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Finance sector dismisses government's reform plan

"Investors have dropped any expectation on the drawn-out and disputed reform story, no matter how they explain it."

Wu Pei-wei, a fund manager at ABN AMRO Asset Management

Government officials' efforts last week to defend the controversial second-stage financial reform plan in a televised debate did not appear to pay off, with analysts saying that repeated arguments would not stimulate finance stocks.

"[During the debate] they just reiterated what they had said before. There was nothing new," said Shirley Yang (楊慶祺), who tracks Taiwan's finance sector at Invesco Taiwan Ltd (景順投信).

This would not boost ailing financial stocks, she said.

Vice Premier Wu Rong-i (吳榮義), who was commissioned to oversee reform in the banking sector led Council for Economic Planning and Development Chairman Hu Sheng-cheng (胡勝正) and Minister of Finance Lin Chuan (林全) to defend the necessity of the government's reform plan in a televised debate last Wednesday with Chinese Nationalist Party (KMT) legislators Lee Chi-chu (李紀珠), Lai Shyh-bao (賴士葆) and Fei Hung-tai (費鴻泰).

The officials said that a consolidation of the nation's crowded banking sector would improve economies of scale and sharpen competitiveness against big foreign banks such as Citibank and HSBC, and develop Taiwan as a financial hub in the Asian-Pacific region.

Opposition lawmakers, however, urged the government to stop intervening in the country's banking sector and allow the free-market mechanism to work.

"Investors have dropped any expectation on the drawn-out and disputed reform story, no matter how they explain it," said Wu Pei-wei (吳佩偉), a fund manager who oversees US$22 million of funds at ABN AMRO Asset Management in Taipei.

Nearly 20 percent of Wu's funds are invested in financial stocks.

Wu said that barring local banks from expanding across the Taiwan Strait has quashed an upturn in the sector. With bad loans in the retail banking sector likely to emerge next year, investors do not expect to see an upswing in the finance sector, he said.

Yang said the government has missed the best timing to get rid of its holdings in state banks.

"The government should have sold all of the state shares in a one-off auction at market prices in the first half of this year when financial stocks were still buoyant," said Yang, who manages over NT$1.2 billion in her portfolio.

Furthermore, she said that the government-dominated plan to shake up private financial holding firms interfered with the free- market mechanism.

"What really matters and would serve as a catalyst to the financial sector would be to allow them to go to China, which provides a big and fast-growing market," Yang said.

Last October, President Chen Shui-bian (陳水扁) announced a plan to consolidate the banking sector, including halving the number of state-run banks to six by the end of this year and cutting the number of financial holdings firms to seven by the end of next year.

The aim is also to create at least three large financial holding companies, each with a market share of more than 10 percent, and with at least of one of the financial holding firms being run by foreigners or listed on an overseas bourse.

In line with this policy, the government disposed of the Bank of Overseas Chinese (華僑銀行), Taiwan Development & Trust Corp (台開信託) and Chang Hwa Commercial Bank (彰化銀行) earlier this year.

The government suffered a setback, however, after the planned sale of shares of state-run Taiwan Business Bank (TBB, 台灣企銀) collapsed after the bank's union initiated a strike.

In order to achieve its goals, the government is working on plans to merge state-run Taiwan Cooperative Bank (合庫銀行) with the Farmers Bank of China (農民銀行). It is also considering integrating the Bank of Taiwan (台灣銀行) with the Land Bank of Taiwan (土地銀行), and probably the Central Trust of China (中信局).

In a bid to encourage consolidation, the Financial Supervisory Commission said last week that larger lenders with more than a 10 percent market share will be allowed to open overseas branches without first getting regulatory approval.

Even so, Morgan Stanley lowered its rating on the financial sector to "underweight" from "equal weight" in its latest market report released on Friday, saying that deteriorating asset quality could undermine earnings next year.

"Despite the ... intention to cut the number of government-run banks by half before end-2005, we expect actual progress to be rather slow, as TBB was unsuccessful -- interference by the labor union was a roadblock to the acquisition," the report said. "At the same time, deteriorating consumer credit in cash card and credit-card loans could drive earnings downside risk to related banks in 2006."

Charles Yeh (葉銀華), professor at the Graduate Institute of Finance at Fu Jen Catholic University, said he was skeptical about the government's talk of seeking synergy and efficiency in promoting the reform.

"It was somehow paradoxical that the government was arguing that only privatization can revamp state banks, while on the other hand planning to merge state banks," Yeh said.

As the government has not outlined how it plans to strengthen professional management in the state banks and create synergies from the merger, it would seem that the merger itself was the ultimate goal of the reform, Yeh said.

If the government insisted on the deadline and its target number without considering the content, it would make the reform only something for the government to boast about during December's local government elections, instead of a milestone for Taiwan's banking sector, he said.
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