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Asia-PacificJuly 3 2005

Taiwan bids to become a financial powerhouse

Taiwan’s push to consolidate its banking sector received a boost recently but whether its efforts will pay off is uncertain. Dennis Engbath reports from Taipei.
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Taiwan continues to make progress in reducing the once massive mountain of bad loans and assets that resulted from the financial crisis of late 1998, the exposure of financial malfeasance after power was transferred from the Kuomintang to the Democratic Progressive Party in 2000 and the bursting of the high technology bubble in 2000-2001.

The combined ratio of non-performing loans (NPLR) and loans under observation continued to decline from 3.8% at the end of 2004 to 3.7% by April 30 (with the official NPLR at 2.75%, compared with 2.78% at the end of 2004), according to Financial Supervisory Commission data released on May 24. It had peaked at 11.74% (8.04% NPLR) in March 2001.

Moreover, average bank reserves against non-performing loans stood at 40.1% in April, compared with 41.4% at the end of 2004.

Buoyed by the results, President Chen Shui-bian expressed confidence that targets for the second phase of financial reform would be met on time. Speaking at a ceremony on May 25 to mark the inauguration of the Taiwan Financial Services Round Table, Mr Chen reiterated that his administration saw financial services as a strategic industry and aimed to bolster Taiwan’s competitiveness in the world financial market by accelerating combinations among financial institutions and implementing other measures.

Government reforms

In June 2001, under intense government prodding and in an atmosphere of crisis, the Legislative Yuan approved six major financial laws, including the formation of a NT$120bn financial reconstruction fund (FRF). This laid the foundations of the first stage of financial reform, after which Mr Chen issued the 2-5-8 target of reducing the average NPLR ratio to 5% and raising the Bank for International Settlements’ (BIS) capital adequacy ratio to 8% within two years.

By December 2003, the average domestic bank NPLR had fallen to 4.33% and the average BIS ratio topped 8%. Moreover, by the end of March 2005, the NPLR had been reduced to 2.74%, the volume of retired bad loans had exceeded NT$1400bn and the average BIS capital adequacy ratio had reached 10%.

Mr Chen said the targets for the second phase were fostering at least three financial institutions, each with domestic market shares of more than 10%, by the end of 2005; reducing the number of banks with public shareholdings from 13 to six; halving the number of financial holding companies from the current 14 to seven by the end of 2006; transferring at least one financial institution into foreign management and listing one of Taiwan’s financial institution on an offshore stock exchange.

The president said this second phase would accelerate the privatisation of public-owned banks and would establish globally competitive financial institutions through mergers.

Mr Chen’s efforts received a belated boost on May 31 when the opposition-controlled Legislative Yuan approved a NT$110bn replenishment for the original NT$120bn FRF and revisions to its operating rules after more than three years of dispute and deadlock. The official fund, which is similar to a US resolution trust company (RTC), will formally end operations on July 10, when the Central Deposit Insurance Corporation resumes its role as the guarantee for deposits up to NT$1m.

But while the financial reconstruction fund will be concerned with cleaning up problems arising from the past, the second phase of financial reform aims to accelerate the process of consolidation to improve Taiwan’s future competitiveness in financial services.

Merger activity

“There has been significant improvement in competitiveness thanks to the consolidation into financial holding companies and a large number of mergers that have removed weak banks or credit co-operatives from the market,” says Daniel Chen Wen-lang, the executive vice-president and head of research and strategic planning at Taipei Fubon Bank.

“The reduction of non-performing loan ratios, the effort by the government to reduce its remaining official shareholding in banks, the fact older banks are catching up with the newer banks in flexibility in management and personnel systems, the achievement of a rising number of syndications and the ability of asset management companies to dispose of bad assets are all positive signs,” he observes.

“Now the financial reconstruction fund bill has passed, the Chung Shing Bank [Union Bank of Taiwan acquired debt-ridden Chung Shing Bank in December 2004] can be taken care of as well,” Mr Chen notes. He says the president’s plan, announced last October, to form two or three financial giants, each with market shares of at least 10% “was possible”, but adds that “the problems are concerned with what happens after the mergers”.

Mr Chen continues: “Taiwan needs banks that are big enough to invest in IT, attract high-calibre professionals and earn high ratings. The critical stage will be the post-consolidation integration of different corporate cultures, payment systems, personal systems and strategies. Size is a necessary condition for success.”

Just as with the private banks that launched a few years ago, signs of polarisation are emerging in the ranks of the 14 financial holding companies (FHCs) and the first merger may well take place later this summer.

In terms of profitability, only three FHCs tallied accumulated earnings per share of more than NT$1 in the first five months of this year – Shin Kong, with NT$1.27, Chinatrust, with NT$1.23 and Taishin, with NT$1.11. Seven recorded gross earnings per share (EPS) of NT$0.65-$1, while four earned less than NT$0.35 between January and May.

In terms of accumulated post-tax earnings, Cathay led with NT$8.06bn (with an EPS of NT$0.86), followed by Mega Holdings with NT$7.60bn (EPS NT$0.73) and Chinatrust FHC with NT$7.44bn. Jih Sun occupied the lowest rung on the ladder with just NT$255m in accumulated post-tax earnings for the first five months and an EPS of just NT$0.12. Fuhwa came in second from the bottom, with NT$702m in earnings and an EPS of NT$0.23.

Banking clout

The first takeover of an FHC may happen later this summer. Ho Shou-chuan, the chairman of the International Bank of Taipei (IBT), said on June 10 that Sinopac FHC would be his “most ideal merger target” because their markets were “complementary”.

Sinopac FHC was listed 24th with NT$31.4bn in revenues in 2004, while IBT was ranked 45th with NT$13.5bn. Shinkong FHC, which is based on the Shinkong Life Insurance Corporation, bolstered its banking clout in April by acquiring Macoto Bank, listed 54th in Commonwealth’s monthly list of the top 100 financial firms in Taiwan, for an estimated price of NT$20bn. Shin Kong, which is run by Wu Tung-liang, was listed fifth among Taiwan’s top 100 financial firms, with NT$239.7bn in total revenues last year.

Fubon FHC, which completed its takeover of the Taipei Bank earlier this year, also secured three seats on the board of the Hsinchu Business Bank to become its fourth largest shareholder as part of a strategic alliance.

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