Taiwan’s CTBC Bank: Outsider goes local to make tracks in Tokyo

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Eric Ellis
Published on:

CTBC is trying to do what foreign banks have rarely done in Japan – own a successful local firm… Good luck with that.

istockphoto-486837180_road_780


IN ADDITION        



When CTBC, Taiwan’s biggest privately owned bank, bought Tokyo Star for $520 million in 2015, it seemed to mark the end of a long and painful saga for the medium-sized Japanese regional lender.

A victim of Japan’s asset bubble of the 1980s, Tokyo Star had been through three changes of ownership in 14 years by the time CTBC picked it up from the Dallas-based vulture fund Lone Star.

But for the Taiwanese buyer, it was an intriguing expansion, not least because CTBC’s owners, a branch of Taiwan’s wealthy Koo clan, have historical connections penetrating deep into Japan’s business, political and imperial establishment dating from the 19th century, when the island formerly known as Formosa was colonized by Japan.

With Tokyo Star, CTBC saw a chance to secure a presence in Japan and to finally fulfil the dreams of its patriarch Jeffrey Koo.

Born in Japanese-controlled Taiwan in 1933, Koo founded CTBC in 1966. He had long coveted a foothold in Japan – and something more meaningful than the small branch office he was eventually allowed to open in 2000. But a half-century of complex politics and diplomacy between Tokyo, Beijing and Taipei thwarted that dream. Koo died in December 2012, around the time CTBC first started looking at Tokyo Star but three years before the deal was completed.

Today, the job of realizing Koo’s dream rests with two veteran bankers; Seiji Sato, Tokyo Star Bank’s chief executive, and Akimasa Tanimura, CTBC’s long-standing country head.

CTBC hired Sato to run Tokyo Star in 2017, following a long international career with Sumitomo and its joint venture with Daiwa Securities.


Many foreign banks tried to develop business here; Citibank, Bank of America, Chase, HSBC, Standard Chartered. But they cannot succeed here. They all disappeared, they all withdrew. Japanese banking is very local. 
 - Seiji Sato, Tokyo Star Bank

Unusually for a Japanese banker, he is multi-lingual; he is fluent in English, conversant in Mandarin by virtue of SMBC postings in Guangzhou and Beijing; and speaks some Thai, as well as his native Japanese.

CTBC’s Tanimura works in a separate building about a kilometre away from Tokyo Star. He presents as Japanese but his original name is Chiu Ming Zheng, the Taiwan-born son of a family that lived under Japanese colonial rule. Tanimura’s Taiwanese roots run deep. He’s an eighth-generation islander whose ancestors originally came from Fujian, the southern mainland Chinese province that faces Taiwan. And as a young man, he was conscripted to defend Kinmen, the Taiwanese island contested by China that lies just two kilometres off the coast of Fujian.

Tanimura belongs to what is known as Taiwan’s in-between community in Japan, straddling two cultures. Educated in Taiwan, Japan and the US, Tanimura has worked in Japanese banking for three decades. Like his Tokyo Star colleague Sato, much of his career was spent at Sumitomo, whose mainland China branches he helped to open in the 1990s. For the last 10 years, Tanimura has run CTBC’s operation in Japan; he has been part-banker, part-bank ambassador.

Since the purchase four years ago, CTBC has set about absorbing Tokyo Star into one of the most extensive branch networks in Asian banking, given that CTBC follows the mostly ethnic Chinese connections from Taiwan all over the world, and particularly across Asia.

Tokyo Star is the only bank in Japan that is owned by a foreign bank.

In a market dominated by the big three – Mizuho, MUFG and SMBC – Japan has yielded thin gruel in the past for foreign banks, who have struggled for profits; a fact underlined by the withdrawal of Citi, HSBC and others from domestic banking in recent years.

With its Tokyo Star play, CTBC is attempting something that many foreign banks before it have tried and failed to pull off: to make a successful go of it in Japan.

“Many foreign banks tried to develop business here; Citibank, Bank of America, Chase, HSBC, Standard Chartered,” Sato says. “But they cannot succeed here. They all disappeared, they all withdrew. Japanese banking is very local.

“Tokyo Star is a pure Japanese bank,” he says, adding that Tokyo Star’s domestic customers do not seem to care that the bank is owned by non-Japanese.

Sato says running Tokyo Star, a full-service business bank with 1,800 staff operating across 35 Tokyo-centric branches, is a “very tough” job.

Tokyo Star’s pre-tax income for the year to March 31, 2015 – the period before CTBC’s purchase – was ¥24.9 billion ($220 million). But for the year to March 31, 2018, pre-tax income was ¥17.7 billion ($156 million).

Sato says 2015 was a special year, when the numbers were distorted by one-off accounting reversals, and that it is more meaningful to compare 2017 to 2018 after CTBC’s investment had settled.

Tokyo Star’s pre-tax income rose from ¥15.96 billion in 2017 to ¥17.7 billion in 2018, an increase of 7%, and Sato expects a further increase for the year to the end of March 2019.

TokyoStar_graph_400

Sato says Tokyo Star has a “very unique” product mix: the corporate finance product is closer in tone to that of the big banks instead of its regional peers.

“Our bookrunner status for syndication is number seven among all Japanese banks, and number two in regional banks,” he says, adding that hospitality and hotel finance has been “’a very good business”.

In a holdover from Lone Star days, Sato also banks operators in what he delicately describes as the amusement sector, notably Japan’s ubiquitous pachinko parlours, which can be gambling dens.

Since CTBC took over Tokyo Star, more Taiwanese companies operating in Japan have become customers.

“We don’t compete on pricing,” Sato says. “We stress our service.”

Sato says the potential of CTBC’s global network to Tokyo Star is what drew him to sign on.

“If I were to be recruited by another Japanese pure regional bank, maybe I would not be very interested,” he says. “Historically and culturally we (Japan and Taiwan) have a very close relationship.”

With Tokyo Star now embedded into CTBC’s network, Tanimura and Sato have embarked on a possible solution to a dilemma that has long dogged Japan’s 100 or so regional banks like Tokyo Star: how to compete internationally with the big three.

As Tokyo Star was absorbed into CTBC, Tanimura and Sato noticed that these pinched Japanese regional banks do not have much of an overseas presence. Tanimura explains that if the client of a regional bank wanted to expand abroad, the bank could lose that customer into the octopus-like reach of MUFG, with its network of offices and subsidiaries in 52 countries, or SMBC in 41 lands, or Mizuho in 34.

The Tanimura-Sato plan is simple: offer CTBC’s extensive offshore network to Japan’s competing regional banks.

Today, Tokyo Star and CTBC are driving the informal development of what might be described as a commonwealth of Japan’s regional banks, a network of banks that, individually, lack the international muscle of the big three but that still want to offer such services to their clients.

“Our conclusion was that they could utilize our (CTBC) bank, our network,” says Tanimura. “We have footprints all over Asia, we have many branches, they can hook into that network.”

International network

Founded in 1966, modern-day CTBC has been one of Taiwan’s more nimble banks, building an extensive international network on the back of a solid domestic franchise that follows its clients in one of the world’s most outward-looking trading economies.

“There are only four banks in Japan who have international operations: the big three and Tokyo Star Bank, through us,” says CTBC’s Tanimura.

Sato says that by using the CTBC global network, he can differentiate Tokyo Star from Japan’s middle-tier banks.

“I took care of many Japanese companies in Thailand,” he says. “I know their requirements.”

Competing with Japan’s big banks domestically is a monumental task. When it comes to product choices, there is not a lot a smaller bank such as Tokyo Star can offer to set itself apart, says Tanimura. And with Japan in its third year of negative interest rates, the cost of money to Japanese banks is virtually zero and the spreads on domestic business are razor-thin. Tanimura notes that the big three are funding deals for Japanese corporates at just 20 basis points over 10-year terms.

“It’s very hard to compete at that level,” Tanimura says. “Japan is an incredible market, but it is very hard to do business here, to tell you the truth. Japanese people don’t invest like Chinese or those in southeast Asia. They are very conservative. They are not risk-takers. It’s very hard to make money with this type of (market) profile.”


There are only four banks in Japan who have international operations: the big three and Tokyo Star Bank, through us 
 - Akimasa Tanimura, CTBC

Little wonder that when Mizuho boss Koji Fujiwara arrived last April as the new head of the Japan Bankers’ Association, he warned of “grave conditions” for smaller banks, cautioning that they may be compelled to pursue riskier business in order to chase profits, while flagging a round of consolidation.

Tanimura and Tokyo Star’s Sato have been busy signing deals with 29 regional banks to join their unofficial fraternity.

These are early days, Tanimura says, but so far three banks are actively making use of the CTBC network on behalf of clients. He expects more to come on board.

“They can say: ‘We are in CTBC’s family’ if they are, say, going to Jakarta, ‘We have this business to introduce you to’,” says Tanimura: “And of course, if they are going to Taiwan… We are extending our reach to these other regional banks which don’t have that network. We can be their international arm.”

A good example of CTBC’s unique reach is in India. CTBC has the obligatory branch in New Delhi, which it opened in 1996 to deal largely with ambassadorial matters of state in the capital. But unlike other foreign banks in India, which are likely to have operations in the country’s main commercial centre Mumbai or in the emerging tech powerhouse Bangalore, CTBC’s only other branch in India is in Sriperumbudur, a town better known to Indians as the place where their former prime minister, Rajiv Gandhi, was assassinated in 1991.

CTBC followed Taiwanese manufacturers that set up operations in the town, companies such the Taiwan-owned tech firm Foxconn, which assembles smartphones there, and the big Taiwanese car parts manufacturer KUS Auto.

The Indian business is part of CTBC’s Asia-facing network of 111 offices and outlets in 15 countries, including standalone banks in Japan, Thailand, the US and Canada, Indonesia and the Philippines.

In China, CTBC has branches in Shanghai, Guangzhou, the Taiwan-facing port of Xiamen in southern Fujian and, soon, Shenzhen, bordering Hong Kong.

“We are trying to buy a bank (in China),” says Tanimura. “We tried to do that, but eventually we have to set up our own branches and we are expanding gradually in China.”

Tanimura is referring to what happened in 2015 when CTBC and China’s state-owned Citic Group agreed that the Taiwanese would buy Hong Kong-based Citic Bank International for $368 million, and in turn its parent Citic Bank would take a 3.8% stake in CTBC. But the deal foundered the following year because of regulatory issues at a time of rising cross-straits tension.

In 2016, CTBC pulled out of a $195 million deal to buy Royal Bank of Scotland’s Malaysian network. But Tanimura says CTBC remains in the market for a mainland bank, and/or one in southeast Asia.

Family ties

CTBC’s corporate slogan is ‘We are family’ and the Koo clan is certainly one of north Asia’s enduring dynasties – and one with intimate connections to Japan. Even today, Jeffery Koo’s portrait adorns the entrance area of Tokyo Star’s office in Chiyoda-ku.

Indeed, as some observers see it, the arrival of CTBC as the owner of a standalone Japanese bank is more than just a commercial transaction, but an important part of the history of the Taiwan-born Koos, beginning in 1895 when Japanese imperial forces invaded Formosa when the island was formally ceded to Tokyo in a treaty with China’s failing Qing empire.

The foundations of the modern Koo business empire can be traced to Japanese occupation and a local businessman, Koo Hsien-jung, who saw an opportunity. Koo helped enable Japan’s annexation of Taiwan, to smother an emergent nationalist movement on the island. The Japanese quickly defeated republican resistance and ushered in 50 years of imperial rule over Taiwan, which ended with Tokyo’s defeat in the Second World War.

Akimasa Tanimura_400
Akimasa Tanimura, CTBC

For his cooperation (some have called it collaboration), Koo Hsien-jung was granted lucrative business monopolies by the Japanese, which would become the source of the Koo clan’s wealth.

He became a pillar of the colonial establishment and in 1934 was rewarded for his fealty by Japan’s Emperor Hirohito who appointed him to Tokyo’s prestigious House of Peers, imperial Japan’s equivalent of the UK’s House of Lords.

Since then, much like the Kennedy dynasty in the US, members of the Koo clan have been close to the crossroads where the island’s turbulent politics intersects with business. And the family’s historic ties to Japan have never been far away.

When Koo Hsien-jung died in 1937, his son Koo Chen-fu inherited the business empire and ran it until his death in 2005. An erstwhile film producer, Koo Chen-fu was better known as the founder and long-time chairman of Taiwan’s Straits Exchange Foundation, the state-sanctioned bureaucracy that manages Taiwan’s often-complicated relationship with mainland China. (A successor as chairman of the Straits Exchange Foundation – Taiwan’s former economy minister and Kuomintang (KMT) chair Chiang Pin-kung – was Tokyo Star Bank’s chairman until his death in December 2018).

Educated in Japan, Koo Chen-fu was also a member of the long-ruling KMT’s central committee, and was a confidant of the Japanese-educated KMT dictator Chiang Kai-shek, as well as Chiang’s son Chiang Ching-kuo, who followed his father as Taiwan’s ruler until his death in 1988.

Koo Chen-fu’s brother, Koo Kwang-ming, was also born in Japanese-held Taiwan but he has been a long-time activist for Taiwanese independence. He was exiled to Japan for many years before returning to Taipei and eventually running for the leadership of the pro-independence Democratic Progressive Party, losing to the island’s current president Tsai Ing-wen. His Kobe-born son, Richard Koo, has been chief economist at Japan’s influential Nomura Research Institute since 1997.

CTBC was founded in 1966 by Jeffrey Koo, a third-generation heir of Koo Hsien-jung’s fourth son, Koo Yueh-fu. Born in Japanese-controlled Taiwan in 1936, Koo was 30 when he founded China Securities and Investment Corporation, the forerunner of the modern CTBC. A fluent Japanese-speaker, he was survived by his Japanese-born wife and four children. A son, Jeffrey Koo Jr, was his father’s notional heir until he was convicted of fraud in 2010 and sentenced to nine years in prison in a scandal that also implicated Taiwan’s then-president, Chen Shui-bian. Jeffrey Jr had fled to Japan before returning to Taiwan in 2008 to face the law.

Sensitivities

The diplomatic status of Taiwan has long vexed governments and business. After Tokyo changed its recognition from Chiang Kai-shek’s capitalist Republic of China in Taipei to Mao Zedong’s communist People’s Republic of China in 1972, official resistance in Tokyo prevented Koo’s Chinatrust and other Taiwanese banks from operating in Japan.

The sensitivities worked the other way too. For years, Japanese banks baulked at entering Taiwan’s fast-expanding market for fear of offending mainland China, which proved the greater commercial opportunity after 1978 when China opened its economy to foreign investment.

Jeffery Koo realized part of his long-held ambition in 2000 when CTBC opened an office in Tokyo, the business Tanimura has run since 2008.

“The reason why it was so late in opening was because of political issues,” Tanimura says. “The Japanese government obeyed the treaty they had with China, and China said no Taiwanese bank (can be in Japan).”

Today, there is no such sensitivity. Tanimura says the days when bankers had to make a choice between China and Taiwan are over. The same Japanese megabanks that operate in China also have branches in Taiwan. And it has become almost essential for Taiwanese banks to have a Japanese presence.

According to Japanese banking insiders, CTBC initially faced some cultural resistance to buying Tokyo Star when it became known that the first C in CTBC stood for China. That it actually means Taiwan eventually placated opposition.

Says one insider, “they stressed the Taiwanese aspect, where there is more trust, probably because of the history.”

Appropriately enough for a colourful owner, Tokyo Star Bank has its own dramatic history. It can trace its beginnings to 1949 and a man called Shoichi Osada who founded a mujin, a local credit cooperative of the era catering to small businesses.

The mujin became a mutual society and, by the 1980s, had been transformed into Tokyo Sogo Bank and eventually Tokyo Sowa Bank.

Osada was one of Japan’s most flamboyant figures of the 1980s before the property asset bubble popped, the effects of which are still felt today. A close friend of the former French president, Jacques Chirac, Osada is notorious for his purchase of an uninhabited island in a bay southwest of Tokyo; there he built the extravagant Awashima Hotel and entertained the world’s rich and influential in sight of Mount Fuji across the bay. Chirac was later investigated in France about his links with Osada, denying that he had secret accounts at Osada’s bank.

The bursting of the asset bubble claimed Tokyo Sowa, and Osada too. By 1999, attempts to keep the bank afloat had failed and it was declared bankrupt. Four years later, the octogenarian Osada was given a three-year suspended jail sentence for falsifying the bank’s accounts. After various state bailouts, Tokyo Sowa was put up for auction. A group of American investors led by the current US commerce secretary, Wilbur Ross, backed out of a deal in 2000 to buy it, and the remains were eventually bought in 2001 by Dallas-based fund Lone Star for about $340 million.

Under US control, the entity was reconstituted as Tokyo Star Bank and cleaned up ahead of a listing on the Tokyo Stock Exchange in 2005. In 2008, Lone Star sold the bank to a Japanese private equity house, Advantage Partners, in a deal that was leveraged against anticipated returns from Tokyo Star. But the financial crisis later that year hit the bank’s returns. With debts spiralling, by 2011 Lone Star was again back in control of Tokyo Star.

Other foreign banks, such as Australia’s ANZ under chief executive Mike Smith, looked at buying it, but Tokyo Star continued under Lone Star until 2015 when it was bought by CTBC, a deal that took two years to gestate.

Has CTBC’s ownership of Tokyo Star changed the bank’s culture in any way? “Not at all,” says Sato. To illustrate his point, he cites the differences between Taiwan and Japanese customer practice, notably the level of foreign currency deposits held by Taiwanese savers compared to Japanese. In Taiwan, he says, it is about 25%, in Japan, 0.3%.

“We (Japanese) are very different,” he says. “CTBC clearly respects the Japanese business situation.”

Japan’s plans to catch up in fintech

As anyone who has spent time in Tokyo’s tech trap Akihabara can attest, being in Japan can feel a little like being inside a computer; a myriad of cogs seamlessly integrating to effect a sleek, efficient machine.

Japan has prided itself on being an early tech adopter and that was certainly true of its mighty consumer products industry, which was an important component of Japan’s post-Second World War, export-led economic revival. That was true in telecoms too: NTT Docomo launched the world’s first commercial 3G network in 2001, burying Japanese heads in handsets long before that became the norm elsewhere.

But when it comes to finance-focused technology, Japan has lagged in Asia. Cashless electronic payments in Japan can be a confusing mass of competing platforms.

Universal platforms such as Apple Pay, which have been widely embraced by banks elsewhere, are only intermittently available in Japan. Whereas it is possible to go for weeks elsewhere in Asia without handling cash, in Japan cash is used daily.

Yoshitaka Sakurada, Japan’s cybersecurity minister, certainly did not help when he admitted in November 2018 that he had never used a computer and was clueless about the concept of a USB drive.

In an interview with Asiamoney in October, Yutaka Soejima, head of the central Bank of Japan’s FinTech Center, admits Japan has some catching up to do, particularly when compared with China, which has embraced fintech’s integration into its financial system with gusto.

Japan’s poor standing comes across in a new joint study into Asian fintechs from KPMG, in conjunction with Cambridge University’s Business School, Zhejiang University’s Academy of Internet Finance and the Asian Development Bank.

The study found that in 2017, as fintech lending grew across the region, Japan slipped down the fintech-led lending league tables, behind China, Australia and South Korea. Japan had led the transaction volume tables since 2013. Indeed, the study found that fintech lending volume had declined in just three economies in Asia – Mongolia, Thailand and Japan.

One reason might be regulation. The KPMG-led study found that there are “no specific regulations” that regulate peer-to-peer (P2P) activity.

The BoJ’s Soejima says the central bank is “very focused” on promoting fintechs operating inside an adequate regulatory framework.