Industry consolidation in Taiwan, Asia’s fourth-largest retail banking market, continues as the government announced its intention to merge three publicly owned banks. The country’s financial services sector continues to attract the attention of foreign raiders.
The Financial Supervisory Commission (FSC) in Taipei has proposed allowing foreign and local investors to fully own domestic banks in a measure to spur consolidation in the island’s over-banked financial services industry. At present, only the government and financial holding companies may hold more than 25 percent of a Taiwanese bank.
The proposed legislation needs approval by the cabinet and parliament, commission officials stressed. Investors will be asked to seek permission from the regulator whenever their proposed ownership in a bank would exceed 10 percent, 25 percent or 50 percent, they said. Under the existing rules, investors that are not classified as financial holding companies can take control of local banks when they are in a distressed state. Revising the bank ownership law would bring it into line with international standards and help facilitate financial consolidation, officials noted.
The Taipei government has also confirmed its determination to merge three wholly state-owned banks into a holding company, despite a move by the opposition in parliament to halt the project. The newly merged bank, Taiwan Financial Holding Company, will combine the Bank of Taiwan, the Land Bank of Taiwan and the Export-Import Bank of the Republic of China.
According to the government, the new entity will emerge as the country’s largest financial services group, with assets of more than $150 billion. The government has set a 31 December deadline for its Ministry of Finance to prepare plans for the merger, which will be carried out in three phases.
Merger objections The opposition had claimed that the government had not taken bank staff’s rights and interests into account, while the absorption of the Export-Import Bank into the new group will lead to disruption of export financing for SMEs. A government spokesperson denied these charges.
“Since all three banks are 100 percent state-owned, their staff’s rights and interests will be fully guaranteed after the banks are transformed into a fully government-controlled financial holding company,” he added.
The government’s main contention is that the new bank will achieve economies and productivity gains to enable it to deepen its reach into new markets. The initiative follows a period of consolidation in Asia’s fourth-largest retail banking market, with its foreign lenders and international private equity funds looking to grab assets from an economy that is still trying to emerge from the recent consumer credit crunch.
According to the FSC, Taiwan’s local banks wrote off $4.93 billion worth of bad loans in 2006. A whopping 70 percent of this, or $3.49 billion, was made up of non-performing credit card loans. Much of the rest ($1.44 billion) was made up of non-performing cash card loans.
Taiwan has more than 40 local and 30 foreign banks as well as hundreds of small lenders. Many banks, particularly smaller to mid-sized players, still suffer from the unsecured loan crisis. Local media reported on the 520,000 problem debtors (out of a population of 23 million), whose bad debts averaged $9,300 per person in the first half of 2006.
The FSC has also stepped up its efforts to clean up the island’s banking sector. A number of local banks – including Entie Commercial Bank, Cosmos Bank, Chinfon Commercial Bank, and Asia Trust and Investment – were asked by the FSC in October to propose capital increase plans due to the losses they have made. In August, the FSC took over mid-sized lender Bowa Bank after its book value turned negative.
A new bout of foreign investment in Taiwan’s banking sector included the US private equity industry’s first involvement in Taiwanese banking. Carlyle Group paid TWD21.5 billion ($657 million) for a 35 percent stake in small Taiwanese lender Ta Chong Bank. Ta Chong had reported a TWD5.9 billion loss for 2006 after writing off a major portion of its personal and credit card loans.
UK bank Standard Chartered bought Hsinchu International Bank for TWD40.5 billion in the first overseas takeover of a Taiwanese bank, in September 2006. In 2007, Citi spent $427 million in a buyout of Bank of Overseas Chinese in April, and in June ABN AMRO agreed to take over failed Taitung Business Bank with a TWD6.9 billion subsidy from the government.
Another strategic aim of foreign investors is to gain exposure to mainland China, as foreign lenders bank on Taiwan and China increasing their economic and trade links in future years.
Greenfield insurance In September, HSBC announced plans to open a greenfield insurance business in Taiwan’s highly competitive insurance market, where it will compete with multinational players such as ING, Aviva and Prudential, as well as the largest domestic insurer Cathay.
HSBC also plans to expand its local presence by employing 40 to 50 advisers in wealth management in Taiwan in the next 12 months. The bank is recruiting bankers in Taiwan to reach a goal of managing 6 percent to 7 percent of the island’s TWD4 trillion private wealth in three years, according to Sanjiv Sud, Taipei-based senior vice-president for HSBC personal financial services.
“Our target is to exceed market growth rate in the mass affluent segment,” Sud explained.
US insurance giant AIG has also announced ambitious plans to expand its presence in Taiwan through the launch of a wealth management business. In August, the insurer confirmed that it was aiming for a 10 percent private banking market share within five years, targeting residents who have made big money in China.
AIG’s newly launched Taiwan wealth management business is due to reach the break-even mark by the end of next year, said Peter Wild, chief executive of AIG Private Bank.
Swiss group UBS has declared that it is aiming to increase its share of Taiwan’s wealth management market to 10 percent by 2015 from about 1 percent now. That will equate to some $70 billion of assets under management.