Taiwan’s decision to loosen capital requirements for financial holding companies and banks pursuing mergers and acquisitions (M&A) should improve the financial sector’s consolidation and competitiveness, Taiwan Ratings said in a report.
However, the local arm of S&P Global Ratings said that it remains crucial for individual companies to maintain healthy capitalization, despite greater flexibility in the calculation of regulatory capital ratios.
RISKS
The Financial Supervisory Commission earlier this month announced that financial holding companies and banks could initiate acquisitions with only a 10 percent shareholding and can have a lower capital risk charge on the investment during the M&A pursuit.
The acquisition period must not exceed more than three years, the commission said.
The financial regulator is seeking to provide incentives for M&A activity by lowering the risk charge, the ratings agency said.
This increased flexibility should encourage M&A activity in Taiwan’s banking industry where a highly fragmented structure has resulted in low earnings capacity, it said.
Over the past five years, the sector’s return on average assets averaged about 0.6 percent, ranking it among the weaker systems in Asia, it said.
COMPETITIVENESS
The nation’s top three banks control only a quarter of total assets in the sector, but a meaningful industry consolidation could lift the competitiveness of Taiwanese banks domestically and in a global context, it said.
While lower capital risk charge offers some relief from the burden of new acquisitions for up to three years, Taiwan Ratings said that it is standing by its rules on calculating the capital risk charge as it does not allow the same flexibility as the local regulator does.
In addition, individual banks need to weigh the impact of their acquisitions on their capital adequacy and maintain the strength of their credit profiles, the agency said.
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