Taiwan’s banks are struggling in a tough domestic market, with some of the lowest net interest margins in the world and too many players fighting for a share of a relatively small pie. The pace of consolidation has slowed and observers say that there are not many opportunities for further consolidation of the 37 domestic banks when such a significant number are government owned.
Taiwan is over-banked and hugely competitive, with one executive describing the market as “cut-throat”, and another calling it “lousy”. “It’s a bare-knuckle bar fight,” says Mike DeNoma, CEO of Chinatrust Commercial Bank’s banking business, when discussing the Taiwanese banking market.
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Many senior figures in the industry estimate that the country's net interest margins are in the region of 1.3% to 1.4%. These are some of the lowest rates in the world and tally with the estimates drawn from The Banker’s database. In a list of more than 120 countries from across the world, Taiwan is second from bottom in terms of its banks' net interest income divided by total loan book. Taiwan’s figure is 1.69, which compares to a worldwide average of 5.17. Only Liechtenstein, at 0.93, has a lower figure among the countries in the list.
The overly competitive market means that banks in Taiwan struggle to have any bargaining power when it comes to pricing. Standard & Poor’s notes: “We consider Taiwan’s fragmented banking sector as less healthy than most economies at similar levels of development. The banking sector suffers from low profitability, due to inadequate risk pricing from excess competition, and market distortions caused by a high proportion of state ownership.”
Other avenues
Taiwan's banks are looking for alternative ways to improve on their current position, whether this means expanding internationally or into new product lines. Chinatrust, for example, is pursuing a strategy of expanding into China, Greater China, Vietnam and the US, and is looking for merger and acquisition opportunities. The domestic market is challenging, but Chinatrust's Mr DeNoma sees the positive side: “It makes you tough. If you are going to build an international bank it is better to start in a tough domestic market,” he says, adding that other markets look more appealing in comparison.
Victor Kung, president of the financial holding company Fubon Financial, says that the challenge for any bank is how to make money in such a difficult environment, considering the credit and operating costs involved. He says that one focus has been on fee income. “We have successfully developed the wealth management business,” he says, explaining that Taiwan is an attractive market for fund management companies because of the level of wealth in the country and the relatively high savings rates.
Fubon covers insurance, securities, asset management and life insurance, in addition to its banking business. This diversification helps it to compete in the market. “Fubon has always believed that we are a comprehensive service provider,” Mr Kung says. “Financial needs are one continual line of different products. Our strategy to have the largest share of consumers, is to be able to provide them with every kind of financial services product they will need.”
Another way to compete is through innovation. “We have to generate more innovative products,” says Kenneth Lo, chairman of Industrial Bank of Taiwan (IBT) Group, who adds that innovation as well as risk management has become a focus of IBT.
[Taiwanese banks] have to generate more innovative products
Stay targeted
Finding ways to be successful in such a difficult environment is a challenge that faces the whole Taiwanese banking industry, and each bank has its own view on how best to tackle it. Jesse Ding, president and CEO of EnTie Bank, says that each player has its own strategy. “You have to focus on your target market,” he says. One area that EnTie has focused on is customer service. “Having speed [when] responding to customers requests – that is important. If you can respond to customers quickly you can do more business. Speeding up, however, does not mean cutting out the steps. But we have spent more time making our organisational structure streamlined so that we can process each step quicker than our competitors,” he says.
Establishing efficient processes and platforms is one of the strengths of the foreign players in Taiwan's banking sector. Jerry Chen, general manager and head of DBS Bank Taiwan, says that “productivity is important”, especially when it comes to focusing on the small-ticket segment of small and medium-sized enterprise (SME) lending and when margins are already squeezed. DBS aims to respond quickly to SME loan applications and give approval within five days.
Another challenge is finding the right talent, especially in wealth management, where relationship managers play a key role in servicing the client base. As a relatively new entrant to the Taiwanese market, DBS is aiming to have at least a 1% share of the market, “We need this 1% scale in order to have economy scale – it is the minimum scale to make money,” says Mr Chen.
Consolidation and privatisation
In a fragmented market such as this, consolidation may seem inevitable. But when such a large proportion of the market – approximately 50% – consists of government-controlled banks, the future of the industry depends on government policy toward privatisation.
There has already been a degree of consolidation in recent years, with the number of domestic banks reduced from about 60 to the 37 that exist today. Fubon Financial, for example, has made a number of acquisitions, including that of Taipei Bank in 2002, a 75% stake in International Bank of Asia in 2004, a 19.99% stake in Xiamen City Commercial Bank in 2008, and the acquisition of ING Life Insurance (Taiwan) in 2009.
Susan Chang, chairperson of Bank of Taiwan, says: “If there is no consolidation of government-owned banks, I think the effect of consolidation will not be significant. It depends on the government policy… the privatisation of the government-owned banks is getting more and more difficult because some law makers object to more privatisation of banks because they do not have a good impression of financial conglomerates.”
Because most of our funding source is from deposits, it is very stable. In Taiwan most banks’ funding source is their own deposits
The largest banks in Taiwan are government owned, with many of the private domestic banks being family owned. Even if these private banks were to merge with each other, there would still only be limited change in the landscape of the market while the significant players were government controlled. And if the government-owned banks were to merge with each other, it is argued that they would not bring with them the benefits of synergy and efficiency while the government was still in control of the policies and decision-making processes in these institutions.
Ms Chang of Bank of Taiwan, a government-controlled bank, says that one of the greatest challenges for state-owned banks is the government's regulation of them, and thus the pace at which decisions are made at these institutions.
Key strengths
The state-owned banks in Taiwan also suffer from low interest margins. Despite this, and the challenges for the rest of the banks in the domestic market, industry observers point to a number of strengths that the Taiwanese banks have.
Their liquidity levels and capital adequacy levels mean that the banks in Taiwan should be able to absorb any further shocks in the global economy. Eunice Fan, associate director at Taiwan Ratings, says that the outlook for the financial services industry for the next year is stable. “Liquidity is still quite ample and capitalisation is adequate,” she says. Ms Fan adds that the banks' earnings will be slightly better this year as the spreads may increase with the gradually rising interest rates. “The interest rate has risen but the upward pace is still quite moderate... this will help with the interest rate margin,” she says.
Ms Chang at the Bank of Taiwan points to the healthy loan-to-deposit ratios in the market. “Because most of our funding source is from deposits, it is very stable. In Taiwan most banks’ funding source is their own deposits,” she says. Ms Chang also points to the low non-performing loan ratios, which in June 2011 were 0.48% for Taiwan’s domestic banks, according to figures from the Financial Supervisory Commission.
While the earnings from the banks are likely to increase, Mr Lo at IBT Group points out that bad debt recovery still contributes a significant part of the earnings.
Interest spreads are likely to slightly improve, given the upward trend of the central bank’s key interest rate, but for now the fragmentation in Taiwan’s banking industry means that each of the players in the market must carve out their own strategy for competing in such a difficult environment.
