Shanghai Commercial & Savings Bank Ltd.
Spanning the Cross-strait Financial Divide
Long seen as a prodigy of Taiwan's banking industry, SCSB has posted growth better than 20 percent every year since 2000. How do they do it?
Spanning the Cross-strait Financial DivideBy Judy Hu
From CommonWealth Magazine (vol. 396 )
At just before 9 a.m. on April 25, more than 100 shareholders are crammed into the 11th floor auditorium of Shanghai Commercial & Savings Bank's (SCSB) Minquan East Road headquarters. The shareholders are all smiles, because SCSB has been the earnings king among financial shares for four straight years. Last year, SCSB shares posted earnings per share (EPS) of NT$4.81, with a dividend yield of NT$2.35 and a stock price nearly twice what it was three years ago.
Several years ago, as other Taiwanese banks charged into the business of issuing cash cards, 85-year-old SCSB chairman Yung Hung-ching was keenly aware of the risk and insisted that SCSB not offer cash cards, even provoking the wrath of the rest of the board. The consequence of that insistence, however, has been that SCSB has been able to maintain a low non-performing loan ratio of just 1.15 percent, far below the average of 1.89 percent for the entire banking industry, making it one of the nation's most structurally healthy banks.
Greater Profitability than Top Holding Company
Apart from its sound financial structure, SCSB last year posted NT$12.6 billion in after-tax profit, up 8.7 percent over the previous year and making the bank the financial sector's earnings leader for the fourth consecutive year with its NT$4.81 EPS – besting the NT$3.34 EPS of top financial holding company Cathay Financial Holdings.
"SCSB focuses on winning top-flight Taiwanese commercial clients. Our direction is very clear. This is our winning strategy," Chiu Yi-jen, president of SCSB for just over a year, told CommonWealth Magazine in a first-ever exclusive interview.
There are two main drivers of SCSB's profitability: (1.) Return on long-term overseas equity investments. The NT$5.46 billion return last year on investment in Hong Kong's Shanghai Commercial Bank accounted for half of total profit. (2.) Offshore banking units (OBUs), operating revenue for which has shown double-digit growth.
What Taiwan's banks are all anxious to know is: Will cross-strait opening pave the way for operations in China? How will that opening take place? Will it be limited to equity participation or will direct investment be permitted? SCSB has a head start as a good cash flow platform for Taiwanese businesses, possessing a presence in Taiwan, Hong Kong and China, which will also allow it to be the first to taste the sweet fruits of financial deregulation.
Cash Flow Platform Bridging the Strait
"Shanghai Commercial Bank has bridged the strait now for some time," says Chengchi University finance professor Chu Hao-min, a long-time observer of cross-strait financial development. SCSB holds a controlling 57.6 percent stake in Shanghai Commercial Bank, which, in turn, holds a three-percent stake in China's Shanghai Bank.
In the absence of direct cross-strait financial links, Taiwanese businesses have long viewed Hong Kong as their financial operations center. A key reason behind SCSB's steadily rising profitability is Shanghai Commercial Bank's ability to offer financial and cash flow services in lockstep with client demands and form close client relationships through Hong Kong.
To serve its Taiwanese business clients, SCSB has since 2000 provided a close cooperative bridge via Shanghai Commercial Bank and Shanghai Bank, offering a financial services platform spanning all three points of the cross-strait triangle. In addition to the "Taiwan Affairs Unit" Shanghai Commercial Bank has established in Hong Kong, Shanghai Bank set up a "Hong Kong and Taiwan Services Unit" in China to provide comprehensive financial services for Taiwanese businesses in all three areas.
With China's central government implementing its current series of "macro-control" policies, corporate financing can be hard to obtain. SCSB's Taiwanese business clients can obtain financing through a variety of channels accessed through the bank's Hong Kong and Shanghai affiliates. Clients transferring funds from Taiwan to Shanghai quickly accomplish in a day what some banks do in three to five days.
More than a few Taiwanese financial institutions have formed strategic alliances with Chinese banks, but these often fall to the wayside once the mainland side acquires the know-how they seek. How has SCSB managed to maintain its cooperative relationships with all three sides vying for their own interests?
A Partnership of Equitable Relations
"The key to our success is that the triangular relationship is rooted in equity," says Chiu Yi-jen, who joined SCSB in 1980 and worked his way up from the bottom.
The banks in the three areas share virtually the same name, and the same goal of "establishing the finest cross-strait Chinese bank." They also hold joint quarterly meetings and a joint annual meeting to enhance exchanges.
"We are all similar in scale, so it's an equitable arrangement," Chiu emphasizes.
Shanghai Bank (the member of the trio actually based in Shanghai), was established a scant 12 years ago, making it a full 80 years the junior of the 92-year-old SCSB. As China's economy has risen, however, demand for corporate financing has been ravenous. Thus, Shanghai Bank's initially low asset holdings ballooned to US$38.4 billion (about NT$1.2 trillion) – far exceeding SCSB's US$19.8 billion – despite having current capitalization of just US$340 million (about NT$10.3 billion), and it has enjoyed 20 to 30 percent annual growth.
Solid Deployment in China
As the wave of cross-strait financial opening and China's stellar economic growth crests, will the Hong Kong-based Shanghai Commercial Bank increase its stake in its Shanghai-based partner?
Noting that SCSB is a traditional, old school bank, Chiu remains demure. "We won't talk about important policies until they're in place," he says.
In the current phase, SCSB's main strategy will be making use of the OBU mechanism and readying for the establishment in June of their Hong Kong branch office. Down the road, once progress has been made on cross-strait financial policy, representative offices will first be established in China, which could later be upgraded to branch offices or subsidiary banks.
Translated from the Chinese by Brian Kennedy
Chinese Version: 搶先品嚐金融開放果實