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Analyst dispels banking optimism

A man walks past a commercial sign for a domestic bank on Monday in Taipei. The outlook for the banking sector is not as rosy as it seems, according to a report released on Monday by Credit Suisse (Hong Kong) Ltd. PHOTO: PATRICK LIN, AFP

Expectations for consolidation in the nation's fragmented banking sector are being overplayed following a recent series of stake purchase deals, as prospects of significant reform remain low in the near term, Credit Suisse (Hong Kong) Ltd said in a report released on Monday.

Sherry Lin (林淑娥), an analyst at Credit Suisse who tracks Taiwan and China's banking industries, said in her latest report on the nation's finance sector that, "It is premature to play the consolidation theme in Taiwan."

The market's optimism following Newbridge Capital Inc's investment in Taishin Financial Holding Co (台新金控), and Chinatrust Financial Holding Co's (中信金控) purchase of Mega Financial Holding Co's (兆豐金控) 10-percent stake is overplayed, Lin said.

A still-crowded banking sector and a lack of attractive take-over targets are likely to further hinder any increase in private equity fund activities in Taiwan, she added.

The sticky control issue among Taiwanese private banks is also an issue. Newbridge's investment in Taishin is highly restructured and leveraged, and such low capital commitment signals the various risks that players still face in future consolidation, she wrote in the report.

The government has vowed to halve the number of financial holding firms to seven by the year's end and have at least one bank run by a foreign operator.

Against that backdrop, New-bridge's NT$27 billion (US$827 million) investment in Taishin earlier this month, which marked the largest foreign investment in a local bank to date, had stimulated both the market and the financial authorities. But it was soon discovered that around 80 percent, or NT$22 billion, of Newbridge's funds were financed by a local bank.

Also, the falling approval rate of the ruling Democratic Progress Party (DPP) will reduce the government's will to privatize state banks, which is viewed as the ultimate trigger to bank consolidation, as resistance from labor forces could send the DPP's ratings even lower, Lin said.

The gridlock between the ruling and the opposition parties further increases risks, she said.

Instead, Credit Suisse said investors should focus on the consumer credit cycle, which will be a key driver for Taiwan's financial sector this year. Provisional expenses are expected to rise continuously throughout the first half of this year and peak sometime in the April-June quarter, the Swiss brokerage firm said.

Credit Suisse expected write-offs from local banks to address defaulted loans from credit and cash cards to reach about NT$300 billion this year, up almost 50 percent from more than NT$200 billion last year.

Despite the seemingly dim prospect of further banking consolidation, a senior banker yesterday said that it is necessary for local banks to expand their economies of scale through mergers.

Local banks are lacking sufficient economies of scale to build financial platforms that can provide one-stop services in advisory, lending and investment banking business to satisfy the needs of their clients, Tu Ying-tsong (杜英宗), chairman of Citigroup Global Markets Taiwan Ltd, said during a financial seminar hosted by Citigroup yesterday.

Citing Standard Chartered's market capitalization of about US$20 billion, Tu said that the few local banks that are capable of expanding their market capitalization to similar levels through mergers should reinvent themselves into regional banks with valuable financial platforms. This would sharpen their competitive edge against foreign rivals.
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