Tue, Jan 04, 2005 page10

• Banking sector gets competitive

  REFORMS Many observers laud improvements in the health of the finance sector last year, including reduced bad loans, but more consolidation is needed

  • By Joyce Huang / STAFF REPORTER
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  Bidding farewell to bad loans and unprofitable years, the local financial sector is geared up to branch out and compete fiercely for market share both domestically and in the Asia Pacific region this year.

  "The `small-and-beautiful' days are long gone," said Paul Lo (盧正昕), president of SinoPac Financial Holdings Co (建華金控).

  "2005 will be a `double S' -- scale and scope -- year, and also a year full of big change, enormous challenge and fantastic opportunity," Lo said. "M&A [mergers and acquisitions] is not a strategy, it is a rule of survival."

  Last year alone, Chinatrust Financial Holding Co (中信金控) acquired Fengshan Credit Cooperatives (鳳山信用合作社) in July, E. Sun Financial Holding Corp (玉山金控) took over the Kaohsiung Business Bank (高雄企銀) in September, and Taishin International Bank (台新銀行) incorporated the 10th Credit Cooperative of Hsin Chu (新竹十信) in October.

  The takeovers were part of the government's goal to encourage mergers and acquisitions among about 50 banks in Taiwan.

  The nation's financial regulator has said it wants to shrink the number of financial holding companies by half to seven by next year, with each of the top three controlling at least 10 percent of the market.

  "2005 will be another heated year for banks to further consolidate through mergers and acquisitions," Gary Tseng (曾國烈), head of the Financial Supervisory Commission's banking bureau, said last week.

  Although further consolidation is necessary, Tseng lauded the banking sector's efforts to improve its health over the past year. The ratio of non-performing loans fell to 3.22 percent in November of last year, from 4.33 percent at the end of 2003.

  As of November, the banking sector had marked 5.56 percent and 9.17 percent growth respectively in assets and net worth from a year earlier. In terms of revenues and before-tax profits, the sector marked 97 percent and 216 percent growth, respectively.

  The commission also hopes to create one or two leading domestic players in the financial-service sector -- or what the commission calls "national champion" banks by next year.

  McKinsey & Co said in a report last week that Taiwan's banking sector needs to undergo more M&As.

  "Taiwan should significantly reduce the large number of commercial banks, with a maximum of four to seven large domestic and regional `champions' taking the lion's share of the market," the consultancy company said.

  But other bankers are not so optimistic.

  Victor Kung (龔天行), chief financial officer of Fubon Financial Holding Co (富邦金控), the nation's third-biggest financial services company, previously told reporters that bidding prices to acquire small rivals have risen to an unacceptable level.

  To solve the price dilemma, Edward Chow (周行一), a finance professor at National Chengchi University, said the government needs to provide a catalyst for further consolidation among state-owned financial institutions.

  "Once a merger deal is closed between state-owned and private financial institutions to set a good example, most players in the market will feel pressure to follow suit," Chow said.

  Hua Nan Financial Holding Co (華南金控) chairman Lin Ming-cheng (林明成) agreed, saying, "Where there's a will, there's a [merger] deal, and then prices won't be such a big problem."

  Hua Nan Financial is among three state-owned financial service providers that have been targeted by the financial regulator as merger catalysts. The other two are First Financial Holding Co (第一金控) and Mega Financial Holding Co (兆豐金控).

  Consolidation may also apply to the securities sector since "small securities firms may be shaken [out of the marketplace] as the competition stiffens to benefit big players," said Susan Chu (朱素徵), associate director at Taiwan Ratings Corp (中華信評).

  New business may also come from abroad, especially China, as some local financial service providers appear eager to enter the Chinese market. Fubon Financial's acquisition of Hong Kong-based International Bank of Asia (港基銀行) last year is an example of this.

  Currently, some 10 banks have set up liaison offices there, which will be later upgraded to branches. But pundits said that no progress will be foreseeable this year given the current cross-strait tensions.

  "Due to the lack of a bilateral agreement between Taiwan and China to regulate cross-strait financial transactions, Taiwanese liaison offices there are unlikely to be upgraded to branch status," Lo said.

  To provide a makeshift channel for local banks to capture cross-strait businesses, Tseng said the regulator will further relax restrictions on the business scope of offshore banking units (OBUs) so as to meet China-based businessmen's financial needs.

  "Offshore banking units will be the best leverage for Taiwanese banks to develop regional businesses," Tseng said.

  To secure a more stable source of income, local financial institutions are beginning to sell more products and focusing efforts on the wealth management business.

  According to Eric Wu (吳東昇), chairman of newly established Taishin Investment Trust Co (台新投信), nearly NT$2.5 trillion -- or 40 percent to 50 percent of people's earnings -- are deposited in saving accounts, which he said could potentially be injected into the nation's fund market.

  Martin Spurling, deputy CEO and senior vice president of HSBC Taiwan's personal financial services division, also aims to tap into the asset-management market.

  He said that if Taiwanese can be further educated to invest part of their cash deposits in mutual funds, this could provide one of the British bank's biggest business opportunities -- and challenges -- this year.
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