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Carlyle, Longreach mull mergers to draw Chinese

Carlyle Group and Longreach Group Ltd may try to merge Taiwanese banks they control with local rivals to make them more attractive targets for Chinese lenders, three people with knowledge of the matter said.

The buyout firms have been approached by investment banks seeking potential targets for Chinese lenders, the people said, declining to be identified. Carlyle and Longreach are waiting for new rules governing investment in Taiwanese businesses by Chinese companies expected before year’s end, they said.

Carlyle and Longreach have invested a combined US$1.38 billion in two Taiwanese banks since 2007, and the value of their stakes fell as the global financial crisis triggered a stock rout.

“It will take a while for them to turn around the business and build a strong niche because the profit margins of the industry are still depressed,” said Patty Wang (王珮齡), an analyst at Taiwan Ratings Corp (中華信評), the local partner of Standard & Poor’s. “The Chinese won’t be too interested in these small banks unless they can control them.”

Chinese banks may be initially allowed to own 10 percent to 15 percent of larger Taiwanese lenders, said bankers who have been briefed by authorities and spoke on condition of anonymity. Taiwan may further open the industry to allow Chinese control of smaller banks, the people said.

Investment bankers have approached Chinese banks including Industrial Bank Co (興業銀行) and Bank of Communications Ltd (交通銀行) about buying into smaller lenders in Taiwan, the people said.

Longreach, founded in 2003 by Mark Chiba, a former UBS AG investment banker, has paid NT$23.8 billion (US$724 million) since December 2007 to buy a controlling stake in EnTie Commercial Bank (安泰商銀), which operates 54 branches in Taiwan. The buyout firm owns 57 percent of EnTie.

“We are on track with the organic turnaround to profitability, but we also see more strategic options coming to us for consideration given the local-market and cross-straits developments,” said Chiba, who is an EnTie director, in a July 29 interview in Hong Kong.

He declined to identify potential merger partners for EnTie.

Since Longreach made its first investment, EnTie has written down the value of its assets by about NT$27 billion as part of a balance-sheet cleanup initiated by the buyout fund, people familiar with the matter said.

EnTie reported losses in the four quarters following Longreach’s purchase as credit card defaults mounted and it booked losses on collateralized debt obligations. It returned to profit in the first quarter this year, posting net income of NT$145 million.

The lender aims to be profitable for the full year as bad debts fall and earnings from wealth management and corporate banking increase, the sources said.

Carlyle, the world’s second-largest buyout firm, two years ago paid US$656 million for about 36 percent of Ta Chong Bank Ltd (大眾銀行), which has 53 branches. The bank plans to boost its number of branches in Taiwan to 100, a source said.

Ta Chong reported a profit in four of the five quarters since Carlyle completed its investment, according to data compiled by Bloomberg. The bank is seeking approval to buy a credit cooperative in Kaohsiung, a move that would boost its number of branches to about 70, the source said.

Sunny Bank Ltd (陽信銀行), Bank of Panhsin (板信銀行) and Hwatai Bank Ltd (華泰銀行) are among potential targets for EnTie and Ta Chong because they have branches in Taipei, where the lenders are seeking to expand, the people said.
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