Taiwan set for financial-sector mergers and acquisitions
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Taiwan set for financial-sector mergers and acquisitions

Government seeks regional competitors; trade relations boost with China on hold.

M&A activity in Taiwan is set to intensify amid mounting speculation that the banking and securities sector is set for a shake-up. The theory is that there will be a wave of mergers among state-owned banks following a government statement that banks in the country should compete at the very least with their regional counterparts.

Allen Wu, executive vice-president of Yuanta Securities and senior vice-president of Yuanta Financial Holdings, says there is no doubt that the edict is fuelling rumours in the banking sector. 

“The speculation surrounding banking M&A in Taiwan resides in which state-owned banks will merge with each other.” Taiwan’s banking environment is intensely competitive and that has eroded profits as well as underwriting standards, say analysts.

Taiwan, Tamsui, envelope

According to Moody’s, which has a ‘stable’ outlook on the sector for the 10 banks it rates, there is a strong correlation between export orders and asset quality. Bank profits have also been hit by weak earnings from Taiwanese corporates since 2012. 

Another factor that might spur mergers among Taiwanese banks is their exposure to the domestic housing market, which is showing signs of a bubble, with prices accelerating beyond metropolitan Taipei to Taoyuan and Kaohsiung, says Moody’s.

Conversely, the picture in the securities market is less about M&A and more about consolidation. Yuanta’s Wu says there are 62 local brokers and 18 foreign houses operating in Taiwan of which the top-10 brokers make up 57% of the securities market’s total market share. 

“Small-size brokers in Taiwan are being squeezed out and the prospect of M&A in Taiwan’s securities industry remains bleak,” he says. Overall M&A activity in Taiwan has fallen markedly since 2012 when the bulk of the deals were acquisitions of Taiwanese companies by international firms.

Others go further and suggest some mainland Chinese institutions in Taiwan might be the subject of a takeover by their local competitors after Fubon bought a majority stake in First Sino Bank for around $1 billion in 2012. 

As First Sino was an amalgam of investors from Hong Kong, Taiwan and China, Fubon was able to skirt the Chinese regulation that restricts Taiwanese banks’ ownership to a maximum 20% even though First Sino operates only on the mainland. As such, the acquisition, which was formally concluded in January 2014, was an important milestone in Fubon’s push into China.

The speculation surrounding banking M&A in Taiwan resides in which state-owned banks will merge with each otherAllen Wu

But despite recent policy initiatives, the Taiwanese government is in a bit of a bind. In March, several hundred thousand protesters gathered outside the president’s office in Taipei to express outrage at government plans to boost trade relations with China. 

The Cross-Strait Service Trade Agreement (CSSTA), as it is officially known, was signed in 2013, but is opposed by a large part of Taiwan’s population who are suspicious of the mainland and consider the terms damaging to Taiwan’s economy. This despite the fact that Taiwan’s economy needs the mainland, which accounts for more than 25% of the island republic’s exports.

The protests led by the Sunflower Movement forced policymakers to postpone further talks on the agreement, which were due to be completed by the end of the year.

With the CSSTA on hold it looks as if China might have stitched up Taiwan’s debt capital markets and its ambition to be an offshore renminbi centre in the short term. The territory has been accumulating substantial deposits from sales of renminbi notes more commonly known as Formosa bonds and was expecting regulatory approval in China’s Renminbi Qualified Foreign Institutional Investor programme.

Approval is required before foreign investors can invest in the mainland’s stock and bond markets. But approval is contingent on the ratification and implementation of the CSSTA. That presents a policy dilemma on how best to deploy the large yuan deposits in Taiwanese banks. The build-up has taken place over the past few years, but has tailed off this year amid the protests.

Yuanta’s Wu says these funds clearly need a way back into China. “Without the passing of the agreement the options for Taiwan are limited. The majority of banks in Taiwan utilize Bank of China’s Taipei branch to earn a spread on existing renminbi deposits while renminbi-denominated insurance policies have also been rolled out. 

"The deregulation of offshore banking unit business to allow for more renminbi products has been set in motion, but is still in its beginning stages.”

Adam Chen, head of global markets at HSBC Taiwan, is equally bullish. “The renminbi deposit pool in Taiwan continues to grow and deposits reached RMB268.4 billion [$42.9 billion] as of the end of March, an 8.6% growth rate over February despite depreciation in the currency. 

"The Financial Supervisory Commission has projected the market to grow to RMB22 billion by the end of 2014. We have seen an increasing focus on the Formosa bond market by Taiwanese investors, especially after the regulator introduced incentives encouraging investors to allocate part of their portfolio to the Formosa Bond market.”

Taiwanese equities might get a boost when MSCI, as part of its annual classification review, is due to announce on June 10 if it will upgrade the MSCI Taiwan Index from emerging to developed market status. MSCI says the index meets many developed markets criteria, including economic development, market size and liquidity, but concerns remain. 

These include the absence of an offshore currency market for the New Taiwan dollar, removal of prefunding practices on the Taiwanese equity market and rigidity of the ID system that makes the use of in-kind transfers and off-exchange transactions difficult to execute in practice.

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