Evaluation of potential financial risks of bank through financial due diligence and preparation of financial due diligence guidelines / Wulan Ningrum Kusuma and Sylvia Veronica Siregar

Financial due diligence (FDD) is critical to a successful mergers and acquisitions (M&A). FDD assists investor in evaluating Target Company's risks. Banks in Indonesia is a sector that investors are interested in as M&A target, notably with the support of the Regulatory Body for Bank consolidation. As the ramp-up of Bank M&A, the need to perform FDD becomes significant. However, the absence of standard in performing FDD for banking can hamper the FDD process, especially for the FDD team that has no experience in banking. This thesis provides study concerning ways in identifying, analyzing and evaluating the Bank's main risks through FDD as well as the preparation of FDD guidelines. The study was conducted qualitatively using case study at Bank XYZ. The study involved interviews and observation on parties engaged in the FDD on Bank including documentation study. The study result is based on FDD guidelines focusing on Bank's main financial risks such as loans, foreclosed assets, deposits and employees. Loans and deposits are the Bank’s main business and have the largest portion of Bank’s assets and liabilities. Loans ’ main risk was evaluated by assessing the loan quality using three pillars analysis (business prospects, performance, and ability to pay) that has impact on the allowance for impairment losses. Foreclosed assets are part of the loans. Foreclosed assets ’ main risk was evaluated by assessing its quality and value that has impact on the impairment. Deposits’ main risk was evaluated using maturity mismatch between loans and deposits including loan to deposit ratio. Employees are another issue often discussed in M&A, especially the severance pay. The risk is whether the severance pay provision is sufficient. The provision is evaluated with reference to the Manpower Act. This guidelines assists the implementers of FDD in performing FDD properly by focusing on the Bank’s main financial risks.