Taiwan’s banks struggle on multiple fronts
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Taiwan’s banks struggle on multiple fronts

Sluggish economy, declining profits, slower loan growth; political rift with Beijing dulls Asia expansion hopes.

Tsai Ing-wen 160x196

President Tsai Lng-wen

Overbanked, overmanned and facing years of falling profits and squeezed margins: dark clouds are gathering over Taiwan’s banking sector.

Few are in any doubt that the export-oriented island economy has too many lenders. Taipei regularly strives to impose consolidation on the industry, only to be denied bypowerful financial unions, wary of extensive layoffs. 

Mergers do take place – in the 10 years to end-2015, according to data from the central bank, 52 onshore banking tie-ups were completed. Yet the total number of national-scale commercial lenders only shrank from 49 to 39. 

Nor can it be argued that more is better. In an August banking outlook, Moody’s Investors Service warned that industry profitability “will deteriorate owing to tighter net interest margins”. 

Asset quality will decline, it added, with fee and commission income also hit by lower mutual fund sales and a regulatory cap on life insurance agency fees. Negative factors were tempered by high levels of liquidity in an industry that enjoys strong state support.


The ratings agency warned that corporate lending, which rose by an annualized average rate of 4% between 2010 and end-June 2016, would remain subdued. It tipped loan growth at the 11 domestic lenders it rates, including CTBC Bank, Bank of Taiwan and Mega International Commercial Bank, to grow “in the mid-single digits” in 2016 and 2017. 

Weak demand, it added, would keep corporate capital expenditures low, with lower home purchases – residential property sales have been slowing since mid-2014 – suppressing demand for retail loans. 

Nor does the external environment offer much cause to cheer. Taiwan’s economy is on track to grow by just 1.5% in 2016 and 2.2% in 2017, with the jobless rate inching up. China’s economy’s grinding slowdown isn’t helping. Nor is a protracted decline in the rate of overseas demand for Taiwan’s chief export, electronics goods, with growth in the sector slowing from 5% in 2012 to less than half that rate in 2015, according to Connecticut-based financial data provider FactSet.

Then there is the issue of the nation’s relations with its far larger cousin on the far side of the Taiwan Strait. When Tsai Ing-wen became the island’s first female president in May 2016, it was on the back of a political campaign that trumpeted the importance of local independence and self-rule. 

Under her predecessor, Ma Ying-jeou, relations between Taiwan and China, which views the island as a breakaway province, had warmed considerably. 

The number of direct weekly flights to the mainland had risen sharply over the years, from none in 2009, the year Ma came to power, to 890 as of August 2016. A comprehensive goods-and-services treaty, drawn up in 2013 but never ratified, proved broadly unpopular in Taiwan, with many seeing it as part of a concerted ‘soft takeover’ by China’s Communist Party. 

The political chill that has since settled over both capitals – a common communication mechanism that kept each side talking was abandoned a month after elections – hasn’t been good news for the onshore banking sector. In the final week of August, CTBC Bank’s parent, CTBC Financial Holdings, scrapped a deal to pay T$11.67 billion ($370 million) for 100% of Citic Bank International (China), a subsidiary of Hong Kong-based China Citic Bank, itself part of the giant Beijing-controlled investment firm. As part of the deal, China Citic Bank would have secured a 3.8% stake in CTBC. 

Both sides refused publicly to draw a line between the deal’s collapse and rising cross-strait tensions. 

“There is not a single political element to it. We are a commercial bank. We can’t play a leading role in politics,” China Citic Bank president Sun Deshun told a press conference in Beijing. The head of Taiwan’s financial regulator, Kuei Hsien-nung, blamed simple bureaucratic procedure. 


Under Taiwan law, any foreign institution buying a stake in a domestic lender needs to have been present in an OECD country for at least five years – and China Citic Bank, Kuei said, did not meet that criterion. Many in Taipei and Beijing saw that deliberative excuse as a simple way for everyone to save face. 

A souring political climate also represents a broader blow to Taiwan’s leading banks, which, Moody’s noted in its August report, are looking to expand their wholesale banking operations overseas “owing to better net interest margins abroad and weak loan demand at home”. 

In recent years, CTBC has bought a stake in a Japanese lender, Tokyo Star Bank, while two other lenders, Taipei Fubon Bank and E. Sun Commercial Bank, have opened new branches in eastern and southern China. But given the political chill, Moody’s warned, Taiwan lenders will likely have to “remain cautious on expanding in mainland China”.

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