Taiwan: When merger isn’t consolidation

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

By:
Chris Leahy
Published on:

Taiwan’s grandiose plan to create a big national financial holding company by the end of 2007 has left analysts on the island cold.

The government-launched plan, which would merge three state-run lenders – Bank of Taiwan, Land Bank of Taiwan, and Export-Import Bank – would create a financial institution with an 18% share of the country’s banking market, assets of $160 billion and a combined market capitalization of more than $3 billion.

But so what? As critics point out, that would just create a much larger institution, with the same inefficiencies in place, and lacking any sort of impetus to reduce staffing levels.

What the country needs to do, as anyone outside Taiwan’s powerful unions recognizes, is to create a small clutch of powerful, privately run lenders capable of extending their reach beyond the tiny, overbanked island.

That hasn’t happened, and is unlikely to happen. Over the past several years, a few, relatively minor mergers have taken place. Yuanta Core Pacific Securities this year absorbed Fuhwa Financial Holdings, creating Yuanta Financial Holding – a substantial power in Taiwan’s equity capital markets, but with little clout in the banking sector. Some foreign banks have also joined the fray. Standard Chartered bought Hsinchu Bank for $1.2 billion in September 2006, and in April 2007 Citi announced that it would pay $426 million to buy Bank of Overseas Chinese, a lender with many years of restructuring ahead of it.

A few foreign private equity firms have also entered the market. Japan’s Shinsei Bank in 2005 bought 31.8% of Jih Sun Financial Holding for NT$11.34 billion ($344 million). In January 2006, GE took a 24.9% stake in Cosmos Bank, Taiwan’s largest cash card issuer, for NT$9 billion. Two months later, Taishin Financial sold stakes to two foreign firms – Nomura bought a 3.38% stake in the Taiwan bank for NT$4 billion, with US private equity firm Newbridge paying NT$27 billion for a 22.32% stake.

Each acquisition has its drawbacks – not so much for the foreign banks, which wanted a foothold in a wealthy Asian market, but for Taiwan’s protracted struggle to consolidate its domestic financial sector.

Taiwan is horribly overbanked by any standard – the nation’s corporations can choose to do business with any of Taiwan’s 39 domestic banks, or 14 locally registered foreign lenders. It’s a lucrative market, to be sure, with services such as wealth management and derivatives going from strength to strength. Indeed, with Taiwan’s economy growing at 4.35% year on year in the second quarter of 2007, Standard Chartered is looking to add 250 sales people to its 4,300-strong Taiwan workforce, with Citi, Morgan Stanley and ABN Amro also looking to bulk up their staff.

Yet a strong Taiwanese economy, although good for industry and employment – and the banking sector – will probably leave consolidation on the back-burner. Until the country experiences a major financial and economic jolt, leading privately run domestic banks are unlikely to sell to larger domestic or foreign rivals. In most cases, that’s because owners of the small family-run banks, many of which control less than 1% of the market, enjoy their status too much.

As Chris Hunt, an analyst at Macquarie in Taipei, points out: "The family owners want to own their bank and talk about it at the golf course. They don’t want to sell it; they want their name on the building, just like Donald Trump."

Mergers between larger private banks, or acquisitions of state-run lenders by private banks, also remain impracticable, for political reasons. On one level, some private banks are affiliated to Taiwan’s ruling Democratic Progressive Party, while others are joined at the hip with the opposition Kuomintang party. Mergers between the two sides, although tricky, do happen – the merger of Yuanta Financial brought together Fuhwa from the Kuomintang and Yuanta Core Pacific from the DPP side. That doesn’t stop political infighting, though. According to Victor Ma, the new CEO of the consolidated group, while Yuanta likes "face-to-face communication", Fuhwa came from a "more political and bureaucratic culture, where one department head found his eyesight worsening after having to personally approve 500 emails a day". Ma, unsurprisingly, hails from Yuanta Core Pacific, a company his father founded in 1962.

Meanwhile the recalcitrance of Taiwan’s powerful unions, fearful of job losses, prevent respected, innovative, privately run Taiwan lenders such as Chinatrust Commercial Bank and Cathay Financial Holdings from taking over leading state-run banks.