Tseng Ming-chung, chairman of Taiwan’s Financial Supervisory Commission, is seen by many as the bringer of long-awaited deregulation and reform. Two years into his mandate, Mr Tseng gives The Banker an update on his strategy, which is already bearing fruit.

Change, pragmatism and reform-mindedness are some of the words peers and banks alike have used to refer to the chairman of Taiwan’s Financial Supervisory Commission (FSC), Tseng Ming-chung. Market participants have welcomed Mr Tseng’s drive to eliminate the over-regulation that many see as having stifled Taiwan’s financial sector development over the years. Indeed, pushing banks to expand abroad and deregulating local capital markets have turned out to be two of the most effective reforms in Mr Tseng’s agenda.

Taiwanese banks are known to be swimming in excess liquidity, with insufficient means to put extra cash to work. To help banks use this cash more productively, the FSC has been encouraging domestic financial institutions to expand in Asia, where their clients – mostly Taiwanese firms – have been setting up operations.

Consolidation push

To help banks face the costs of expanding abroad, the FSC is continuing to push for bank consolidation. There are currently 39 banks in Taiwan, and one local lender is now applying for a merger and acquisition (M&A) deal through tender offer, says Mr Tseng.

“The FSC encourages domestic banks to adopt strategies for business expansion in Asian markets that focus not only on enhancing profit opportunities and diversifying their operational risks, but also on improving their international competitiveness,” he adds.

The FSC also advocates the regional banking model, which has become increasingly popular following the 2008 financial crisis's highlighting of the global bank concept's weaknesses. “We hope that one or two domestic banks will grow to become regional banks in Asia and serve more Taiwanese enterprises in Asia,” says Mr Tseng.

This strategy seems to be working. By the end of June 2015, Taiwanese banks had 375 foreign offices, of which 75% are located in Asia. Key destination countries in the region include Vietnam, China, Japan, Cambodia, the Philippines, Hong Kong, Indonesia and Singapore.

M&A drive

One way for Taiwanese banks to establish their presence abroad is through M&As. Six deals have been completed so far. In Cambodia, Taiwan's E Sun Bank acquired Union Commercial Bank, and Cathay United Bank acquired Cambodia’s Singapore Banking Corporation. In the Philippines, Yuant Bank acquired Tong Yang Savings Bank, and Cathay Life Insurance bought 30% of Rizal Commercial Banking Corporation’s equity. In Japan, CTBC Bank acquired retail bank Tokyo Star.

Cathay Life Insurance also became the first Taiwanese financial institution to buy a stake in an Islamic lender when it purchased 40% of Indonesian Bank Mayapada’s equity. This deal also stands out given that market participants in Asia often consider Indonesia to be one of the most protectionist and difficult to crack banking sectors for international banks.

The FSC is particularly happy with this new development as it sees Islamic finance as the next growth opportunity for Taiwanese banks. “The future of Islamic finance in the global economy looks bright. With 10 of the world’s 25 fastest growing markets in Muslim-majority countries, industry forecasts estimate that Islamic investments might grow to trillions of US dollars by 2015,” says Mr Tseng.

In addition, Taiwanese banks would do well to consider Islamic finance based on domestic demographics, according to Mr Tseng. “There are hundreds of thousands of Association of South-east Asian Nations immigrants and workers living in Taiwan, some of whom are Muslim. Taiwan [also] has the potential and geographic advantage in developing Islamic finance. We'll encourage Taiwanese banks to explore this potential market in order to do more business in this area,” he says. 

China worries

Meanwhile, one foreign market that is cause for worry is mainland China. Its economic slowdown is making a countries such as Taiwan nervous, given their dependence on China for export revenues. Indeed, China and Hong Kong account for 42% of Taiwan’s total exports.

“The Chinese economy has slowed considerably and continues to decelerate. Growth this year is expected to be the lowest in a generation. This is likely to have a chilling effect on the volume of Taiwanese exports to mainland China,” says Mr Tseng.

The FSC is also concerned about the health and risk management of Taiwanese banks’ operations in mainland China. Due to strict regulations, the Taiwanese banks’ total credit, investment and interbank loans and deposits may not exceed 100% of their own net worth as of the end of the preceding fiscal year. As of the end of May 2015, this overall figure reached T$1.74bn ($55.7m), accounting for 63% of the banks’ net worth in 2014. 

To minimise the risk of exposure of Taiwanese banks in mainland China, the FSC has put stricter regulation in place. It requested that Taiwanese banks in China increase their bad loan allowance to 1.5% by the end of 2015. The FSC also asked for credit evaluation and after-loan management to be included in these banks’ internal control systems. In addition, applications to set up operations in mainland China will only be granted to those banks that can deal with potential non-performing loans, says Mr Tseng. 


Capital markets bloom

At home, the FSC has been focusing on developing local capital markets to give banks more growth opportunities and make the domestic financial sector more sophisticated.

Mr Tseng has made eliminating red tape and over-regulation in Taiwan’s capital markets the hallmark of his mandate. This strategy is embodied in the FSC’s Financial Import Substitution Programme, which had already been mostly implemented by December 2014.

“[This programme] supports overseas financial products transactions [done] by domestic financial institutions, and has had clear benefits with respect to expanding the scope of [their] business, spurring the development of Taiwan's domestic bond market and increasing domestic financial markets’ scale and business opportunities,” says Mr Tseng.

These reforms have helped to internationalise Taiwan’s own bond market. The value of international bonds (including Formosa bonds) issued in Taiwan totalled T$694.4bn between the beginning of FSC’s deregulation on June 4, 2014 and the end of 2014. This represented a 406% increase on volumes before deregulation (November 1, 2006, to June 3, 2014).

In the derivatives space, often seen in east Asian markets as relatively risky, the FSC requested the Taipei Exchange (TPEx) establish an interest rate swap platform, which went live on December 1, 2014, and includes both interest-rate swaps and forward rate functions. “TPEx estimates that 30 domestic financial institutions will take part in it. Interest rate swap transactions will reach T$150bn in the first year [2015],” says Mr Tseng.

Formosa bonanza

Under the Financial Import Substitution Programme, the FSC also announced in June 2015 that foreign-denominated bonds listed in Taiwan (including Formosa bonds) would no longer count towards Taiwanese insurers’ 45% cap on their foreign investments.

This sent Formosa bond (non-Taiwan dollar-denominated notes sold in Taiwan) issuance volumes skyrocketing and lured new foreign borrowers into the market. European borrowers – mostly financial institutions – have been particularly keen to tap this sector, which is flush with liquidity and investors who are keen on buying rare foreign names. Lloyds, Standard Chartered, Credit Suisse, Deutsche Bank, UBS and Société Générale are some of the European financial giants that have issued Formosa bonds this year.

The build-up of renminbi deposits is also playing a part in the market's development. “Since Taiwan is an island of abundant funds and a trade surplus with mainland China, renminbi capital is growing rapidly, showing that Taiwan has potential to develop the Formosa bond market,” says Mr Tseng.

As of the end of May 2015, Taiwan counted a total of Rmb336.2bn ($54.15bn) in deposits. By the end of June, 77 Formosa bonds had been issued, totalling Rmb51.74bn.

The FSC’s reform allowing mainland issuers to print Formosa bonds sold exclusively to professional investors helped develop local capital markets further and broadened the professional investor spectrum, says Mr Tseng. Out of the 77 Formosa bonds issued so far, 33 have been printed by mainland borrowers.

Thanks to the FSC’s reforms, the Taiwanese market is becoming home to increasingly international banks and to increasingly sophisticated and deep local capital markets. With Taiwan’s financial sector profits reaching record highs in 2014, it appears that the market is responding well to and benefiting significantly from the FSC chairman's revolutionary agenda.


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