. We have decided to be a full lifecycle relationship bank to the customer and try and achieve a high share of customer wallet - otherwise it is not clear to us you can make sufficient returns in this segment.

In the affluent segment, our position is to become the bank for the entrepreneur and their business. We really have a very good SME business. So in addition to supporting their business, we want to be their banker on the personal side. The foreign banks only play offshore in this respect, while the local banks are not linking the two today. So we think we have a unique value proposition. We will offer them a good suite of investment products.

When you look at the SME and commercial banking side, there are 20 million self-employed people in Indonesia. Danamon has an important role to play in supporting these people. We have 500 branches already. With some repositioning we could get a much higher share of that marketplace. Again, just like with the lower income consumer, the experience with the self-employed has been very good. They have been resilient and generally pay their debts. The loss experience has been quite modest. In fact one of the curious facts about Indonesia is that the poorer people are a better credit than people at the upper end of the spectrum?

The billionaires?

Billionaires or millionaires, I leave that to you to surmise. But it is quite an interesting fact that poorer people have been much more conscientious about meeting their obligations in the last seven years.

So we will build an appropriate business model to support the self-employed. We will also grow our SME business, which is the largest among the private banks.

Then moving up the chain to customers who borrow Rp5 billion to Rp50 billion, is what we term the "commercial" segment. We've had some track record in this segment, but not much. But given my background, I feel this is a golden opportunity to create a national commercial bank that supports the middle-sized corporates that play a key role in the distribution of goods and services in Indonesia. Our goal will be to get a leading position in this segment - which banks have shied away from since 1998, generally because of the dollar debt these companies had. But those companies that have acted honourably, we will support. The big difference, going forward, is we will run our commercial banking business on a portfolio basis rather than a name-by-name basis. Losses will therefore be more predictable using this approach.

Then you move to the large corporates. These have been a minefield in Indonesia, largely causing the collapse of many of the banks. So we will be selective, but there is room to build a decent business. Our goal will be to keep these loans to around 20% of the total. We want to be known among these corporates as the best bank in trade finance, cash management and treasury services. In this regard we are creating a capacity equal to the best - whether foreign or local. I hope this platform will be completed in the course of the next 12 to 18 months. We are hiring some of the best talent available locally. We are confident we will be viewed in 18 months as the most responsive trade, treasury and cash management bank in Indonesia.

We will lend selectively, and become a lead bank for the right customers. For customers who have less than ideal creditworthiness, we will want to be more of a services bank and less of a lender.

What does your background at Citibank bring to Danamon?

I spent almost 29 years at Citi before joining Temasek, to help assist them in their objective to invest in financial institutions across the region. Danamon was the first investment we made and I felt it was important for me to come and make sure it was a roaring success.

The last seven years of my career at Citi was as the global head for SME and commercial business in emerging markets. I started a new business model and rolled it out in 20 countries. I had good experience in how to modernize and run a portfolio-driven business.

So you created Citi's embedded bank strategy?

Yes, I was one of the architects of Citi's strategy and was later chosen to create Citibusiness which services customers in the SME segment.

I was previously in Taiwan, before going to London to run the SME business. So I had a lot of fun trying to create something unique and it has done very well. I would love to do the same here.

Here I will be able to influence outcomes more directly than at Citibank, where everything is subject to lots of different influences. Here I will be able to create the special model I have always wanted to create.

Is the strategy a bit like that of HDFC Bank or ICICI Bank in India?

HDFC bank does not have an SME business. Their strategy is largely middle income. We are trying to create the wherewithal to holistically serve each segment, as opposed to trying to sell a products that are profitable in each segment. We don't to take a product-driven approach, but a segment business model. ICICI Bank is closer to what we are thinking of doing.

If your model is working well, what should the ROE of this bank be on a consistent basis?

North of 25%.

What's your overall assessment of the banking market in Indonesia? Is it a much healthier market now?

Much healthier. It has strengthened and now has good supervision from Bank Indonesia. There are much tighter governance standards. What has made the basic difference has been Indonesia's sound fiscal management. Government debt has come down to 1.25% and that's in an election year. I am impressed. There are not many countries you see with the population and job pressures that have the courage to hold the line with lower fiscal deficits.

The memories of 1997 remain strong and the government will do everything it can to avoid it happening again, and Indonesia's sovereign rating will improve. I am very optimistic the government's new international bond will be oversubscribed.

So the financial industry is now benefiting from that stability. There is excess liquidity and hopefully as the market stabilises lending will grow more robustly. Today most borrowing is going into consumption-related areas, but in Indonesia it is very hard to separate consumption and investment at the lower end. For example, if someone buys a motorcycle, it might be used to transport goods to market. Do you call that consumption or investment? It's very hard to know how much is consumption and how much is investment. The low income level segment is driving much of the demand. Affordability is rising as the rupiah strengthens against the dollar.

Probably, because this is an election year, there will not be a lot of heavy investment. But we expect a successful election process and that investment will start coming in. The conditions are now very suitable for investment now.

What do you estimate Indonesia's natural growth rate to be?

We are running at 4.5%, but the opportunity is to raise it to 6% through additional investment. We are missing that. That's what we are all waiting to see happen. Sooner or later, large and middle sized corporates are going to have to make a decision on whether they upgrade plant and machinery to compete on the world markets more successfully, or are they just going to keep working the older, lower productivity machinery and not embrace new technologies. To some extent we are also losing out in terms of investment to China and India. Indonesia is going to need to try and regain that attention and get them to put the appropriate amount of investment into a country with 200 million people.

Indonesia has always been poor at managing its external PR. Is that changing?

They are aware that they can do a better job. The government is organizing a number of roadshows. In the past it was hard to go out and market yourself when it was obvious things were not in good shape. In the last couple of years things have started to look more stable and growth has returned. So now is when you can tell a story and market yourself.

Is China a threat or an opportunity for Indonesia?

It's a big opportunity. It is a huge market and a lot of Indonesia's commodities have gone up in price due to Chinese demand. So Indonesia is ideally situated to capitalise on China's growth. The challenge for Indonesia is its own industrial products. That's why unless the corporates start investing in their own productivity, they will lose out as a low cost producer to China and India.

But I think it is a big opportunity. The trade requirements of China are just going to grow bigger and bigger.