Leading Taiwanese banks are looking forward to renewed expansion of revenues and earnings in 2011 in the wake of the apparent strong rebound of the island nation's economy and its success in implementing internal risk controls in the wake of the global financial crisis.
Taiwan's economic performance in 2011 also promises to test the insistence by president Ma Ying-jeou's Kuomintang (of the Chinese Nationalist Party) that the Cross-Strait Economic Co-operation Framework Agreement (ECFA), signed between the Chinese and Taiwanese governments in Chongqing on June 29, 2010, will lead Taiwan into a "golden decade" of prosperity.
Whether Taiwan's trade-dependent economy experiences a recovery that can be felt by ordinary citizens may prove crucial for Mr Ma's chances of winning re-election in the presidential and national legislative polls expected in early 2012, against a resurgent Democratic Progressive Party.
Apparent boom
After expanding by just 0.73% in 2008 and contracting 1.93% in 2009, Taiwan's economy enjoyed an apparent boom in 2010 as real growth in gross domestic product (GDP) may have topped 10%. The official Directorate-General for Budget, Accounting and Statistics (DGBAS) estimated in mid-November that inflation-adjusted GDP would rise 9.98% in 2010 thanks to an expansion of 3.43% in private consumption spending, 32% in private capital investment and 24.4% real growth in exports of goods and services, powered largely by a 42% surge in merchandise exports to China.
The DGBAS forecasts a 4.51% expansion in Taiwan's GDP in 2011, mainly fuelled by a 3.51% rise in private consumption spending and a 6.2% growth in exports, while private fixed-capital formation contracts would go up by 2.86%.
Sustainable recovery?
However, the jury is still out on whether last year's growth surge signalled a sustainable recovery or was primarily a rebound from the nadir reached in 2009.
The Taiwanese think-tank Polaris Research Institute (PRI) forecast real GDP growth of 10.06% for Taiwan in 2010, but PRI president Liang Kuo-yuan says 6.23% of that figure is attributable to "base period effects" associated with the previous two years of stagnation.
Moreover, Hu Sheng-cheng, an economist for the Taiwanese research institute Academia Sinica and former chairman of the country's Council for Economic Planning and Development, tells The Banker that the GDP rebound is "an unbalanced recovery" based mainly on expanding exports to the Chinese market and the rapid expansion of Chinese tourism. He points to a continued high level of unemployment (4.72% in November 2010) and stagnant wage levels and says the recovery has yet to be "felt" by most ordinary citizens.
The current chairwoman of the Council for Economic Planning and Development, Christine Liu Yi-ju, told reporters on December 28 that "2011 will be the year of consumption" for Taiwan and that people would feel the effects of the recovery as corporations boost wages and employment.
Mr Hu questions Ms Liu's expectation, commenting that "it is debatable whether many enterprises will be willing to raise wages, given rising concerns that the appreciating foreign-exchange rate will erode earnings" and points to official data indicating that more than half of the record $35.7bn in Taiwanese export orders recorded in November is to be produced offshore, especially in China, and not by Taiwanese workers.
Government data also seems to contradict official expectations that full liberalisation of cross-strait transportation links and the implementation of the ECFA would ease cost pressures on Taiwanese firms moving plants to China and would lead foreign companies to invest in Taiwan.
During the first 10 months of 2010, approved incoming foreign direct investment to Taiwan declined by 19.5% to $3.01bn, while outgoing direct investment from Taiwanese companies to China soared by 130.1% to $11.43bn, not including newly announced plans by AUO Optronics to invest $3bn in a TFT-LCD display-screen fabrication plant.
"In the past three years, the amount of foreign capital invested in Taiwan has declined, while the amount of Taiwanese capital invested in China has soared," says Mr Hu, who adds that "there has not been any noticeable change in this pattern since the ECFA was signed".
Nevertheless, Taiwan's rebound in 2010, which included a 27.3% growth in the revenues of publicly listed Taiwanese companies from T$800bn ($27.6bn) to T$1810bn and a 9.6% improvement in the Taiwan Securities Index to 8975.50 by December 31, was welcomed by the banking community, as reflected by an expansion of bank lending and investment by 6.33% during the first 11 months of 2010.
Moreover, in 2010 Taiwan's 15 financial holding companies also turned in their best earnings performance since 2007. Fubon Holding led the pack with T$2.75 earnings per share (EPS), followed by Mega Holdings with a T$1.41 EPS, while Jih Sheng, First, Taishin, E Sun and Yuanta also recorded EPSs above T$1 each, largely thanks to intensifying efforts to control risks and improve asset quality. Average non-performing loan ratios for Taiwanese domestic banks continued to fall from 0.78% in 2009 to 0.7% by the end of November 2010, while average coverage ratios rose from 128.91% to 141.54% in the same period.
Hike in rates
On December 30, the governor of the Central Bank of the Republic of China (Taiwan), Perng Fai-nan, announced that the central bank had hiked the discount rate, the rate on accommodations with collateral, and the rate on accommodations without collateral by 12.5 basis points each to 1.625%, 2% and 3.875%, respectively. Mr Perng justified the hikes through the DGBAS's expectations of moderate economic expansion in 2011, projections that the revival could raise annual consumer price inflation from 0.94% for the first 11 months of 2010 to 1.85% in 2011, and continued high asset prices.
The central bank also adopted a set of measures to tighten housing loans to selected areas experiencing an abnormal surge in property prices. In coordination with the central bank, the Financial Supervision Commission (FSC) formed a task force on December 30 to work with the Taiwan Securities and Futures Exchange Commission to monitor custodian banks to curb foreign-exchange speculation.
New regulations
Already faced with a saturated banking market and narrow interest spreads of just over 1%, Taiwanese banks face a new pressure on interest earnings with the implementation on January 1 of a new FSC regulation requiring the allocation of 0.5% of interest for loss provision in order to boost credit quality, with the exception of loans to Taiwanese government institutions. FSC vice-chairman Lee Chi-ju tells The Banker that "this measure brings us in line with international standards".
The new FSC actions serve notice that profitability in the financial sector will in future be dependent on asset quality instead of lending volume.
"The interest margin is so small that it is difficult for commercial banks to make an outstanding profit if lending is their core business," says Yuanta Financial Holding Company chairman Yen Ching-chang. He adds that Yuanta's success in pushing down its non-performing loan ratio to 0.57% by November 2010 "allows us to maintain earnings if we increase lending volume, so long as risk is controlled".
Mr Yen, a former finance minister, says: "I have instructed our managers and staff to work to increase the volume of our lending, since I anticipate a possible increase by the central bank in the second half of this year."
"The revival of the [Taiwanese] economy and higher interest rates will help raise our margins," says Chang Hwa Bank president William Lin, who adds that the interest-rate spread should "improve from 1.22% to at least 1.3% and will help to boost profitability, so long as we can continue to control risks".
Cathay Financial Holding Company president Chen Tsu-pei says that Cathay Union Bank (CUB), which has so far primarily focused on lending to large Taiwanese firms, aims to boost lending to consumers and small businesses in the coming year.
"In the wake of the credit-card crisis of 2005-06 and the global financial tsunami, consumers are more aware of the risks, while the survivors among small and medium-sized enterprises after these shocks should be fairly healthy," says Mr Chen. CUB is also tightening its risk management in corporate finance and has implemented a system of quarterly reviews with borrowers.
Mr Chen admits that the frequent reviews could be "rather time-consuming", but reports that the system "allows us to spot and deal with problems very fast" and has contributed considerably to CUB's reduction in its non-performing loan ratio from 0.55% at the end of 2009 to 0.29% a year later.
Self-discipline
A movement towards tighter self-discipline among banks is reflected in the Bankers Association of Taiwan's passage of a set of 'guidelines for self-discipline in financial derivative products', approved by the FSC in mid-December, and the FSC's own campaign to enact a far-reaching financial consumer-rights protection law, which was sent by the Taiwanese cabinet to the Legislative Yuan January 6.
"Banks may at first experience some impact after [the new law] takes effect, but we need to respect the rights of our customers. We should have had such a law a long time ago," says Taiwan Co-operative Bank (TCB) president Tsai Chiu-jung.
"We need to tell the customer very clearly what the nature of the products they are buying is and what are the risks and benefits," says Mr Tsai, who confirms that TCB will apply to the FSC to form Taiwan's 16th financial holding company this year.
"The outlook in Taiwan's market is positive for financial services providers who are very good at their game, can find niches and generate decent returns, but the other implication is that someone will be squeezed out if the market is only growing by 3% to 5%," says Taishin Holdings' chief operating officer, Greg Gibb.
