A financial milestone was reached in Taiwan in early June with the first successful operation of an officially-backed market exit mechanism aimed at thinning the ranks of the country’s saturated banking sector.
Taiwan has been trying to restrain the expansion of financial institutions and the decline of credit quality in the wake of serious saturation of the banking market. Its efforts have included passage of a law in July 2001 allowing the merger of same-type financial institutions and a statute the following year to permit the formation of cross-sectoral financial holding companies, 14 of which have since been formed.
The formation of financial holding companies has facilitated horizontal consolidations and over 40 cases of troubled financial institutions have been taken into receivership by the official Financial Reconstruction Fund (FRF). But, until last month, there were virtually no cases of a managed exit of a troubled financial institution from the market.
The new page was turned when E.Sun Bank, the core component of the E.Sun Financial Holding Company, signed a contract with the state-owned Central Deposit Insurance Corp (CDIC) on June 3 to buy the NT$17.1bn ($506m) in assets of the failed Kaohsiung Business Bank (KBB). The bank had been taken into receivership by CDIC, acting on behalf of the FRF, on January 1, 2002.
At the signing ceremony, finance minister Lin Chuan said: “The establishment of an effective mechanism for the withdrawal of financial institutions from the market, the most difficult step in financial reform, has finally been realised today.”
Downsizing begins
Lin also said that the withdrawal of KBB marked a beginning, not an end, of the process of downsizing of Taiwan’s over-banked market and expressed the hope that the “withdrawal mechanism should be actively used even when there is no FRF”.
E.Sun, which is scheduled to take over KBB on September 4, won the second session of bidding for the bank on May 31 with a low bid of NT$13.37bn: the bid being the amount it would need from the official restructuring fund to take over the bank. As a result, E.Sun will effectively absorb a cost of NT$3.7bn for KBB and its 45 branches.
Speaking to The Banker, E.Sun Holdings deputy president Duh Wu-lin says that the acquisition marks a breakthrough in E.Sun’s development toward a faster and broader growth strategy through expansion of its branch network from 54 to 114. It will also accelerate the bank’s shift from a branch-centred organisation to a specialised division of labour with regional centres for consumer finance, corporate finance and wealth management.
Mr Duh says the acquisition was especially important in the light of the ministry of finance decision to suspend the granting of licences to open new bank branches in its efforts to curb over-banking.
“We participated in May’s bidding for KBB because the conditions for the bid had been significantly changed from the first unsuccessful bidding round held last December,” says Mr Duh. The new conditions have given bidding banks more freedom to decide how to deal with the branch licence rights and how to handle personnel issues, says Mr Duh.
“The new conditions allowed the winning bank to take rights for 39 bank branches that can be located anywhere we want, compared with 26,” says Mr Duh.
Of KBB’s original 45 branches, E.Sun will be able to relocate 23, have the rights to reopen anywhere 15 branches closed by the CDIC and will leave 22 in their original locations – one in Taipei City and 21 in the Kaohsiung area.
E.Sun plans to add most of the new branches in the greater Taipei area to push its network in the capital region from 28 to 67 within two years.
Enhanced freedoms
The government’s handling of this case has been widely regarded as reducing the difficulties of the acquisition process and enhancing the freedoms regarding the management of business locations, thereby helping to incentivise the M&A process.
“We hope that this first case of the successful operation of a market exit mechanism can be an example for other banks, based on similar conditions in terms of manpower and lowering risk,” says Mr Duh.
