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SME Borrowing Drives Bank Earnings


SME Borrowing Drives Bank Earnings

Source:Domingo Chung

In 2010, Taiwan's financial sector was back on a roll, as SME lending became the new big thing, for the first time accounting for more than half of all business lending among Taiwan's domestic banks.



SME Borrowing Drives Bank Earnings

By David Huang
From CommonWealth Magazine (vol. 471 )

The results of CommonWealth Magazine's latest survey of the 100 largest financial institutions are out, and the big winners are the banks.

Both operating revenues and profits grew across the board among Taiwan's 100 biggest financial institutions, with total assets topping the NT$50 trillion mark, aptly demonstrating their rising strength and operational capabilities. Of the top ten most profitable financial institutions, nine were banks, and earnings at each of the top five banks surpassed NT$10 billion.

Corporate loans at Cathay United Bank accounted for 51.2 percent of the bank's total lending, while Chinatrust Bank made 59 percent of its loans to institutions and micro-enterprises, and corporate lending at Mega Bank exceeded 70 percent, indicating that the percentage of bank profits deriving from corporate finance had risen.

In corporate finance, once neglected SMEs, numbering 1.2 million potential clients, rode upon relatively high interest rate spreads (the spread between lending rates and interest paid on deposits) and government incentives to become the new darlings of the banking set for the first time.

According to Financial Supervisory Commission (FSC) statistics, total bank loans to SMEs in 2010 reached NT$3.67 trillion, for the first time exceeding more than half of total corporate lending. New loans taken out during the first quarter of this year reached NT$114.9 billion, 57 percent of the government policy target for new lending of NT$200 billion for the entire year.

China, Taiwan Both Eye SME Lending

Taiwan's FSC policy incentives allow banks receiving high annual evaluations to upgrade so-called "mini branches" to full service branches or have their inter-city/county branch institutions move into the three main financial centers of Taipei, New Taipei and/or Kaohsiung, another reason banks have been eagerly competing for business.

This is not dissimilar to events in China, where the 12th Five-Year Plan currently underway contains policy provisions designed to support SMEs, including items meant to help them overcome difficulties accessing loans. These provisions have become the most lucrative commercial opportunity awaiting Taiwanese financial institutions that set up shop in China.

Taiwan's 1.2 million SMEs are the lifeblood of its economy, accounting for more than 90 percent of all business enterprises, and are also a major provider of employment opportunities. According to Tina Lo, managing director and head of China strategy at Industrial Bank of Taiwan, the success of China's 12th Five-Year Plan at stimulating domestic demand and raising per-capita gross domestic product will necessarily depend on SMEs.

Consequently, IBT International Leasing Company – which Industrial Bank of Taiwan is preparing to establish in Suzhou as its first subsidiary in China, pending Beijing's approval – plans to tailor its lending services toward SMEs. Meanwhile, the strategic alliance concluded between Taiwan Business Bank and Bank of Beijing will have Taiwan Business Bank acting as guarantor on up to RMB$5 billion in loans to Taiwanese businesses operating in China. Upon arriving at the Bank of Beijing offices to sign the agreement, Taiwan Business Bank chairman Peter Lo's curiosity was piqued at the sight of a photograph of what appeared to be a court sentencing. Bank of Beijing officials told him it was a photo of a former bank president who had been sentenced to death by firing squad for making too many bad loans.

As Lo sees it, China wants to encourage bank lending to SMEs, but with the inherently higher risks such lending entails and demand for financing among state-owned enterprises remaining high, that won't be an easy bill to fill. Conversely, Lo says Taiwanese financial institutions, with their superior credit-checking capabilities, are in a relatively better position to make loans to SMEs in China.

Taihsin Bank, rated the number-three SME lender in the FSC's 2010 evaluations, altered its operational philosophy and saw annual pre-tax profit reach NT$10.7 billion, three times that of the previous year.

"Prior to the financial crisis, our system was designed to serve larger corporate clients," Taihsin Financial Holdings president Lin Keh-hsiao says. "In the aftermath of the crisis, we realized the importance of diversifying our client base and began looking for a model that would serve small- and medium-sized enterprises."

One element they were looking for in a new model was an adaptation to the operational peculiarities of SMEs.

"A lot of these companies operate at night, but banking hours are only until 3:30 p.m. So we at Taihsin wanted to come up with a way these companies could safely make deposits at night," Lin says, adding with a smile: "That's our area of expertise – let me keep some details to myself."

First Bank, the top lender to SMEs in the 2010 FSC evaluations, with an average of NT$470 billion in outstanding loans to SMEs, has applied a "green banking" philosophy to create new business.

First Bank set forth its "Financing Promotion Plan for Energy Conservation Businesses," offering financial services tailored to energy service companies (ESCOs) that assist businesses in their energy conservation planning, as well as those companies seeking to invest in ESCOs.

For example, if a given company's annual electricity bill was NT$12 million and an ESCO could set forth a viable plan to reduce those annual costs to NT$8 million, First Bank could provide a loan of NT$4 million to the ESCO, secured through the NT$4 million in projected electricity savings of the ESCO's client company, says First Bank vice president Chou Po-chiao. First Bank's services allow companies looking to cut energy consumption costs to use what was originally a fixed cost as collateral, providing essential financing to ESCOs, which are often small-scale operations that have difficulty obtaining loans.

One self-financed small businessman had established eight small hotels in the Taipei area and was seeking to build his ninth when a loan officer from Taihsin Bank finally contacted him and professed a willingness to lend him the money. It wasn't until after the loan went through that Lin Keh-hsiao discovered that the businessman in question was an old classmate of his.

"If I can open eight hotels, how come the bank is still worried I won't be able to repay my loan?" the businessman lamented.

Lin thinks that's mostly due to a mindset among bank employees of "SMEs have nothing to do with me."

To be sure, underwriting an NT$1 billion loan to a major corporation and an NT$50 million loan to an SME costs the bank about the same in terms of time and money, so the loan officer will naturally prioritize the big player.

"Long-term disregard has led to a lot of missed opportunities," Lin concedes. "The biggest issue in serving SMEs is that they often have no financial report that can be examined, so we must rely on new credit-checking methods."

One of those methods is to get a clear picture of the status of the prospective client's overall assets, then examine the operational conditions of nearby businesses and those in the same industry in judging their ability to repay.

Savvier Risk Management

"The bank's risk management and operational capabilities all improved during the financial crisis and that also made us better able to take on SME loans," Lin says, pointing out the larger trend of improved capabilities among financial institutions resulting from the crisis.

FSC figures show that despite the rapid growth in the amount of financing being taken on by SMEs, the ratio of non-performing SME loans has continued to decline, from 0.96 percent at the end of last year to 0.87 percent as of the end of March of this year.

First Bank's strategy is to make use of a secure Internet platform to gain a solid grasp of the orders placed with prospective clients.

"If you can get a read on the major upstream clients' order books, you can understand the actual operations of hundreds of SMEs up and down the supply chain," Chou Po-chiao says.

Where banks once required collateral, guarantors, letters of credit and other assurances, "now our grasp of companies along the supply chain is much better and we can offer loans against orders, pre-pay financing and accounts receivable financing," Chou says.

Due to the high degree of credibility of the upstream client's operations, a good read on the status of orders placed can serve to assure banks that there are no doubts about the liquidity of the SME in question. When the small company delivers its goods to the big client, its loan payments will be transferred directly from the big client to the bank's account, thus considerably reducing the bank's risk.

Translated from the Chinese by Brian Kennedy