Taiwanese banks are expected to favour opening new branches in mainland China and in Hong Kong to bolster their renminbi and CNH reserves and take advantage of new regulation that gives them greater leeway to invest and lend to Chinese entities, loan experts have told Asiamoney, rather than issuing bonds to raise funds. According to loan syndicate sources in Hong Kong and Taiwan, Taiwanese banks seek a long-term solution to raising their renminbi and CNH reserves in order to facilitate lending and investing into the market.
The plans come as Taiwan’s Financial Supervisory Commission announced that local banks can now lend or invest a sum equal to 100% of a mainland Chinese company’s net worth. Banks were previously only able to lend up to the equivalent of 30% of a Chinese entity’s worth, and were not able to invest.
This comes as welcome news to Taiwanese banks which have sought lucrative lending and investment opportunities beyond the country’s borders, where they have largely been confined.
"From a regulatory point of view this is very important. Taiwanese banks have been very important in the syndication landscape so clearly this is an important move that they can invest more in Chinese loans," said one Asia Pacific head of global loan syndication based in Hong Kong. "The thing that they have to do next is boost their [onshore] renminbi and offshore renminbi deposits to leverage this opportunity. The thing with CNH deposits is that it’s like the chicken and the egg – until you have real reason to accrue deposits you won’t have incentive to collect the deposits."
Sources say that banks will likely look to open branches in China and Hong Kong as a long-term means to generate deposits, rather than tap the offshore dim sum bond market for capital, which is viewed as expensive and short-term given that the overwhelming majority of CNH bonds issued have a three-to-five-year tenor.
"It’s a fundamental idea to these banks that they open branches in the markets where clients deal in renminbi, rather than issuing bonds," said Ron Liu, senior vice president on Crédit Agricole’s global loan syndication group based in Taipei. "There’s a view that branches in China and Hong Kong will collect enough deposits that to be sufficient for their lending long term."
Establishing bank branches now also appeals as it sets Taiwanese banks up for long-term operation as China’s capital account continues to liberalise.
Bank branches such as Cathay United Bank, First Commercial Bank and Taiwan Cooperative Bank have opened up shop in the mainland to aid Taiwanese companies that have also expanded into the market, but they await approval to provide renminbi-denominated services.
But the environment is becoming more favourable to these entities. Last week, Hua Nan Commercial Bank became the only Taiwanese bank to be given approval to offer renminbi-denominated services in China by mainland authorities. Hua Nana announced it will be able to offer these services through its Shenzhen branch to Taiwanese investors operating in China within its first year. Next year it will be able to extend these services to customers in China.
Further, Taiwan’s announced late March that Taiwan and China may sign a cross-strait currency settlement agreement in the first half of the year that will enable the direct conversion of the Taiwan dollar into Chinese renminbi. There is no such agreement now, meaning that Taiwanese companies, for example, change their Taiwan dollars into US dollars and then into renminbi.
This arrangement would give Taiwanese banks further capability to conduct renminbi-denominated business.
Thomas Tsui, head of corporate banking at Hang Seng Bank, says, Taiwan’s banks will look to follow Hong Kong banks’ path to broadening their renminbi services. This could eventually include allowing clients to open CNH deposit accounts and then helping to conduct trade settlement business.
Banks view this scheme as a safer bet than issuing costly debt, despite being a longer-term plan.
"Taiwanese banks will more actively come to Hong Kong to raise deposits and they will look to follow in Hong Kong’s steps to become a CNH hub," Tsui said. "The success of bonds depends on the overall economic climate, which seems quite unstable right now. Banks are cautious given today’s economic climate."
However, while sources say that banks are not currently planning on issuing bonds, it’s not out of the question if they look to take advantage of short-term investment and lending opportunities in China.
"Opening bank branches will help to generate more CNH and issuing bonds could help to generate more CNH," concluded an Asia Pacific head of global loan syndication group. "It depends on banks’ individual goals."