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Top 100 Financial Enterprises

The Struggle to Stand Out

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For Taiwan's financial industry, 2006 was a year for post-disaster reconstruction. In this highly competitive market, Taiwanese businesses must now seek to break free from the existing herd mentality and create new value.

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The Struggle to Stand Out

By Hsiang-Yi Chang
From CommonWealth Magazine (vol. 371 )

The consumer debt crisis sparked by rash issuance of both credit cards and cash cards (known locally as the “two-card crisis”) sent a shockwave through Taiwan’s financial industry at the end of 2005, not only dealing a great blow to the industry, but also causing consumers to tighten their purse strings.

2006 was a year for rebuilding. While the top 100 finance companies had combined revenues of nearly NT$5 trillion and year-on-year growth of 13.9 percent, profits averaged only 2 percent, significantly below the former average of 5 percent.

“The main reason for this is residual bad debt from the two-card crisis,” says Victor Kung, president of Fubon Financial Holding Co., shrugging resignedly as he ponders Taipei Fubon Bank’s plunge in revenues. The bank had originally contributed 46 percent of the parent company’s net profits. After canceling out NT$15 billion in bad debts, that portion dropped to 16 percent.

In addition, Taiwan’s overall economic environment is also inconducive to growth in the financial industry.

The past two years have seen no rise in the NT dollar or interest rates, a stark contrast to the global growth trend, especially in emerging Asian markets. Despite resumed mobility in the second half of 2006 and a much greater trading volume than that of 2005, the rate of return remains firmly below the international average.

Changes are most apparent in the Taiwanese securities industry, where total revenues grew last year by 33.71 percent. “But underwriting and IPOs have atrophied,” inevitably causing operational difficulties, says Chang Lee-Chiou, president of Yuanta Core Pacific Securities, the firm with the largest share of the domestic market. “Handling fees and financing are the only two moneymakers now; that and the decline in revenues are causing a brain drain to China.”

Can Taiwan Keep Its Capital at Home?

The low rate of return on the NT dollar is naturally a result of the vicious circle created by decreased domestic investment. “Money will always find its way to higher returns,” says JF Asset Management (Taiwan) chairman Eddie Chang.

According to the latest Central Bank statistics, Taiwan had a record net financial account outflow of US$22.99 billion in 2006. Business and individual investments are becoming more and more globalized, and things are beginning to look “hot without and cold within” for Taiwan’s financial industry.

Foreign investment institutions are taking advantage of their own international investments and global deployment of consultants to set up large operations in Taiwan. The purchasing of Taiwanese banks for better market access is a clear example of this trend. After the purchase of Hibank by Standard Chartered and the formation of Standard Chartered Bank Taiwan in 2006, Citibank followed suit with the purchase of the Bank of Overseas Chinese, instantly gaining 50-plus branch offices and over 7,000 small and medium enterprise clients.

Taiwanese banks are also actively working to draw in foreign investment. In 2006, they succeeded in attracting over NT$90 billion, according to the Financial Supervisory Commission (FSC).

Foreign concerns are not only purchasing Taiwanese financial institutions at an accelerating pace, but even making their weight felt in the contentious wealth management market, and in the process altering the line-up of Taiwan’s top 100 financial enterprises. Investment banks prominent in private banking, including Deutsche Bank (ranked 31st), J. P. Morgan Chase & Co. (ranked 87th), UBS AG (ranked 82nd) and Merrill Lynch (ranked 100th), have begun to aggressively develop business in Taiwan, taking the capital of affluent Taiwanese overseas.

Some are even engaging in private banking in Taiwan without obtaining wealth management licenses, making them not only unregulated, but also free from any investment restriction. “Taiwan has become a paradise for foreign firms,” says Chang Lee-Chiou.

Shedding the Herd Mentality

The consumer banking crisis not only left the Taiwanese financial industry with bad debts irresolvable even after two years, but also showed industry businesses, now under threat both locally and internationally, that they need to face a common problem: they can no longer afford to continue offering identical services.

Excessive competition due to over-similarity in the nature of services offered has resulted in a profit average of only 1.6 percent for Taiwanese banks, significantly lower than the international average of 4 percent. “Taiwan is running out of profit resources,” says Paul C. Lo, CEO of SinoPac Holdings, a man with 37 years of experience in the industry. “The industry must innovate and find its own way.”

Survival in this strife-ridden environment will depend on the banks themselves, but we can sum up a few increasingly popular strategies for success:

Strategy 1: Innovative Business Lending

The atrophy of the business loans market in recent years drove financial institutions toward the vigorous pursuit of consumer banking. But in the wake of the two-card crisis, the industry was again forced to return to business lending, and the market was finally able to show a 5 percent growth at the end of 2006 – the highest in five years.

However, as profit margins narrow and businesses seek ever more diverse channels for raising capital, “we can no longer wait passively for business to come to us,” says Victor Kung. “The current trend is for proactively planning on behalf of our clients, combining banking and securities to provide investment banking services, and designing financial products geared toward businesses. That is the only way they will be willing to do business with you.”

Kung notes that Fubon’s growth rate reached 33 percent last year after adopting the strategy of “assisted business wealth management.”

Strategy 2: Focus on Fee-based Operations

As Basel II nears implementation and the financial industry raises the capital adequacy ratio threshold, risk management is becoming an ever-greater concern. Fee-based services, with their low risk and steady returns, have therefore become a focal point of business development.

The wealth management market, targeting affluent individuals, is the most obvious example. The predictable frequency of business account handling fee payments is a major incentive for development. According to FSC statistics, wealth management operations for major banks grew by 40 percent last year.

Strategy 3: Integrating the Resources of Overseas Branches

With the slow easing of investment restrictions with reference to China, and the banking, securities, and insurance industries all racing to gain footholds in Hong Kong, mainland China, and even international markets, establishing a distinctive formula for integrating resources to maximize effect has become a major development objective for Taiwanese financial enterprises, regardless of their status – as foreign-registered enterprises, or branch businesses or branch offices of local partner firms.

SinoPac Holdings, for example, is working to retain the loyalty of Taiwanese businesses that are expanding their operations regionally and even globally, reliably fulfilling the financing and capital-allocation needs of subsidiaries all over the world, by integrating the resources of all the overseas branches under its banner. They now offer a CrossPacific Account (CPA), which allows for real-time access to overseas branch bank accounts. They have also developed a variety of on-line business-related financial transaction services.

“For example, we offer e-factoring for all accounts receivable. Going online, businesses can transfer a fixed amount of international assets and liabilities to us for ready capital,” says Lo. “We rank third in the world in volume for this type of service.”

Strategy 4: Steady Expansion, Ongoing M&A

Lastly, mergers are another shortcut to winning out in an excessively competitive environment. Looking back on the past two years, we see that mergers and acquisitions never slowed even while Taiwanese financial holding companies were saddled with unimaginable amounts of bad debt after the acquisition of other financial institutions.

Small and medium-sized banks are selling out to foreign investors in order to acquire new technology and talent, as well as new images. They also gain the freedom to do much more business on the other side of the strait. In addition, local Taiwanese holding companies are engaging in mergers with an emphasis on whether such pairings are mutually complementary. In the past, Shin Kong Financial Holding always focused on insurance operations, while its banking operations flagged. But with the purchase of Makoto Bank, it was able to gain much in the way of banking channels and operations. The merger of Yuanta Core Pacific Securities and Fuhwa Financial Holding Co. will see the integration of their mutual strengths for the creation of the first local Taiwanese financial holding company specifically devoted to investing in banking institutions.

While the deregulation of cross-strait financial transactions is not yet in sight, and the trends of brain drain and capital outflow show no signs of ebbing, some financial industry players are learning from their mistakes and moving towards growth with ever more creative coping strategies. Having weathered the worst of the storm, the financial industry’s greatest challenges and opportunities now lie in the creation of new value, and escaping the fetters of crowd culture.

Translated by Ellen Wieman

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