The Financial Supervisory Commission (FSC) urged banks to open more branches in China, pushing them to expand more quickly in the world’s fastest-growing major economy as competition erodes returns at home.
“If Taiwan’s finance companies can’t raise their competitiveness, they’ll remain buried in a domestic market that’s overbanked and rife with price undercutting,” Financial Supervisory Commission Vice Chairwoman Lee Jih-Chu (李紀珠) said on Aug. 26. “That’s our biggest concern right now.”
Fewer than one in five Taiwanese banks has opened a branch in China after investment restrictions were relaxed amid warming ties. China, with a population more than 50 times bigger than Taiwan’s and US$15 trillion in banking assets, is Taiwan’s largest trading partner, accounting for more than two-thirds of its exports.
Taiwan has been pushing for consolidation in a home market that has 37 domestic banks, 28 foreign lenders and more than 300 credit associations competing to serve 23 million people. That has forced average loan profit margins for its banks to less than 1.5 percent, compared with 2 percent or more for Chinese rivals, said Tseng Fan-jen, an analyst at KGI Securities Co (凱基證券).
“Given the fact that state--controlled banks collectively still account for the majority of market share, meaningful banking sector consolidation will only happen if the government is determined to actively pursue it,” said C.J. Chien, senior vice president and head of financial institutions at DBS Taiwan Ltd (星展銀行).
In China, Taiwanese banks lag behind rivals “in terms of market--entrance timing and absolute scale,” he said. Only six Taiwanese banks have set up branches in China so far, Lee said, adding that the lenders should also considering opening more outlets in Southeast Asia.
The commission has proposed easing restrictions on domestic lenders investing in Chinese rivals, said Lee, who is also an economics professor at National Chengchi University. The Economic Cooperation Framework Agreement (ECFA) was signed on June 29 last year to allow more access to each other’s markets.
Under current regulations, Taiwanese lenders can only choose two out of three options: take stakes in a Chinese rival, or open a branch or subsidiary. Taiwanese banks cannot invest more than 15 percent of their net worth in China.
The FSC wants to remove these “unnecessary obstacles,” Lee said.
Taiwan is also considering letting its financial institutions invest in yuan-denominated assets in Hong Kong, after allowing the nation’s insurers to do so in July, Lee said.
The return on common equity for Taiwan’s 20 largest banks is about 5.6 percent on average, compared with 8.2 percent for the biggest lenders in the rest of Asia, according to data compiled by Bloomberg. Chinese banks are at about 20 percent, while those in Southeast Asia are at 15 percent, the data shows.
Policymakers are looking to tap growth in China. China expanded 9.5 percent last quarter, while Taiwan grew 5.02 percent, its slowest pace since 2009. The government this month cut its growth forecast for next year to 4.81 percent.
China has 3,769 banking institutions with total assets of 95.3 trillion yuan (US$15 trillion) serving 1.3 billion people, according to the nation’s banking regulator.
The number of Taiwanese lenders has dropped to 37 from more than 50 following a wave of mergers and takeovers. DBS Group Holdings Co (星展集團), Southeast Asia’s largest lender, took over the distressed Bowa Commercial Bank Co (寶華銀行) in 2008. Citigroup Inc, HSBC Holdings PLC and Standard Chartered PLC have also acquired Taiwanese banks to tap Asia’s wealthiest people outside China and Japan.
Still, the financial reforms were stymied by corruption probes linked to mergers and acquisitions carried out under former president Chen Shui-bian (陳水扁) and political wrangling over the valuations.
“Indonesia had a fragmented banking sector before 1997 and it took a crisis as large as the Asian financial crisis and state intervention to spark mass consolidation,” Leong Wai Ho (梁偉豪), a Singapore-based senior economist at Barclays Capital, said. “The problem in Taiwan is that there is no such impetus. Banks are adequately capitalized, but mostly are domestically focused and comfortable in their niches.”
The ECFA allows the two sides to cut tariffs and increase access to banking, insurance and the securities industries.
Four Chinese lenders — Bank of China Ltd (中國銀行), Bank of Communications Co (交通銀行), China Merchants Bank Co (招商銀行) and China Construction Bank Corp (中國建設銀行) — have set up representative offices in Taiwan as of April, according to the China Banking Regulatory Commission.
The ECFA has not been a bigger catalyst for change in Taiwan because the economic integration is proceeding at a “cautious pace,” Leong said.
“It will be a long time before Chinese banks actually compete meaningfully in Taiwan,” Leong said.
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