Last year, CommonWealth Magazine's survey of Taiwan's Top 100 financial enterprises revealed that the industry had recovered from the credit and cash card crisis of the previous years. With an average profit margin of 4.5 percent, the industry posted a five-year high in 2007.

But the good days did not last long. Last year's financial storm has pushed the Top 100 financial service companies to the edge of the abyss once again.

This year's survey of the Top 100 financial service firms found that they rapidly expanded their operations in 2008. Total revenues topped NT$5 trillion, the highest since 2000. But ultimate profits were lower than the companies can afford.

After the double whammy of the collapse of international investment and derivative financial products plus the economic downturn, the total net profit after tax of the 100 largest financial companies shrank in 2008 by 115.8 percent, or NT$35.76 billion.

This was not only the first negative value in six years, but even surpassed the NT$31.48 billion negative profits of 2002, scoring the lowest figure ever since CommonWealth Magazine began its annual surveys in 1990.

Among the 89 companies that provided figures on net profit after tax, just 45 made money in 2008, while 44 operated in the red. Never before has the ratio of loss-making companies reached 50 percent.

"Last year everyone in the financial industry was hurt. No one could claim they were winners," sighs Albert Hsueh, head of auditing firm PriceWaterhouseCoopers Taiwan and a longtime observer of Taiwan's financial industry. "The only difference is that those who were initially more cautious sustained fewer injuries."

Even James Chen, president of Chinatrust Financial Holding, which was ranked No. 1 in terms of profitability and even posted growth in 2008, remains markedly understated: "Our performance last year wasn't outstanding. We can only claim to have made fewer mistakes."

Life Insurance Hardest Hit

The life insurance industry, which used to account for the highest share of the Top 100's total revenue, was virtually crippled by last year's financial meltdown.

The 25 life insurers that made the cut for the Top 100 accumulated after-tax losses totaling NT$108.971 billion. Just six are still profitable. Nothing like this has ever happened before.

Even industry leader Cathay Life Insurance, which boasts the highest revenue in the industry with almost NT$1 trillion, has posted the first losses in its 47-year company history.

That Taiwan's life insurers have been so hard hit by the international financial crisis is partly due to the fact that Taiwan lacks fixed income instruments and that therefore companies have been overly trusting of overseas investments.

But insurers also engaged in excessive competition with industry peers, which made them offer highly attractive policies with low first-year premiums and high fixed interest rates that neglected the company's risk tolerance.

In interviews with CommonWealth Magazine, Fate Chang, president of Cathay Life Insurance, and Pan Po-Tseng, president of Shin Kong Life Insurance – the Taiwanese insurance firm most adversely impacted by the financial crisis – both concurred that in the low-interest environment of the future, life insurers will have to face losses from a negative interest spread. Companies must "return to the basics," in terms of both operations and product mix. They must attach greater importance to risk management and the basic needs that customers need to have safeguarded. Insurance companies must offer simple and straightforward health and life insurance policies and not risky high-yield products if they want to win back customer trust.

Wealth Management Bogs Down, Bank Profits Sag

Last year's international investment market collapse did not spare the securities industry either.

The 16 securities firms in the Top 100 posted average losses of NT$500 million, while revenue growth shrank 11.6 percent.

The main reason for the industry's lackluster performance is its heavy dependency on the brokerage business, which is highly susceptible to changes in the economic climate.

But the futures industry, which values risk avoidance, bucked the trend and posted growth last year. Polaris MF Global Futures and KGI, which made it into the Top 100 for the first time, both ranked among the Top Ten fastest growing companies in the financial industry.

As far as Taiwan's banks are concerned, those with a comparatively low overseas direct investment position were less affected by the crisis. However, wealth management, the major profit engine during the past three years, was dealt a severe blow.

After massive defaults on credit cards and cash cards, wealth management had become a secret weapon for banks to boost consumer banking operations. Figures from Taiwan's industry watchdog the Financial Supervisory Commission show that within just three years Taiwanese banks managed to greatly increase income from transaction fees, which rose from 7 percent to 18 percent of overall revenues. For certain private banks, that ratio stands at an even higher 30 to 40 percent, with fees coming mainly from the sale of investment funds and structured notes.

But the problems with structured products that emerged late last year have thoroughly undermined consumers' trust in the banking industry. As a result, people are pulling their money out of the market, and the reputation of banks is in tatters.

Banking industry statistics show that in the latter half of last year transaction fee income shrank almost 50 percent over the first half of the year. For the banks' already weakening profitability, this only made things worse.

Presently, the Taiwanese banking industry's interest spread has already narrowed to a new historic low of 1.5 percent. Now bankers worry that should wealth management operations shrink further, the profit growth of commercial banks will experience a severe freeze.

Translated from the Chinese by Susanne Ganz

Chinese Version: 海嘯重創　半數企業虧錢