Shrugging off concerns over worsening China-US relations, Taiwanese lenders are making calculated investments in their south-east Asian neighbours. Peter Janssen reports.

Taipei Fubon Bank

With an incredibly stable but somewhat staid market at home, Taiwanese banks are increasingly looking abroad for growth. They have found it especially in mainland China and south-east Asia, where they have earned a reputation as a solid source of dollar-based lending. Although US-China trade tensions may have dampened growth prospects in China, Taiwan’s big banks say the tussle between the giants should prove a win-win situation for them.

“Taiwan is a small economy with 37 banks, but every one of them is profitable,” says Roman Cheng, president of Taipei Fubon Bank, one of Taiwan’s biggest private banks with an ever-expanding reach in mainland China. “The key is credit quality: 37 banks but the average rate for non-performing loans is only 0.35%. The fundamentals [in Taiwan] are good but the growth drivers are not strong, so we have to go overseas.”

Regulator support

Taiwan’s bigger banks have been spreading their wings abroad for decades, following in the pioneering footsteps of Taiwanese companies that constitute an important source of foreign direct investment (FDI) in China and south-east Asia. While the country’s FDI footprint in a huge market such as mainland China’s remains miniscule, it has had a significant impact on emerging economies such as Vietnam, where Taiwanese investments led the pack between 1992 and 2006, after the communist country opened its economic doors to foreign investors.

Taiwan’s regulators – the Central Bank of the Republic of China (Taiwan) and the Financial Supervisory Commission (FSC) (established in 2004 to supervise the securities market, banks and other financial companies) – have facilitated the expansion of Taiwanese banks abroad as a means of supporting Taiwanese companies. The regulators, for instance, deliberately supported state-owned Mega International Commercial Bank to become the government’s champion abroad, with a special mandate to support Taiwanese corporations in getting established in foreign markets. State banks are still major players in Taiwan, claiming 50% of the system’s total assets, with the big private banks claiming 20% and the smaller ones 30%.  

“It [Mega Bank] has the strongest international franchise, because the government has the intention of having one state bank with an international footprint,” says Cherry Huang, director in charge of financial institutions at Fitch Ratings in Taiwan. “Mega has an offshore banking unit [OBU], domiciled in Taipei, so Taiwanese companies can do offshore business through the OBU. This was part of the process when a lot of Taiwanese companies moved to China 20 years ago. Initially they established paper companies in the Cayman Islands, Mega’s OBU financed these paper companies and they enjoyed tax benefits.”

The government has also designated Mega Bank as its clearance bank for Taiwan’s considerable foreign exchange reserves (which stood at $464bn in March 2019), which is one of the country’s chief attractions as a source of funding. “The dollar clearance bank is Mega Bank, so it has the largest capacity to supply dollar loans,” says Jean Chiu, director-general of the banking bureau at Taiwan’s FSC. “The second largest is China Trust Bank, which is a private bank.” While Mega Bank has access to the national foreign reserves, private banks have access to Taiwanese corporate reserves, which are similarly impressive given the companies’ export prowess.

Room to grow

With their steady earnings in the Taiwan market, and low-risk lending to Taiwan’s companies either at home or abroad, Taiwanese banks enjoy a great deal of liquidity in both Taiwanese and US dollars. “We have an abundance of US dollar deposits on our books,” says Chao-Shun Chang, chairman of Mega International Commercial Bank. “In terms of total deposits right now it stands at close to T$2300bn [$74.5bn], almost half of which is foreign exchange. And the loan-to-deposit ratio for foreign currency stands at about 50%, so we still have a lot of room for growth.”  

Mega Bank is the offspring of a merger in 2006 between two state-owned banks: the Bank of Communications and the International Bank of China. The bank currently has four branches in the US, three in Europe, five in China, including one in Hong Kong, and 19 branches in south-east Asia, south Asia and Australia. “The US still produces stable profits but we do see huge potential in the south-east Asian market,” says Mr Chang.

Like most Taiwanese banks, Mega Bank has followed its Taiwanese clients into mainland China. Taiwan’s central bank, in recognition of the massive outflows of Taiwanese FDI to China, in February 2013 allowed Taiwanese banks’ domestic banking units to conduct yuan-denominated transactions in China, essentially easing lending to China-based Taiwanese and Chinese companies. This led to a swift uptick in bank lending in China.

“The China exposure reached a peak in mid-2014, when it accounted for about 9% to 10% of the system’s assets, but now it is down to about 6% to 7%,” says Fitch’s Ms Huang. “That’s a big drop, but it’s mainly because of the slowing economy in China.” It also has something to do with the FSC, which has expressed growing concerns about overexposure of Taiwanese banks to the Chinese market, especially after the US-China trade war kicked off in 2017. Under FSC regulations, Taiwanese banks face a cap of lending to China of 100% of their net book value, although since the trade war heated up this has been essentially lowered to 80%.

Funding SOEs

Besides the Taiwanese companies operating in China, Taiwanese banks initially targeted Chinese state-owned enterprises (SOEs) for lending because these were considered the safest, although it now appears that the Chinese authorities are taking a tougher approach in allowing SOEs to fail. 

“That was something that surprised us,” says Mega’s Mr Chang. “And with the China-US trade war, the US is trying to stop the Chinese government from subsidising [Chinese] SOEs, so if the government agrees not to subsidise SOEs we are worried that might lead to further destabilisation of their enterprises.” But he is not overly worried about Mega’s China exposure, chiefly because a large amount of that exposure is to China’s top five banks in foreign exchange inter-bank loans. “The top five banks will not go under,” he points out.

Mega Bank is not alone in using Chinese banks to minimise risk in the Chinese corporate market. The Shanghai Commercial & Savings Bank (SCSB), the Taiwanese offspring of the original Shanghai Bank established in 1915, has been among the top lenders to Chinese companies in recent years, but management insists it is well covered. “Many Chinese companies want to get some money from the overseas market to invest overseas,” says SCSB first executive vice-president Alex Lin. “For these clients we just ask their Chinese banks to issue a semi-overcollateralisation to guarantee the loan, because we want to keep our risk very low.”

SCSB says that its lending exposure to China is about 9.5% of the bank’s assets, and less than 75% of its net value, so well below the FSC’s 80% target. SCSB is well positioned among Taiwanese banks to serve the Chinese market. In Hong Kong it has the Shanghai Commercial Bank, a 100%-owned subsidiary, with 40 branches and three branches in mainland China, two in Shenzhen and one in Shanghai. In Shanghai itself, SCSB has established a business alliance with its old namesake, the Bank of Shanghai, in which it holds an equity stake. “In the early days, before the government opened up the Chinese market, we were already there,” says SCSB deputy executive vice-president Dusty Yen. “We are very proud of our platform because it allows us to serve our clients in the greater China area.”

Following the clients

Cathay United Bank, a Taiwanese insurance conglomerate that has branched out into banking, has been a little slower than others in establishing its China platform. In 2010, Cathay upgraded its representative office in Shanghai into a full subsidiary, which has allowed it to expand faster, opening five branches in 2015 and 2016. “It is a market you can’t ignore,” says Cathay United managing director Benny Miao. 

Cathay, which has had a presence in Vietnam since 2007 when it won a local insurance licence and has been expanding its reach in south-east Asia through mergers and acquisitions in Cambodia, Indonesia and the Philippines, is positioned to capitalise from the China-US trade spat. “What we have benefited from is the overseas developments,” says Mr Miao. “A lot of [Taiwanese] companies are moving to Vietnam, and a lot of them are our existing clients, so that has benefited us a lot. It is not that they are reducing their existing activities in China but for that incremental increase, [for example] another plant, they are looking to build it in Vietnam, Cambodia or Indonesia.”

Much of the Taiwanese banks’ overseas expansion strategy is still aimed at following their Taiwanese clients. In Thailand, for example, in 2016 China Trust Bank purchased a 35.6% stake in the small Thai bank LH Financial Group. The chief aim behind the purchase seems to have been giving China Trust an edge in lending to the Taiwan corporate sector in Thailand. “They are using LH Financial to tap the Taiwan corporate market, not the Thai retail market,” says Mega Bank’s Mr Chang. “That is causing competition for us because we were the only Taiwan bank operating in Thailand.”

For Taiwanese companies, the migration to south-east Asia is arguably more about their own clients than rising China-US trade tensions. “Taiwan manufacturing is mostly [based] on an original design manufacturing basis,” says Fubon’s Mr Cheng. “We don’t own the brand. The Taiwanese companies will follow whatever their customers like.” And Taiwanese banks, in general, follow whatever their Taiwanese clients like.

Independent status

For some Taiwanese banks, such as Fubon, the China market has a growth allure of its own with or without Taiwanese clients to shadow. Fubon, as is the case with SCSB, has a somewhat unique platform in the Chinese market. Fubon has a 100%-owned subsidiary bank in Hong Kong, and in 2014 it purchased 100% of the Huayi Bank in Shanghai, providing it with a local licence. “This is a full licence. You can do corporate banking, retail, local currency, so it’s a national banking licence,” says Mr Cheng.

The Huayi Bank was set up in 1997 by a Taiwanese manufacturer who had little experience in banking. “The licence was granted for political reasons,” says Mr Cheng. “The China government was trying to show a good gesture to Taiwan. None of the Taiwanese banks or foreign banks have this kind of licence. It is a powerful licence.” The acquisition of Huayi has gained Fubon 24 branches in China – including in major cities such as Beijing, Shenzhen and Shanghai – covering six provinces. “We do everything,” says Mr Cheng. 

Fubon is keen on loan syndication, an area in which Taiwanese banks have earned a good reputation, and not just among their Taiwanese corporate clients. “I think the strength of Taiwanese banks is liquidity,” says Mr Cheng. “Some Chinese blue-chip companies set up offices in Hong Kong and Singapore for overseas expansion so we have been very successful in leading syndications.” Fubon was also the lead arranger of a syndicated loan last year worth $400m to Vingroup of Vietnam for its investment in a national car project, and in April arranged another syndicated loan for Vingroup’s hospital project.

Mr Cheng thinks Taiwanese banks should capitalise on their core strengths in the Asian market: their liquidity and Taiwan’s corporate entrenchment in the Asian supply chain. “Taiwan banks’ knowledge in supply chain management is superb because Taiwan is part of the global supply chain,” he says. “So if you ask me where could we be unique in the Asian market… in my opinion it is in blockchain.” And as for the China-US trade war, Fubon is not too concerned. “I honestly don’t worry about China,” says Mr Cheng. “I can make money from whatever scenario unfolds, so why should I worry?” 


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