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Taiwan's Banking Sector Goes International

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A "hird stage" of financial reform is quietly revolutionizing Taiwan’s financial sector. Local Taiwanese conglomerates-widely reviled during "econd stage" financial reforms-are being edged out by a wave of powerful, deep-pocketed foreign giants.

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Taiwan's Banking Sector Goes International

By Maxine S. C. Yang
From CommonWealth Magazine (vol. 369 )

While most people were enjoying their spring break, Wayne Wen-cheng Pai, the chairman of Bank of Overseas Chinese’s biggest shareholder, Polaris Financial Group, and Morris Li, Citigroup Taiwan country officer, worked all night on April 6 to complete a merger. Rumors that Citi was buying Bank of Overseas Chinese had finally come true.

“Bank of Overseas Chinese can now leap onto the international stage,” proclaimed Pai with conviction.

Citi paid NT$14.1 billion to acquire Bank of Overseas Chinese, which, with its 55 branches and 2,200 employees, will become part of Citigroup’s network of 200 million consumer, corporate and government clients in over 100 countries.

With the acquisition, Citi gains 1 million new customers in Taiwan and expands its number of branches six-fold from 11 to 66.

“This is a triple-win situation for Citi, Bank of Overseas Chinese, and our customers,” Li said.

At the end of March, the Financial Supervisory Commission suddenly announced it would assume custodial control of China United Trust and Investment Corporation, culminating an unprecedented run in which they took control of four ailing financial institutions within four months.

But that wasn’t the lead story in the next day’s financial press. Dominating the news was the story of another troubled bank, Bowa Bank, attracting interest from foreign investors.

While most people were enjoying their spring break, Wayne Wen-cheng Pai, the chairman of Bank of Overseas Chinese’s biggest shareholder, Polaris Financial Group, and Morris Li, Citigroup Taiwan country officer, worked all night on April 6 to complete a merger. Rumors that Citi was buying Bank of Overseas Chinese had finally come true.

“Bank of Overseas Chinese can now leap onto the international stage,” proclaimed Pai with conviction.

Citi paid NT$14.1 billion to acquire Bank of Overseas Chinese, which, with its 55 branches and 2,200 employees, will become part of Citigroup’s network of 200 million consumer, corporate and government clients in over 100 countries.

With the acquisition, Citi gains 1 million new customers in Taiwan and expands its number of branches six-fold from 11 to 66.

“This is a triple-win situation for Citi, Bank of Overseas Chinese, and our customers,” Li said.

At the end of March, the Financial Supervisory Commission suddenly announced it would assume custodial control of China United Trust and Investment Corporation, culminating an unprecedented run in which they took control of four ailing financial institutions within four months.

But that wasn’t the lead story in the next day’s financial press. Dominating the news was the story of another troubled bank, Bowa Bank, attracting interest from foreign investors.

If they all succeed in finding a suitable match, one-third of Taiwanese banks will have some degree of foreign ownership. On the street, that translates to one in every four banking outlets having a foreign name or a foreign manager influencing everyone’s personal wealth.

Foreign Banks Seen as Saviors

Whenever Taiwan-based banks are put under the control of financial regulators and desperately need an infusion of capital to survive, they naturally seek out foreign investment. It is now to the point where the moment a Taiwanese bank reveals it is looking for partners, reporters seek out foreign institutions to comment on their level of interest.

So why are mergers between foreign and domestic banks so popular? Jeffrey Wong, deputy director of McKinsey & Company’s Asian Corporate Finance Practice, believes that the merger fever infecting foreign banks has long been prevalent in Asia. After the 1997 financial crisis, foreign banks immediately moved in on Japanese and South Korean banks needing capital and technical assistance.

Currently suffering from an epidemic of bad debt arising from over-issued debit cards and credit cards, Taiwan-based banks have instinctively sought help by riding the merger wave. The participation of foreign banks is proving to have many positive benefits for Taiwan’s financial system.

Cleaning Clogged Gutters

To begin with, they have eased the desperate need for capital at some domestic banks. Many of Taiwan’s financial institutions, weighed down by mountains of delinquent “double card” debt, have posted losses and seen their stock prices drop in the past two years. As a group, Taiwan’s domestic banks lost NT$7.4 billion in 2006. Injections of foreign capital can help them maintain their capital adequacy ratio (a bank’s capital base as a percentage of its total risk-weighted assets) above the standard of 8 percent mandated by the Bank for International Settlements. Last year, direct foreign investment in Taiwanese banks surpassed NT$90 billion.

From the experience of other Asian countries, foreign banks can also introduce new management technology.

During the Asian financial crisis a decade ago, South Korea’s domestic banks received a huge influx of capital from foreign financial institutions, which transformed how they were run. Every Korean bank established a risk management department and loan committee that carefully screened every loan application, not only considering applicants’ collateral but also their credit history and ability to repay the loan. In some cases, final decisions on loan approvals were left in the hands of foreign managers. Also, banks set up investor relations departments that regularly and transparently publicized information about business operations.

Before that time, these seemingly commonsense measures had never gained traction in conservative, fiercely nationalistic South Korea.

“The gutters were clogged, so the banks had poor results. But cleaning out those gutters inevitably challenged vested interests,” notes Steve Sun, associate partner in IBM Taiwan’s Global Business Services/Financial Services Sector, who has experience working in both foreign and domestic banks. “The biggest role of foreign banks is to do what has to be done but wasn’t done by previous managers because they didn’t want to rock the boat.“

In Taiwan, GE Consumer Finance, Newbridge Financial Group and Shinseibank have all introduced risk management and information systems, as well as foreign managers, to their local partners.

For example, GE Consumer Finance, Cosmos Bank’s biggest shareholder, installed foreign managers to head the bank’s risk, finance and operations departments. It also drew on its wealth of global experience to transform many areas of the bank’s operations, from consumer service, marketing and risk management to receivables collection and information systems.

NationalChengchiUniversity finance professor and ex-legislator Norman Yin believes that foreign capital can also raise the government’s regulatory standards and bring them in line with international norms. He cited the impact of foreign banks in changing South Korea’s definition of a nonperforming loan. Where loans previously would have to be unpaid for six months before being classified as nonperforming, they are now considered overdue there if unpaid after a month and are labeled nonperforming if unpaid for three months.

Foreign financial institutions can also help broaden the vision of domestic firms. Singapore-based Temasek Holdings, for example, has a diverse portfolio of interests in Taiwan, China, Indonesia, India, South Korea and Singapore that includes Standard Chartered Bank. The managers of these branches meet annually in a club-like atmosphere to exchange ideas and learn from one another. E.Sun Commercial Bank became part of the Temasek family last year and at the annual conference was able to exchange ideas on how to improve customer service with other “club” members.

At the same time, Taiwan’s customers also need local banks to get a transfusion of new blood from foreign institutions to improve their service quality.

Financial Supervisory Commission chairman Sheng-Cheng Hu suggests that a majority of employees in local banks got their start in “old banks” ?w the mostly state-run banks that dominated the Taiwanese banking industry before the market was liberalized in the early 1990s ?w and as a result, they work and think similarly.

In contrast, HSBC and ABN Amro have already begun using the Internet to help corporate clients consolidate their finances around the world. The banks can immediately notify their clients of any transactions, enabling them to more efficiently utilize their financial resources.

Foreign financial institutions, therefore, can offer plenty to Taiwan’s banking industry. The question is, why are they showing interest in Taiwan? There are actually plenty of reasons.

Using Taiwanese to Penetrate China

The first is the local market. Taiwan has Asia’s fifth largest economy and fourth largest banking market, and 53 percent of Taiwan’s households have annual incomes over US$25,000, trailing only Hong Kong and Singapore.

“It’s a crucial battlefield,” says UBS’s Hong Kong-based managing director for investment banking David Chin, who was born and raised in Taiwan.

At the same time, Taiwan’s emerging banking niches are growing rapidly. A Financial Supervisory Commission report indicated that asset securitization products, which lower banking system risk, boost bank fees and give the public another avenue of investment, are growing at a rate of 150 percent a year. The wealth management businesses of major Taiwanese banks grew last year by 40 percent.

Foreign financial institutions are also drawn to Taiwan because local banks are unable to set up branches in China – due to political barriers. When Standard Chartered promoted its acquisition of Hsinchu International Bank to investors, it noted that 70 percent of the Taiwanese bank’s corporate clients had operations in China and that its 3,300 Chinese-speaking employees could help expand Standard Chartered’s market penetration there.

“Many people feel that it’s easier to transfer Taiwanese bankers to China than to train bank staffers there,” Yuanta Financial Holding Co. chairman Yen Ching-chang said at a recent conference.

The acquisition of stakes in Taiwanese banks by foreign banks is seen by many, therefore, as a mutually beneficial proposition, but Sophia Cheng, Merrill Lynch Global (Taiwan) Limited managing director for Equity Research, warns they are overlooking the impact these foreign financial institutions will have on the local market.

First, aside from real estate, Taiwan residents have US$1.3 trillion in assets they can invest, and they are more likely to be lured by foreign institutions, which can offer the most tempting investment-planning vehicles, Cheng believes.

“Taking just a 1 percent fee, they can earn a lot of money,” she said.

Second, Taiwanese businesses have interests around the world and need financial services wherever they are. With their global networks, foreign banks are well positioned to grab the lion’s share of this market.

Facing such a predicament, Cheng can’t help feeling sorry for Taiwan’s banks. “It’s not that there aren’t commercial opportunities in Taiwan, but to concede the market to others is really a pity,” she laments.

Citigroup Global Markets’ Du is also concerned that almost all of Taiwan’s smaller banks are looking to sell out to foreign investors. Within three years, Citi, HSBC and Standard Chartered may all have more than 100 branches in Taiwan, offering local customers products from around the world backed by a global resource base. At that point, Du wonders, what will Taiwanese banks do and how will they compete with these industry giants?

Yin-Hua Yeh, director of the Graduate Institute of Finance at Fu Jen Catholic University, describes the looming battle as an unfair competition. Unlike Taiwanese banks, foreign banks can set up branches in China, where they can offer a full range of financial services and employ Taiwanese staffers to wrest away Taiwanese clients operating there. Local banks, on the other hand, remain caged in Taiwan, nervously watching a situation they cannot influence.

“The foreign banks have eaten all the beef off the bone,” complains Shin Kong Financial Holding executive vice president & CFO Victor Hsu, who anticipates that the pressure on Taiwan’s banks will only grow with time.

The foreign invasion is also likely to have an impact on Taiwan’s economic policy. Hontai Life Insurance chairman David Jou argues that Taiwanese banks have played an indispensable role in nurturing the country’s manufacturing sector and high-tech growth, supporting government policies or helping mitigate crises, despite the risks ?w and even losses ?w involved. If Taiwan is only left with foreign banks, which do not take on money-losing ventures, Jou and others wonder what will happen if another Asian financial crisis hits. Will the foreign-invested banks support public policy in a pinch?

“Even if the president comes begging for help, foreign banks may not pick up the tab,” said a high-level manager in the financial sector.

How to “Use” Foreign Banks

In the face of such challenges, what should Taiwan do? How many foreign banks does Taiwan need? What requirements should Taiwan make of them, and what should its policy goals be?

“It should be totally open. Let market forces decide,” is Financial Supervisory Commission Chairman Hu’s simple, straightforward answer.

Hu argues that foreign banks can revolutionize Taiwanese financial institutions, helping them break through cross-strait barriers to serve Taiwanese businesses operating in China and extending their reach to the rest of the world.

“Foreign institutions can help extend the value chain of our banks,” Hu explains, citing the example of Hsinchu International Bank. Originally just a medium-sized bank, with the injection of Standard Chartered’s resources it has now become an international financial institution that can meet the financial needs of Taiwanese businesses anywhere in the world. In the face of intense global competition, Taiwan’s domestic banks can help retain clients and protect the jobs of employees by taking on foreign partners.

Domestic banks have already gained a feel for how to “use” foreign institutions. E.Sun Commercial Bank, for example, knows that the future lies in regionalization and China, so it has developed partnerships with Temasek and UK-based Prudential Plc., both of which have strong presences in Asia in general and specifically in China.

On the Shoulders of Foreign Giants

Even more important in the future will be the battle Taiwan’s banking professionals face in taking on foreign competitors.

“In a globalized world, you can’t stop others from coming in,” says Phee Boon Kang, Asia Pacific president for the San Francisco-based Allard Institute, who has served previously as Taiwan-area general manager for Bank of America and American Express and has considerable experience throughout Asia. He recommends that Taiwanese working in the financial sector find positions with foreign banks or foreign-invested banks so that they can learn and be better prepared to take on challenges.

Wu-ling Lan, who has been with Hsinchu International Bank for 18 years, had an eye-opening visit to Standard Chartered’s Hong Kong offices in March. “Only by looking back from the outside do you realize how big the world is. It’s like you’re standing on the shoulders of giants,” she says.

Standing on the shoulders of these foreign giants, Taiwan’s financial sector cannot help but want to make a new start from higher ground, with the people, technology, capital and global networks these giants can provide.

Translated from the Chinese by Luke Sabatier

Keywords:

好友人數