The Democratic Progressive Party (DPP) is tipped for victory in Taiwan’s presidential election in January 2016. If successful, DPP candidate Tsai Ing-wen would not only become the first female president of the country, but her victory would also strip the Kuomintang (KMT) party – known to be more mainland China-friendly – of its rule.
If outside Taiwan’s borders this election is often seen as a make or break point in cross-strait political and commercial relations, local market participants remain calm. They trust that neither side of the strait is interested in a flare-up. Besides, such political turnover is not new to Taiwan; the country remained stable after DPP’s Chen Shui-bian’s presidential win in
2000 ended more than 50 years of uninterrupted KMT rule.
Taiwanese bankers are far more concerned about offsetting low growth and net interest margins (NIMs) at home and low growth in mainland China, which is Taiwan’s main trading partner. Expanding abroad and diversifying revenue sources are the key issues keeping top Taiwanese bankers on their toes.
Pre-election calm
Every market participant The Banker met in the Taiwanese capital, Taipei, agreed that a DPP win in the presidential elections in January 2016 was not synonymous with burning bridges with China. Some even admitted that they would be voting for Ms Tsai.
Taiwan and mainland China are too interconnected to let such a break happen, say local market participants; Taiwan on the commercial front – it is heavily reliant on China for trade, and the country provides a fertile platform for its entrepreneurs – and mainland China on the political front – if it wants to become Asia-Pacific’s superpower, it will need to maintain peaceful relations with countries in the region, especially one as close to home as Taiwan.
One senior banker believes cross-strait relations will not change following the election, as long as the topic of Taiwanese independence is not raised. “In practice, Taiwan is independent. We don’t pay tax to China, they don’t tell us what to do. We have a lot of room to manoeuvre. I don’t think Ms Tsai or anyone in the DPP will go for a public independence referendum because it does not do anybody any good,” he says.
Though the subject of independence might not be raised in 2016, for the most part the Taiwanese population wants to avoid lifestyle or political influence from the mainland – as shown by the ‘sunflower’ student movement of 2014, which saw students and civic groups demonstrate against the KMT’s passing of the Cross-Strait Service Trade Agreement, which they judged would leave Taiwan vulnerable to China’s political influence, without a clause-by-clause review.
“The Taiwanese peoples’ consensus is very strong. It shows we want to partner with China for economic development but we do not want things to change on the lifestyle and political front. Whoever wins will need to take this consensus into account. In the medium to long term, I don’t worry too much about this,” says a senior Taiwanese banker.
In the open
Calming Taiwan’s market participants further is the ease with which the elections are discussed with business partners from the mainland. “Chinese bankers have come to see my bank so many times recently. We talk about this all the time and very openly,” says one senior banker. “China is changing, they have opened up slightly. Ten years ago, government officials did not talk about politics at all. Now they do.”
On the other side of the strait, the mainland is too focused on becoming Asia-Pacific’s superpower – by means of renminbi liberalisation and the ‘One Belt, One Road’ foreign policy initiative – to provoke a dispute with Taiwan, say bankers. “To achieve renminbi liberalisation, regional banks need to trust China. So China cannot penalise foreign business for no reason,” says one banker. “We don’t need them to treat us in a favourable way. They just have to be fair and use market mechanisms to decide winners and losers and resource allocation, as stated by Chinese president Xi Jinping. I think they will not have a bias for or against Taiwanese business people.”
The only real risk is regarding state-owned banks, according to a senior official in Taiwan. “All the bank presidents must sound calm, but if the ruling party changes, there is a risk, especially for state-owned bank presidents, that they might be replaced,” he says.
Central bank’s rate cut
As well as upcoming presidential elections, Taiwanese lenders have also had to deal with the central bank’s 12.5 basis point interest rate drop, introduced in September 2015, which sought to revive the local economy. Falling Chinese export demand is hurting Taiwan’s poorly diversified export and industrial base.
Taiwan’s top banks will not be significantly affected by this rate drop, given its relatively small magnitude, and the fact that their large overseas profits and assets are agnostic to monetary easing at home, according to market participants. According to Perng Fai-nan, Taiwan’s central bank governor, banks have nothing to worry about. “Banks’ deposit rate decreased just by a little bit after the 12.5 basis point rate drop. Banks really will not be hit by this rate drop,” he says.
What is more, banks had already priced in a potential rate drop before September, according to Frank Shih, chief strategy officer at CTBC Bank. “The market rate has reflected the official rate for a while now; long enough for banks to reallocate their liquidity by, for example, swapping
Taiwanese dollars into US dollars and lending abroad,” he says.
McKinney Tsai, chairman of Mega International Commercial Bank, which is unlikely to be hit by the rate drop as more than half of its profits are generated abroad, says: “The drop was a symbolic one – it will not have a real effect.” But smaller lenders might not be as lucky. “Smaller banks will be impacted more. Among Taiwan’s 39 banks, 22 banks have less than 1% market share,” adds Mr Tsai.
Meanwhile, this rate cut could benefit the corporate sector by decreasing costs and increasing export competitiveness, according to Po-Chiao Chou, president of First Bank. “This could [in turn] help decrease non-performing loans and banks’ business risk. It could also push for more Taiwanese dollar depreciation which would increase foreign exchange revenue from banks’ foreign currency assets,” he says.
However, local bankers worry that under the rate cut could NIMs will be pressured further and could hurt bank earnings.
Christine Lee, chairperson of Bank of Taiwan, is worried the rate cut might hurt profits for banks that rely on the domestic market and loan business. Bank of Taiwan’s profits are expected to drop by T$700m ($21.3m) by the end of 2015 on the back of the September rate cut.
Asean darling
To offset low NIMs at home and a sluggish domestic economy, Taiwanese banks are growing overseas. Well capitalised and highly liquid, Taiwanese lenders are ahead of the curve in expanding abroad. Today, significant portions of banks’ profits – from about 17% to up to 50% and above in Mega Bank’s case – are generated outside Taiwan’s borders.
The Association of South-east Asian Nations (Asean) with its large, unbanked, young markets remains a top choice for Taiwan’s banks. In Cathay United Bank’s (CUB) case, expanding in Asean is key to generating higher returns on its hefty investment in IT. “If our IT development is successful in Taiwan, we can expand this in larger and younger consumer markets such as Indonesia, Philippines and China. It is difficult to get huge payback for a large investment in IT… in a small country such as Taiwan,” says Alan Lee, senior executive vice-president at CUB.
“Most of our capital expenditure is now focused on digitisation and overseas expansion. We plan to double our IT expenditure in the next five years [to 8% of the total],”
he adds.
In 2015, CUB launched a new application, Line Pay, which offers payment services through Taiwan’s most popular chat app, Line. It also inaugurated a new-generation branch called Koko (meaning ‘money’ in Taiwanese dialect). Young staff, light wood panelling, Apple computers all around and weekly events including ukulele lessons make Koko branches attractive to and approachable for tech-savvy, often younger clients while subverting the conventional concept of bank branches.
In Asean, CUB purchased two large stakes in some of the most in-demand markets – a 40% stake of Bank Mayapada in Indonesia and a 20% stake in Rizal Commercial Banking Corporation in the Philippines. These deals will help introduce Taiwanese corporates to Asean markets and foreign clients to the burgeoning Formosa bond market (non-Taiwan dollar-denominated notes sold in Taiwan), says Mr Lee.
And CUB mergers and acquisitions may not be over. “We are still looking for strategic investments in Thailand and Malaysia,” says Mr Lee.
Further afield
CTBC Bank is targeting a different set of countries. It will open three representative offices focused on corporate banking in Australia, Malaysia and Myanmar by January 2016. A chunky 38% of CTBC Bank profits are generated abroad. The lender aims to reach the 50% mark in the next five years.
Similar to CTBC Bank, Myanmar is particularly attractive to Mega Bank, even if the lender has not yet set up a physical presence in the country. “The cost of doing business is low and there is a big domestic market. Myanmar is at a turning point politically and economically. We expect it will open its market and our priority is to do a joint venture with a local bank. My team flies there very often to talk to potential partners,” says Mr Tsai.
Similar to its peers, First Bank is also moving into the Asean region. It recently inaugurated operations in Vientiane, Laos, where it focuses on lending for infrastructure investment. By the second quarter of 2016, it will have opened two additional sub-branches in Cambodia.
Even state-owned banks – often seen as less dynamic and reactive than privately owned peers – are accelerating their international expansion. Bank of Taiwan, for instance, has 11 units overseas and it will set up new operations in Yangon, Fuzhou, Sydney and the Shanghai Free Trade Zone by 2016, says Ms Lee. Overseas operations account for a significant 31% of Bank of Taiwan’s profits.
Managing China
In the long term, China remains a top destination for many Taiwanese banks, despite its economic slowdown. But in the short term, these lenders are more cautious. China’s gross domestic product is slowing and its highly leveraged private sector is plagued by defaults. “Default risks for Chinese [corporate] issuers are likely to increase in 2016, following a record number of defaults in 2015,” says ratings agency Standard & Poor’s.
China’s corporate sector is also relatively opaque. Financial statements are often not transparent, say analysts. To offset this risk, Mega Bank is expanding in the mainland through collaborations with China’s top 10 lenders. “We need to get to know the market better and understand the culture,” says Mr Tsai. The bank only offers lending of up to one year in China.
First Bank’s cautious mainland strategy involves targeting only Taiwanese customers doing business there. “We know them better and can control risks,” says Mr Chou. The lender also set up a risk management system for its lending business in the mainland.
But according to Mr Shih, Taiwanese banks would do well to stick it out in China. “We are affected [in China] now because we still are not vastly present [there]. China is trying to save its economy by pounding more liquidity into the market, which is lowering rates. So, clients are switching back to borrowing onshore. We will be able to capitalise on this when our presence will be bigger in China.”
CTBC Bank has already moved ahead with a 100% acquisition of China Citic Bank International, which includes Citic branches in Shenzhen, Shanghai and Beijing.
CUB is also expanding its operations in China. The lender bulked up its mainland general insurance unit by selling a 60% stake to Chinese e-commerce company Alibaba. “It is very difficult to compete in general insurance in China. We invited this new partner to help grow the business further,” says Mr Lee. CUB also has a life insurance business in China, which is growing by 50% per year.
Bank of Taiwan is also taking a positive view on China. The lender became a member of the Shanghai Gold Exchange in July 2015, to square the bank’s gold positions. This initiative will provide new profit opportunities, a channel for the bank’s substantial renminbi funds and will help develop an international market for gold trading in Taiwan, says Ms Lee. This initiative will also complement Bank of Taiwan’s new credit card, whose loyalty points can be redeemed in gold – the first of its kind in the country.
Although the eyes of the world will be fixed on Taiwan’s elections this January, local market participants are not worried about a DPP win damaging business with China, despite the party’s known antipathy towards the mainland. The risk running deep is, rather, China’s economic slowdown, which is hurting Taiwan’s poorly diversified economy. Expanding Taiwan’s export and industrial base is crucial. Meanwhile, Taiwanese banks’ efforts to offset a tepid home market through international expansion and revenue diversification are impressive.
