In the eyes of others, Taiwanese bankers Daniel and Richard Tsai, scions of one of Taiwan's richest families, grew up with a silver spoon in their mouths. Yet the sons of Fubon Group founder Wan-tsai Tsai feel that they needed to toil away under their boss-cum-father for more than 20 years before they were allowed to run the show.

The family-controlled Fubon has frequently faced criticism for its caution and lack of innovation, but today it is the darling of international giants like Citigroup of the United States, Dutch insurance concern ING Group and Japan's Bank of Tokyo-Mitsubishi UFJ (BTMU).

In a highly symbolic gesture, the Fubon Group last month sponsored a performance by Taiwan's Han Tang Yuefu Music Ensemble in southern China. Addressing an illustrious audience that included many high-ranking Chinese government officials, Victor Kung, president of Fubon Financial Holding Company (Fubon FHC), the group's flagship, likened his company to the music ensemble, pointing out that Han Tang Yuefu had brought the ancient Nanguan musical style from Fujian Province to Taiwan and added new elements there before bringing it back to China.

"Like many other Taiwanese, the ancestors of the Fubon Group founder came to Taiwan from Anxi in Fujian Province. And today we return to Xiamen to start our China business with Xiamen as its headquarters," Kung said as he opened the Nov. 21 performance.

After three years of waiting, Fubon FHC in mid-November obtained approval from the China Banking Regulatory Commission for its Hong Kong subsidiary Fubon Bank to acquire a 19.99-percent stake in Xiamen City Commercial Bank, thus establishing a presence in China for the first time.

Amid the corruption scandal surrounding Taiwan's former President Chen Shui-bian and the havoc wreaked by the recent financial tsunami over the past six months, Fubon FHC stands out as the only Taiwanese financial institution that keeps making positive headlines. In July Fubon FHC announced a business alliance with BTMU, Japan's largest financial group.

In late October Fubon FHC bought ING's Taiwan unit ING Life Insurance (ING Life Taiwan) through a share swap, catapulting Fubon from No. 4 to No. 2 in the island's life insurance market. The transaction results in ING, the world's largest financial services group, gaining a five-percent stake in Fubon FHC. The deal also boosted the assets of Fubon FHC to NT$2.52 trillion, allowing it to surpass rival Mega Holdings and making it the second largest listed financial group in Taiwan, right on the heels of industry leader Cathay Financial Holding, which is run by a rival branch of the Tsai family.

"Fubon is seizing this opportunity to tell the market, I want to be the consolidator of this chaotic financial world. The Tsai brothers want to tell the market, we are very strong, we will have the highest capital adequacy ratio, and we will become even stronger. They're using this opportunity to set their company apart from the other financial holding companies," says Carl Chien, managing director for JPMorgan Chase Bank in Taiwan, in analyzing the Fubon strategy. Chien served as financial consultant for Fubon in the ING deal.

Fubon: We Want to Get Even Stronger

"For ten years the Fubon Group had to deal with changing fortunes, but in the current financial turmoil, Fubon FHC's shortcoming of being conservative has turned into an absolute advantage," notes Richard Yang, vice president of Taipei Fubon Commercial Bank, who used to work for the municipally owned Taipei Bank before it merged with Fubon Commercial Bank.

In the finance industry Fubon is widely regarded as conservative. The group has never counted among the trendiest or most innovative financial institutions. Since Fubon FHC tends to retain earnings and pay rather modest dividends to shareholders, its earnings-per-share ratio is lower than those of other financial institutions. Consequently, stock analysts have often labeled Fubon as overly conservative.

But when it comes to capital adequacy ratio, Fubon FHC ranks fifth among Taiwan's 14 listed financial institutions. In October this year, the ratio of stock pledged as collateral by Fubon board members stood at zero, even below the ratio for the board of Mega Holdings and other state-owned financial holding companies. This compares to pledged share ratios of 91 percent, 87 percent and 81 percent for Chinatrust Financial Holding, Waterland Financial Holdings, and Taishin Financial Holding, respectively.

A high-ranking Fubon manager who has been with the company for 15 years observes that the Tsai brothers never make bold investments during economic booms, but rather move when the economy is slow. He cites as a classic example the Tsai brothers' biggest coup before the ING Life Taiwan acquisition. Right after the SARS epidemic of 2003 when confidence in Hong Kong was at an all-time low, they bought the Hong Kong-based International Bank of Asia (IBA), which would later be renamed Fubon Bank (Hong Kong). Fubon purchased IBA for 1.16 times the bank's net asset value, making it the cheapest bank acquisition in Asia in the past decade.

Insights from the Junk Stock Crisis

When did Daniel Tsai, chairman and CEO of Fubon FHC, realize the critical importance of a conservative approach and risk management?

He points to the junk stock debacle in the Asian financial crisis of 1997 and 1998. Tsai acknowledges that before the junk stock crisis, real estate companies and banks made a lot of money, and he himself felt very powerful. Together with Continental Engineering chairwoman Nita Ing and four other second-generation entrepreneurs, Tsai formed a consortium that managed to outbid a group led by Liu Tai-ying, asset manager for the then ruling Kuomintang, for the Taiwan High-Speed Railway project. At the time Liu ridiculed the young entrepreneurs as "kids pretending to be grown-ups."

"Back then I was very unwilling to accept (Liu's judgment), but when I think about it now, I think we were really young and inexperienced!" Tsai admits frankly.

One year after the Fubon-led consortium won the highspeed railway bid, Taiwan was hit by the Asian financial crisis. Fubon Bank and Fubon Securities stepped on two big landmines when contractors Kuo Yang Construction and New Magnitude Group faced financial problems, incurring a loss of almost NT$10 billion. The Tsai brothers almost destroyed the business that their father had singlehandedly built and they drew heavy flak for their mismanagement. "I understood only after the junk stock crisis that there are economic ups and downs," says Tsai in recalling that wake-up call.

Aside from his own realization, the checks and balances provided by "big shareholder" Wan-tsai Tsai are the underlying reason for the Fubon Group's conservative approach.

While the founders of many other family-run conglomerates have already split up their fortunes among their children to let them run their own businesses, the wealth of the Fubon-Tsai clan is still entirely in the hands of Wan-tsai Tsai, Daniel Tsai reveals. He says he and his brother Richard are working for their father for a salary. "I think that's very good – you won't become greedy," he says.

Persuading the Master of Risk Management

Tsai explains that while his father no longer holds any executive position in Fubon FHC, he still remains its largest shareholder. "My father sees his own role now as the master of risk management. Whatever we want to do, he will say No," Tsai says jokingly.

Tsai says he can understand that his 79-year-old father, at his advanced stage in life, gives priority to business consolidation rather than expansion. But he argues that he and his brother are only in their fifties and feel that they are still able to push the envelope, at least until turning 60. Therefore, the duo needs to spend a lot of energy trying to win over their skeptical and cautious father for new ventures. The good thing, though, is that their father's scrutiny forces the brothers to be well prepared. They know if they want to convince their father, they must think their plans through and understand that big investments must not be rushed.

Conservative Caution Proves Attractive

In the current financial crisis, caution has proven to be attractive. It was the crucial element that helped Fubon FHC land the ING Life Taiwan acquisition deal.

Tsai reveals that that the Dutch life insurer had already been looking for a buyer for its Taiwan unit for two years and that Fubon and ING Life Taiwan had been talking to each other and exchanging copious amounts of information for quite some time without striking a deal. However, in early October Tsai received a phone call from an executive director of parent company ING. The Dutch national quickly came to the point, giving Fubon FHC just one condition, namely that the acquisition needed to be finalized within two weeks. "He said, Mr. Tsai, think it over, if you can do it, then tell me, and if you can't do it, then tell me right away," Tsai quotes the ING executive as saying.

Tsai got to know only later on that the two-week deadline was directly linked to the upcoming announcement of ING's third quarter results. The Dutch financial service company was eager to release a 1.5 billion-euro reserve that had been kept for ING Life Taiwan. ING did not demand to be paid in cash, but wanted to swap ING Life Taiwan shares against Fubon FHC stocks and subordinated bonds to become a major shareholder. "This means that ING chose us and that they were observing us for a very long time," Tsai concludes.

Chien of JP Morgan Chase Bank agrees that ING chose its partner carefully: "Since ING wanted a share swap, they needed to look for a stable partner."

Since ING did not aim to sell its Taiwanese unit for cash, yielding a high price was not their priority. Therefore, Fubon FHC was able to massively negotiate the price down, eventually sealing the transaction at 30 percent below book value. On top of that, ING has pledged to buy US$350 million worth of subordinated bonds before the end of next year should Fubon Life Assurance (Fubon Life) want to increase its paid-in capital. Tsai seems extremely pleased with the deal.

"I bought ING Life Taiwan almost for half the price. And after the sale was done, they made out another check for me," he points out. "Do you think that I should still worry about fiscal black holes?"

However, credit rating agencies clearly have some reservations about Tsai's demonstrative optimism. In October, Fitch Ratings revised its outlook on Fubon FHC from "stable" to "negative." Financial experts worry that in the current low interest environment the high-interest policies sold by ING Life Taiwan might prove a burden for Fubon FHC.

"This Fubon deal is legal arbitrage. The problem is that Taiwan sooner or later will have to catch up to international standards," says Yi-cheng Liu, chief risk control officer at Cathay Financial Holdings in analyzing the deal's potential risks. As soon as Taiwan adopts the International Financial Reporting Standards (IFRS) that are also used in the Netherlands, Fubon FHC will have to inject more capital into ING Life Taiwan.

Time will prove whether the acquisition of the insurance company was right or wrong. But what can be said for sure is that after the current turmoil in the financial markets has abated, Taiwan's leading insurer Cathay Life Insurance will find Fubon Life close on its heals and breathing down its neck. Market entry in critical times is the Tsai brothers' trademark. Now that they have formed alliances with partners in China, Japan and Europe, the hard-toiling sons hold three more tickets for entry into new markets.

Translated from the Chinese by Susanne Ganz

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Chinese Version: 富邦蔡家兄弟的危機入市學