Industry consolidation in Taiwan,
Asia’s fourth-largest retail banking market, is accelerating, with
foreign lenders and international private equity funds looking to
grab assets from an economy still trying to emerge from the recent
consumer credit crunch. John Evans reports
The pace of consolidation in Taiwan’s
over-banked financial services system is ratcheting up, driven by a
wave of foreign acquisitions. The government controls about half
the island’s banking assets and is seeking to divest itself of much
of its bank holdings to help spur consolidation.
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The government and financial regulators in Taipei, after urging the
restructuring of the country’s underperforming banking system for
the past seven years, are throwing the doors wide open to foreign
investment. Taiwan’s policymakers on 1 June revived a plan to
encourage mergers in a market where more than 40 local and 30
foreign banks, as well as several hundred credit associations,
compete to service some 23 million people.
Almost one-third of these 40 local banks were unprofitable in the
first quarter this year. Many banks, particularly smaller to
mid-sized players, are still suffering from an unsecured loan
crisis, spurred by indiscriminate lending in areas such as credit
cards.
Potentially adding to local banks’ legacy of bad debts is a draft
law from Taiwan’s Financial Supervisory Commission, which could
cost them many millions of dollars in the future. The new bill
consolidates all existing finance-related laws. Under the
proposals, the commission can require financial institutions to
settle disputes out of court. This will apply in situations where
there is insufficient evidence or when distances make the
investigations difficult, as in international disputes.
Based on US precedents, these settlements could be considerable,
commission officials have said. They cited the example of several
mutual fund firms being required to pay a total of $5 billion as a
result of a single administrative probe.
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By GlobalDataFor foreign banks, buying into Taiwan carries a number of potential
advantages, including getting a stake in the island’s growing
population of high net worth individuals. Switzerland’s UBS, the
world’s biggest wealth manager, has just applied to open more
branches in Taiwan to serve rich clients.
The consultancy Boston Consulting Group estimates that Taiwan has
210,000 individuals with net assets of $1 million or more,
controlling about $585 billion.
Another strategic aim is to gain exposure to mainland China, as
foreign lenders bank on Taiwan and China increasing their economic
and trade links in future years.
The new bout of foreign investment includes the US private equity
industry’s first involvement in Taiwanese banking. Carlyle Group
has agreed to pay TWD21.5 billion ($657 million) for a 35 percent
stake in small Taiwanese lender Ta Chong Bank. Fitch, the US rating
agency, estimates that Ta Chong had more than $80 million in bad
and doubtful debt still on its books as at the end of 2006.
Nonetheless, its overall asset quality is considered to be superior
to many hard-pressed Taiwanese banks.
Under Taiwanese law, Carlyle’s equity stake is likely to be no more
than 25 percent, a cap that can be exceeded only by a financial
holding company. As a result, the private equity group is bringing
other financial backers into its investment group in Ta
Chong.
Carlyle beat off competition from US rivals Oaktree Capital and MBK
Partners to take its Ta Chong stake, which marks its seventh
acquisition in the country. Last year, it took a stake in Eastern
Multimedia Group for $1.52 billion in what marked Taiwan’s largest
leveraged transaction to date. However, it failed to acquire
Taiwan’s Advanced Semiconductor Engineering in April, after
offering about $6.5 billion.
Loss-making EnTie Commercial Bank
Another buyout investment firm, Longreach Group, has agreed to pay
TWD23 billion for a 51 percent stake in Taiwan’s loss-making EnTie
Commercial Bank. Longreach officials said they hoped to return the
bank to profitability in two to three years. EnTie, which controls
1.2 percent of deposits in Taiwan, lost TWD2.77 billion before
taxes in the first four months of this year and TWD5.94 billion in
2006.
At the same time, DBS Group of Singapore, South-East Asia’s biggest
bank, is in talks to buy a majority stake in Taiwan’s Far Eastern
International Bank (FEIB), which has a market value of about $1.1
billion. The bank, which has hit credit quality problems competing
with market leaders such as Chinatrust Financial and Citigroup, had
in recent months been in talks to sell a stake to foreign lenders
including Citigroup, HSBC and ABN AMRO.
Another serial acquirer in Asian banking, General Electric (GE), is
among a group of companies that may invest a combined TWD27.3
billion in Cosmos Bank to help rebuild its capital. Taipei-based
Cosmos, 10 percent owned by GE’s consumer lending unit, recorded a
pre-tax loss of TWD2.38 billion in the four months ended 30
April.
In addition, Morgan Stanley has applied to buy up to 10 percent of
Chinatrust, Taiwan’s largest credit card issuer, according to
Taipei bankers. It reportedly is prepared to invest more than $600
million in the issuer.
First overseas takeover
These latest transactions follow the entry into Taiwan by several
multinational banks in recent months. Standard Chartered bought
Hsinchu International Bank for TWD40.5 billion in the first
overseas takeover of a Taiwanese bank, in September last year,
followed by Citigroup’s TWD14.1 billion buyout of Bank of Overseas
Chinese in April. ABN AMRO agreed in June to take over failed
Taitung Business Bank with a TWD6.9 billion subsidy from the
government.
In addition, the government plans to sell its stakes in a number of
banks, including First Financial Holding and Taiwan Cooperative
Bank, as it seeks to consolidate banking. Among banks in which the
government has at least majority control, it plans to keep two
large ones in principle and will dispose of its shares in the rest,
according to Taipei officials.
The government will retain the wholly owned Bank of Taiwan and
majority-owned Mega Financial Holding. Bank of Taiwan is considered
a strategic policy bank whose interest rates serve as industry
benchmarks. Mega Financial’s banking unit has branches abroad that
distribute salaries to overseas government workers.
The government has already announced plans to merge Bank of Taiwan
with its smaller, fellow state-owned Central Trust of China and
Taiwan Land Bank.
