TAIPEI -
With a population of 23 million, Taiwan is a very
over-banked country; home to 50 banks and 14 financial
holding companies (FHC). Due to the saturated market,
many banks, such as Chinatrust, are losing market share
to others, thus mergers and acquisitions are strongly
needed. If things don't improve in the long term, the
industry could die a slow death, as there is too much
competition for such a small market; it is tantamount to
death by a thousand cuts.
The international
financial ratings agency Fitch, based in Singapore,
indicated in its May 26 "2004 Outlook for Taiwan" that
Taiwan's banking sector looked positive, but challenges
still remain. One of these major challenges is how to
reduce the number of banks operating in Taiwan without
massive staff layoffs.
The market will be
watching how the government deals with the fast
dwindling funds of the Resolution Trust Corp Fund (RTC),
a fund set up by the government and used to write off
banks' non-performing loans (NPLs). Over the weekend,
there were media reports that legislators had agreed in
principle to extend the RTC for at least another year.
The condition is that the government, led by the ruling
Democratic Progressive Party (DPP), will put forward a
proposal and budget over three years on how to manage
problematic financial institutions, ones with large
amounts of non-performing loans.
The DPP
government aggressively tackled the high NPL level in
2002, and to its credit, forced banks to write off
massive non-performing loans with financial assistance.
As a result, according to Fitch, "The level of the
industry's problem exposures dropped to 5.72 percent of
total loans at the end of March 2004, down from the peak
of 8.85 percent in 2002."
The first major
mergers in the Taiwan banking industry occurred in
2002-03 with Taishin Bank and Dah Chong Bank, Fubon
Financial and Taipei Bank, Cathay Financial and UWCCB,
while Chinatrust absorbed Grand Commercial, Chiao Tung
FHC and the International Commercial Bank of China. But
despite these mergers, there has been no real
integration of facilities, since all agreed to remain
independent operations for the next three to five years.
In efforts to consolidate its operations, Cathay
FHC, Taiwan's largest integrated financial group, spent
hundreds of millions of New Taiwan dollars on
renovations to its branches and provided new uniforms to
its staff. The main reason was to relaunch itself as
Cathay UWCCB Bank, with a new company logo and new staff
uniforms. But there has being no major reduction in
staff or branch numbers.
Another example of how
difficult consolidation will be is that earlier on,
Cathay FHC wanted to merge with Capital Securities, a
medium-sized, market-listed Taiwan broker. However,
according to market rumors, Capital refused a merger
because it would have caused the broker to lose
management control. Now Cathay has decided to set up its
own securities company, which is natural, as it doesn't
have one.
The failure of the Capital deal is a
glaring example of how hard it is for the next wave of
mergers and acquisitions to occur. It is very difficult
for any Taiwanese laoban (boss) to give up
control of his company because of the issue of face.
Moreover, it seems as though almost everyone in Taiwan
wants to be a laoban, and this applies equally to
both small and large financial corporations.
Even the better-managed banks and market leaders
find it a challenge to prosper in such a crowded market.
Chinatrust FHC is the largest issuer of credit cards in
Taiwan with 5.4 million holders; it is 53 percent owned
by foreign investors and is arguably one of Taiwan's top
three banks. According to a May 19 research report by
dutch bank ABN AMRO, "Chinatrust had guided that it
would increase credit card balances by over 25 percent
in 1Q04 [the first quarter of 2004], when in fact credit
card revolving debt fell slightly to NT$51.4 billion
[US$1.5 billion]." The credit card business, while
previously a cash cow for Taiwan's banking industry,
faces stiff competition.
As of February 2004,
Taiwan's Ministry of Finance (MOF) reported that there
were 32 credit card issuer banks in Taiwan, with 470
million cards in circulation. Meanwhile, credit card
debt amounted to NT$181.5 billion or around 4 percent of
total consumer loans. The finance ministry plans to
tighten credit card NPL supervision, as it wants to
prevent problems similar to those that plague South
Korea. Since the Asia financial crisis in 1997, South
Korea has been struck by two credit card crises. The
first occurred in 1999 when liquidity concerns were
raised over investment trust companies by the defaults
of the now defunct Daewoo Group, and then again in 2003
when crisis was triggered by false disclosures at SK
Global.
New measures put forth by the MOF took
effect on June 1 and are applicable to banks whose
credit card/cash NPL ratio is greater than 3 percent.
However, the MOF will prevent any new issuances of
credit/cash cards if the NPL ratio is more than 8
percent.
With the short-term outlook for the
stock market uncertain and the banking sector stocks off
recent lows, it is highly unlikely that there will be
any more mergers and acquisitions among market players,
a factor that concerns banks such as Chinatrust. But for
now, the market will digest May results to be released
by June 10 before deciding where bank stock prices move
over the next quarter.
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