Taiwan’s banks may have performed perfectly adequately in recent years, but now with increasing internationalisation, consolidation in the market and new tools for managing the country’s excess liquidity, the sector is poised for a hike in growth. 

Since the Asian financial crisis in 1997, the Taiwanese banking sector has not excelled, but neither has its performance been disastrous. It has recorded consistent profitability while remaining conservative in its ways. With little state encouragement to internationalise, banks have been stuck within Taiwan’s borders for the better part of the past 20 years, making it hard to deal with excess liquidity in the market.

But the change in leadership in the country’s Financial Supervisory Commission (FSC) is generating a long-awaited wave of change. The incumbent government-backed FSC chairman, Ming Chung Tseng, is keen to upgrade Taiwan’s banking sector. He wants to see the country's banks expand across Asia as well as undergo an overdue wave of consolidation. “I believe in a two-wing principle. In one wing, I ask banks to follow laws, regulations and pay attention to risk management. The other wing includes liberalisation, deregulation and foreign development,” says Mr Tseng.

Results have already materialised. Taiwanese banks are growing within Asia, they have completed several mergers and acquisitions (M&A) and they are participating in the development of a new bond sector.

What could slow down Taiwan’s expanding banking sector, however, is the people’s resistance to growing business agreements with mainland China. Although these deals make sense on a commercial level, an alleged lack of transparency around talks and the potential political influence from the mainland are fuelling social discontent in Taiwan. This anxiety culminated in this spring’s Sunflower Movement, whose supporters deemed the latest Sino-Taiwanese trade agreement unconstitutional.

Handling excess liquidity

Taiwanese banks are overwhelmed by excess liquidity. “Banks are meant to be experts in managing liquidity, but this is now a tough challenge since so much excess liquidity has built up in the market since the financial storm of 2008,” says Chang-Ken Lee, president of Cathay United Bank.

Previously conservative regulation is partly to blame. Risk aversion was emphasised to the point of hindering liquidity management. Some of this conservatism remains, with Taiwanese banks finding it hard to create products that digest liquidity.

“Deregulation of banking licences, especially in terms of product offering, will benefit Taiwan’s banking sector. As of now, we have to get approval for new products we want to offer,” says Frank Shih, chief strategy officer at CTBC.

CTBC has expanded its lending scope to manage liquidity. “We have been lending to Singapore’s global oil traders for the past four years. Singapore is the perfect place for oil traders to set up regional offices. It has now become a pretty sizeable community. We’ve never had the chance to do this in Taiwan,” says Mr Shih.

Some, such as Cathay United’s Mr Lee, see excess liquidity as a source of strength. “This is a burden to us today, but this could also be an opportunity,” he says. Taiwanese banks have been providing a number of wealth management products to solve the issue domestically. They have also introduced a lot of foreign companies to Taiwan since excess liquidity is offering them low costs of funding.

Renminbi bonanza

To the FSC, granting access to more renminbi financial products through deregulation is key. Taiwan has Rmb300bn ($49bn)-worth of deposits – a volume reached in just 18 months – and few investment vehicles to put them to use.

However, the FSC relaxed regulations in 2013 to allow the expansion of offshore security units (OSUs) and offshore banking units (OBUs), which are branches of a foreign bank in an offshore financial centre involved in trading securities or banking services, respectively. Domestic banking units can now also trade renminbi derivatives.

“There will be about 3 million mainland Chinese visitors in Taiwan this year. We hope that by building OBUs, OSUs and [offshore insurance units], we can build asset management targeting mainland Chinese customers in Taiwan. As of this year, offshore mutual funds can also be sold in OBU and OSU without obtaining prior approval from authorities,” says the FSC’s Mr Tseng. The FSC is also discussing the establishment of the Renminbi Qualified Foreign Institutional Investor programme with mainland China to further boost cross-border investment.

Formosa enthusiasm

Formosa bonds – non-Taiwan dollar-denominated notes sold in Taiwan – are currently one of the few renminbi funding instruments available in Taiwan. Issuance volumes have increased throughout 2014, also because these notes offer cheap funding to foreign borrowers. Thirty-one formosa bonds worth a total of Rmb23.4bn have been issued so far. Volumes should reach Rmb35.9bn by the end of 2014, says the FSC.

Deregulation has made more domestic investors eligible to buy formosa bonds, but in terms of Chinese issuers, only banks are allowed to tap this market currently. “The formosa bond market can grow if the government opens the sector to Chinese corporates,” says Po-Chiao Chou, president of First Bank. The FSC, however, says it will not open the market further in the short term.

The regulator remains keen to welcome top-tier, international borrowers in these early stages. Export-Import Bank of Korea became the first South Korean name to print a formosa note in January 2014. But some domestic banks are not reaping the same benefits. “We thought of issuing a formosa bond last year but the regulation was not complete yet and the pricing was not attractive,” says Mr Chou.

Consolidation question

In addition to liquidity management, bank consolidation is a key debate in the Taiwanese banking sector. There are now 39 domestic banks and close to 80 financial institutions overall in the country. Mr Shih, however, does not think Taiwan is overbanked. “If you look at average profitability, it’s not as if we are trying to kill each other. Most of us are still making profits,” he says.

But most market participants agree consolidation is needed, especially now that Taiwan's banks are internationalising. “We need to size up if we want to internationalise and drive economies of scale. It would give us more room to streamline operations and to become more competitive,” says Mr Shih.

Mr Chou adds: “By completing more M&A we can increase our scale size to become a regional bank. It seems quite an obvious thing to do.” 

Consolidation reforms are long overdue. Markets such as Singapore, South Korea and Malaysia completed bank consolidation soon after the Asian financial crisis. Taiwan, though not suffering significantly in 1997, fell behind in the process by comparison.

The FSC is keen to recover lost time. “In Taiwan, state-owned, state-run banks account for more than 50% of the domestic financial market, so I proposed a policy to increase M&A, which I will be discussing with the minster of finance. I think it will be easier for Taiwan’s state-owned banks to merge in the near future,” says Mr Tseng.

Mr Lee at Cathay United adds: “In the past 12 months these new FSC policies have been a major catalyst. They are pushing Taiwanese banks to change from being local banks to Asian regional banks. We needed to have a new view of Asian financial markets.” 

Mr Tseng’s preferred outcome would be to privatise Taiwan’s nine state-run banks. “But I don’t think our society will accept this,” he says. “The second best option is to have state-owned banks merge together to become bigger and go abroad.” This could happen in the near future, he adds.

Promised mainland

The FSC is also advocating foreign expansion to strengthen Taiwanese banks and manage excess liquidity. “One of my visions is for Taiwanese banks to go abroad. Taiwan’s average gross domestic product [GDP] growth in 2013 was 2.2%. It was double in the rest of Asia. According to an Asian Development Bank forecast, Asia’s share of global GDP will be 50.6% in 2050. We need our financial industry to seize this opportunity,” says Mr Tseng.

Mainland China is the top destination for Taiwanese banks. Closeness in terms of culture, language and geography makes for ideal business ties. Banks are also best placed to service Taiwanese firms in China, which as of the end of May 2014 had invested $138.2bn in the mainland.

By September, the FSC had granted 13 Taiwanese banks approval to establish branches or subsidiaries on the mainland. As of August 2014, pre-tax profit of Taiwanese banks’ mainland branches was $80m, up $25m from 2013. Combined assets of these branches skyrocketed from $788m in 2011 to $8bn by August 2014.

CTBC is looking to solidify its presence in major Chinese cities to turn a profit in five years’ time. Taiwanese companies in China account for 80% to 90% of China Trust’s customer base. “We have started to gradually provide syndicated loans to Chinese state-owned enterprises and large private companies,” says Mr Shih.

Overlapping competitors

In contrast, Cathay United has not prioritised Taiwanese manufacturers on the mainland to avoid overlapping with its competitors. Only 45% of Cathay United’s customers in China are Taiwanese. The remaining are multinational or Chinese corporations.

First Bank also wants to focus on Chinese corporates via syndications and supply chain services. “We have the highest market share of small and medium-sized enterprise [SME] loans in Taiwan, so we want to transfer this operational experience in China,” says Mr Chou.

First Bank’s application for 10 rural branches in Henan province distinguish it from its peers. These operations will cater to local farmers and the agricultural sector. Faster set-up times in China’s rural areas mean 10 rural branches can be set up in two or three years, post approval.

The Henan branches, however, cannot be approved until the Cross-Strait Service Trade Agreement (CSSTA) is passed. The CSSTA includes the removal of trade restrictions and the increased flow of services, including retail, education, banking and finance, telecommunications and cultural industries.

Sunflower Movement

The CSSTA would be a ticket for Taiwan to exponentially grow trade ties and renminbi business with mainland China. However, protests in Taipei in March and April postponed the agreement’s signing, which was scheduled for 2014.

CSSTA negotiations behind closed doors were claimed to be unconstitutional by Taiwan’s protesters, who feel China has increasingly impinged upon Taiwan’s democratic political process.

While the Sunflower Movement has received less international media attention than Hong Kong’s similar Umbrella Movement, it is clear there is much at stake for the mainland with the CSSTA. Well capitalised, healthy, profitable and eager to expand, Taiwanese banks have a healthy reputation as business partners. Taiwan’s Rmb300bn-worth of deposits are also a significant commercial opportunity for China.

But the Taipei protests also underscore how mainland China’s authoritarian government is a cause of contention in any attempted rapprochement with its autonomous regions. While trading with the mainland is a significant opportunity, it also comes with enormous socio-political baggage.

Describing the dilemma in dealing with the mainland, one Taiwanese senior market participant says that China may be unreliable, but Taiwan cannot break away from it. Highlighting the dilemma further, some Taiwanese state-bank employees said of the protests: “I’ll tell you in secret. I was there.”

Asean expansion

For Mr Tseng, however, there is more to Asia than mainland China. “I don’t think we should focus exclusively on mainland China. India, Indonesia, Myanmar and Thailand are some other Asian countries with growth potential,” he says.

Each Taiwanese bank is taking a different approach to expansion into Asia. CTBC plunged into north Asia by acquiring Japan’s Tokyo Star Bank in 2013. Though the country is not growing particularly quickly, it will help CTBC expand its Asian network, says Mr Shih.

“We think we have a competitive advantage now that we have a presence in China. There are many Japanese SMEs whose international expansion is not well serviced by local mega banks. With this acquisition, we can service their trade and investment in Taiwan, China and south-east Asia,” says Mr Shih.

Like many of its peers, CTBC is also expanding in south-east Asia. The bank has operations in Vietnam, Indonesia, the Philippines, Singapore and India. It is also looking to set up representative offices and branches in Malaysia and Myanmar. Unlike its peers, CTBC includes Australia in its south-east Asia strategy and is looking to set up operations in Sydney to facilitate Australia’s trade relations with China and the countries of the Association of South-east Asian Nations (Asean).

Cathay United has also expanded significantly abroad. It became the first Taiwanese bank to have a fully owned operation in Cambodia when it acquired Singapore Banking Corporation Cambodia in 2013.

Cathay United has branches in Singapore, Malaysia and Vietnam and representative offices in the Philippines, Thailand and Myanmar. At odds with many Taiwanese banks, Cathay United is set to open a branch in Laos in December 2014. The immaturity of Laos’ banking sector has not made it an obvious destination, but Cathay United has been drawn to its 7% to 8% GDP growth and the fact Taiwanese manufacturers are looking to relocate there.

First Bank is one of the few Taiwanese banks to have built a strong presence in Cambodia, where Taiwanese corporates account for only 20% of its client base. The bank also wants to upgrade its Myanmar operations to branch status, but being a non-Asean bank makes it harder to breach this market, says Mr Chou. First Bank is the only Taiwanese financial institution in Myanmar.

Tech race

The Taiwanese banking sector is poised for many positive developments, including internationalisation, growing renminbi business, a developing formosa bond market and consolidation.

Banks have also focused on upgrading their digital and electronic services to meet customer needs. However, the competitive threat from technology giants on the Asian continent looms large. A shared sentiment worldwide, this could be the new big hurdle for Taiwan’s banks. “Our competitors are no longer just banks; they are the [e-commerce] providers such as Alibaba and Taiwan's PChome,” says Mr Chou.

Unprecedented transformations are defining Taiwan’s industry today, and Asian internet corporate giants are already creeping in as the next big challenge.


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