Taiwan: Cross-strait banking plans to bear fruit

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Chris Wright
Published on:

Taiwanese focus on Fujian; Hua Nan logical trailblazer

Warmer cross-Strait’s relations brought huge hopes for the Taiwanese banking sector, but even though most of them have been unfulfilled, this could be the year they finally bear fruit. When Ma Ying-jeou became president of Taiwan in May 2008, he did so on a platform of reconciliation with the mainland, in stark contrast to the more antagonistic position taken by his predecessor, Chen shui-bian. The financial services industry, in particular, had good reason to be cheered. Barred from investing in Chinese securities, or serving their clients in their Chinese business, they had been impeded for years. Agreements for cooperation were slow to come together, but in June 2010 came a formal trade deal and, since then, relaxed rules on setting up branches in China. Only in September did the Financial Supervisory Commission in Taiwan allow direct investment by a Taiwanese bank in a mainland one, and it also said it will allow Chinese banks to take a 5% stake in Taiwanese institutions, a rule that came into effect last month. That quid pro quo, three-and-a-half years in the making, might finally allow some prominent deals to take place. Pathfinder At the start of the year, Hua Nan Commercial Bank, part of the state-backed Hua Nan Financial Holdings conglomerate, let it be known it was seeking to make a direct investment in a Chinese bank, probably a 20% stake in Fujian Haixia Bank, although other banks are also under consideration. Hua Nan has still made no formal comment about this, but it is understood a deal in the region of NT$10 billion ($333 million) is being discussed. At the same time, China’s ICBC and China Construction Bank are believed to be working on acquisitions in Taiwanese banks, while Bank of Communications and Bank of China are upgrading their Taiwan offices to full branches. Hua Nan would be a logical trailblazer here. Since 2010, it has signed cooperation agreements, typically covering training and information exchange, with several banks, including Bank of China, Bank of Communications, China Guangfa Bank and Fujian Haixia. Its Shenzhen branch is operational and on target to break even within its first year of operation, and it is working on a leasing company focused on China. Its securities arm is working with Peking University’s Founder Group on Taiwan depositary receipt underwriting, asset management and brokerage, and it has a memorandum of understanding with Shanghai HuaBao Securities.
 
 President Ma Ying-jeou bows to supporters as he celebrates winning the 2012 presidential election in Taipei in January
The other name to watch would be Fubon, which is the only Taiwanese firm to own a stake in a Chinese bank – Xiamen City Commercial Bank – but holds the stake indirectly through a Hong Kong subsidiary in a deal that had to be brokered – refereed, you might say – through the Hong Kong Monetary Authority. That deal, which took place in June 2008 and cost about $33 million, appeared to be the vanguard of new deals. They haven’t followed. So, what do we learn from the mooted deal, and from the slow pace of change? For Taiwanese banks, it’s all about Fujian Province. Xiamen City, which Fubon holds the stake in, is in Fujian; so too is the bank Hua Nan wants to buy into. This makes perfect sense for a host of reasons. Most obviously, it’s the closest to Taiwan; Taipei is closer to Fuzhou City in Fujian than it is to Kaohsiung in southern Taiwan. It’s also where the bulk of Taiwanese manufacturing excellence has set up, and so creates a ready-made market to get started with. Better still, it has been pretty much ignored by other foreigners, who have either gone farther north (Shanghai, Tianjin, Beijing), southwest (Guangdong province and the Pearl River Delta) or west (Chengdu and Chongqing). None of this means a thing for the bottom line. Fubon said from the outset that a 19.9% stake in a local city bank, held through a Hong Kong subsidiary, was going to have a negligible impact on its balance sheet. Hua Nan’s deal will be bigger but still won’t make a big difference to earnings for years. And consider the reverse: what possible difference does it make to ICBC, the world’s largest bank by market capitalization, if it gets a 5% holding in a Taiwanese bank? This is all about symbolism and footholds. That said, it matters dramatically more to the Taiwanese side than the Chinese. Taiwan needs this: its domestic market is over-banked, no longer as lucrative as it was since changes to credit card rules came through, and exposed to global slowdowns. If the Taiwanese aren’t looking outwards then they’re looking downwards. There’s widespread frustration throughout Taiwanese banking that progress has taken so long, but should we be surprised? One country seeks to own the other one – indeed, it believes it rightfully does own it, which among other things is the reason Taiwan can’t compete under its own name at the Olympics. When flights commenced between the two states on July 4 2008, they were the first chartered flights to go directly between the two places since 1949. The history to overcome is not exactly without emotion – and beyond that has been a fear, a realistic one, among Taiwanese banks that letting the likes of ICBC in is like asking to be eaten.

Allowing a direct investment will be a big step, but perhaps a more important one will be an acceleration of approvals for Taiwanese banks to conduct renminbi business. Bankers hear rumours this will happen this month or March, alongside progress on a cross-strait currency settlement mechanism. That would be a sign that cross-straits banking could be more than symbolic.