Surrounded by a vocal and excitable entourage in a Taipei office, Charles Lo, chief executive of China business at Chinatrust in Taiwan, is outlining the company’s aspirations for expansion across the strait to the mainland.
“In the long term, I see Greater China becoming one market,” says Lo. “This would cover China, Hong Kong, Macau and Taiwan. I have always believed this.”
Ambition and idealism aside, any such unified market remains some way off. Before the nations in northeastern Asia can become one (very big) happy family, traditional adversaries China and Taiwan need to get much more friendly.
It is a potentially long and difficult process but there are signs of progress. Deepening economic arrangements such as the Economic Cooperation Framework Agreement and the Memorandum of Understanding are squarely aimed at enhancing the cross-strait relationship. And the timing looks spot on.
 |
|
| Freya Beamish, north-east Asian economist at Lombard Street Research based in Hong Kong |
“In terms of both solvency and liquidity, Taiwanese banks are relatively healthy,” says Freya Beamish, north-east Asian economist at Lombard Street Research based in Hong Kong. And while capital-to-asset ratios came down after the Asian financial crisis of 1997-98 and were lower still after the 2000 dotcom bust, they are within the Basle III requirements and are at present at around 8%. Beamish adds that loan-to-deposit ratios have come down in Taiwan and points out that while this means better liquidity in the market, it also means it is harder for banks to make a profit. Banks on the island have struggled for many years to make money in a market that remains overcrowded. “Currently in Taiwan there are around 40 banks, over 100 securities companies, more than 20 insurance companies, more than 40 asset management companies and 16 financial holding companies. The market is really saturated and competition is fierce,” says CY Huang, chairman of the Taiwan mergers & acquisitions and private equity council based in Taipei. And all of this is to serve just 23 million people.
Moreover, “most manufacturers that originated in Taiwan have moved business to China already,” says Pandora Lee, Taiwan analyst at UBS. As a result, loan demand in Taiwan is low. Cumulative loan growth over the past 10 years in Taiwan has been 3%. Combine this with net interest margins set at around 1% for banks, and bank earnings reports make for grim reading.
Under these circumstances, banks in Taiwan are effectively faced with two ways to increase profitability: to consolidate or find new customers. “Consolidation would lead to massive lay-offs and the government will avoid this. Thus expansion into China is the natural solution,” says Lee. Taiwan is eagerly looking to its big brother across the strait for a ready-made customer base to extend earnings.
“The motivations for Taiwanese banks to move onto the mainland are obvious,” says Bradford Ti, Taiwan financial analyst for Citi Investment Research in Hong Kong. “Taiwanese corporates have already moved a large portion of their manufacturing bases to China, so there is a huge business opportunity which, over the past decade, Taiwanese banks have been forced to forgo. Now that China is opening up, they are trying to catch up and get a piece of that business.”
But questions remain over the ability of Taiwanese banks to steal back Taiwanese companies that have long been established on the mainland. Although tech company Hon Hai has its headquarters in Taipei, it has been present in mainland China for the past 20 years and is well established there. “A company like this would easily gain support from Chinese or international banks,” says Lee. What will motivate them to turn to Taiwanese banks?
Lee argues that Taiwanese branches abroad have accomplished little. “Most Taiwanese banks have branches in places like the Philippines and Vietnam but these branches do not perform as well as domestic branches,” she says. “They are only doing business with overseas Taiwanese people in the region. Doing business with a limited amount of people prevents Taiwanese banks from gaining any meaningful presence in Southeast Asia.” Could the same be said for branches in China?
In both respects, Taiwanese banks are confident. They believe that they hold the advantage when it comes to dealing with Taiwanese companies and small and medium-sized companies in general. “Chinese banks are not familiar with Taiwanese enterprises and have difficulty accessing their headquarters, which are usually based in Taiwan,” says Victor Kung, president of Fubon Financial in Taipei. “Moreover, Chinese banks don’t really understand how to assess the credit of Taiwanese enterprises. There is great demand for banking services among Taiwanese investors in China. As a result, Taiwanese companies will look for help from banks that they are familiar with.”
Taiwanese banks boast of success when it comes to SME lending, which they hope to transfer to the mainland. “The SME market in China is greatly underserved, thus there are still opportunities for Taiwanese banks to succeed in China if they can tap the SME market, particularly Taiwanese SMEs,” says Ti. Kung concurs: “Taiwan banks are familiar with servicing and assessing the credit of SMEs. We will be the banks to increase credit flows in SME businesses in the mainland.”
Taiwanese banks are counting on their innovation and creativity to propel them up through China and the region. “Our Chinese counterparts ask us how we survive on a 1% interest rate margin,” says Kung. “We control our costs and credit effectively and we conduct a lot of fee business. It’s not easy to operate in this environment, but we do. Taiwanese banks like us can teach our Chinese counterparts how to succeed even within a saturated market.”
Analysts argue that Taiwanese banks will not only need to focus on SMEs but will also need to limit their scope in China. “As a foreign bank in China you need to be localized in order to be successful,” says Huang. “Finding a niche is the most important thing, and this is what Taiwanese banks will be looking to do.”
Several Taiwanese banks are now putting the wheels in motion. Fubon, for example, has learnt from the Chinese market through the 19.9% stake it took in Xiamen City Bank through its Hong Kong subsidiary in 2008. And the benefits have been mutual. Fubon was “invited by the original shareholders of Xiamen Bank to bring in a higher level of expertise and professionalism to banking operations on the mainland,” says Kung.
Mega ICBC, the sixth-largest bank in Taiwan by assets, has been expanding its network throughout China and knowledge of the market by establishing a business centre on the mainland. “The business centre developed relationships with corporates in China and gained a better understanding of Chinese regulations,” says an official at Mega ICBC. “This gave us the edge when it came to understanding the Chinese market by the time we were allowed to build a representative office there.”
Some banks are keen to avoid some of the potential restrictions imposed by a strategy that puts the accent on staying local. For Chinatrust, “initially branches will follow Taiwanese business on the mainland and in the short to medium term we will focus on establishing our banking business in three areas in China – Shanghai, Guangzhou and Beijing/Tianjin,” says Lo. “In the longer term we will look to open branches in Chengdu and Chongqing as well. These are China’s rising stars. As long as development runs smoothly, in the next five years we hope to have one subsidiary, five branches and 14 sub-branches on the mainland. Additionally, we will have eight leasing companies in China, and three micro-lending businesses with 15 branches all together. In total we hope to have 46 outlets on the mainland.”
The economic benefits of better cross-strait trade relations are starting to be felt in Taiwan. “Taiwanese investment is coming back to Taiwan, cross-strait tourism is growing, and we are even seeing Taiwanese factories choosing to relocate back to Taiwan,” says Ti. “We are seeing a resurgence in demand for corporate loans not just for working capital but also for capex investments. The demand is not necessarily coming from large corporates, which have driven demand in the past, but it is now largely coming from SMEs which are being revived due to a better domestic economy in Taiwan.”
So with an expedient market waiting on the mainland and cross-strait ties continually improving, Taiwanese banks are optimistic. But there’s a flipside.
With China offering preferential treatment to the Taiwanese the mainlanders are looking for the same in return. For instance, while Taiwanese banks are able to take stakes of up to 20% in Chinese banks, those banks are permitted only a 5% stake in Taiwanese banks. “For an institution to become a strategic investor, it needs to be able to make a meaningful investment above 10%,” says Huang. But regulators in Taiwan are reluctant to reciprocate. “If Chinese banks are permitted to buy 15% to 20% stakes in Taiwanese banks, there is a possibility that they could become the largest single shareholders of some banks in Taiwan,” says Chung Hsu, head of Taiwan financial sector research and Taiwan market strategist at Credit Suisse in Taipei.
 |
|
| Charles Lo, chief executive of China business at Chinatrust in Taiwan |
But other bankers don’t see a threat: “So what if a Chinese bank acquires a bank in Taiwan? Why would they even want to do this? In a commercial sense, acquiring a Taiwanese bank will be of little or no interest to Chinese investors,” says Lo. Kung takes a similar line: “Why doesn’t Taiwan open up its saturated market to China in return for access to a fertile Chinese market? This is an excellent trade-off, which we should embrace.” Consolidation might be enforced as a buffer to over-mighty Chinese interlopers. “The concern for Taiwan is that the banking system is too fragmented,” says Ti. “Prior to letting Chinese banks in, there will have to be consolidation in the banking sector in Taiwan. Otherwise, if Chinese banks were allowed to enter Taiwan, the banking sector would become even more competitive. And if they were allowed to take larger strategic stakes, this could pave the way for larger Chinese banks to swallow much smaller Taiwanese banks. For any administration, this would be politically and socially unpopular.”
Lower caps on Chinese investment in Taiwanese banks reflect Taiwanese concerns about China obtaining undue influence in the Taiwanese economy – concerns driven by the history of conflict between the two territories, despite recent agreements such as ECFA.
So while regulators continue to move with caution, bankers hope for speed, although the economic justification for this remains unclear. “From a political point of view, China is eager to enter Taiwan. Chinese banks want to plant their flags in Taiwan. And having one branch is enough to do this,” says Kung.
Lee adds: “Given the size difference, Chinese banks may find opening branches in Taiwan will have very limited earnings impact. Rather, the reason they are hoping to do this is to have a presence in Taiwan. Their presence in Taiwan will be more symbolic than real.”
Despite the issues, Lee believes that the path ahead for cross-strait relations is relatively smooth, especially compared with the severe bumpiness of the past. As she puts it, “neither side will close the door that has only just opened”.
