Editorial: Bank privatization must advance

With around 50 to 60 percent of the nation's banking assets controlled by state-run entities, financial regulators are under pressure to meet President Chen Shui-bian's (陳水扁) ambitious goal of halving the number of state banks to six by the end of this year. Though consolidation tops the government's financial reform agenda as a way to increase the competitiveness of local banks, the pace of merger activity has been slow, despite some merger and acquisition deals being sealed in the past few years.

Minister of Finance Lin Chuan's (林全) announcement last Wednesday that the share sale of Taiwan Business Bank (台灣企銀) to a prospective buyer would be aborted exemplifies the difficulties in privatizing state banks -- and signals a further slowdown in the pace of market consolidation in the sector.

Taiwan Business Bank is the nation's ninth-largest lender by assets, with a market share of 4.1 percent and a distribution network of 125 branch offices. It is 41 percent owned by the Ministry of Finance and a few other state banks. Though it has the political mission of granting loans to small and medium-sized enterprises, the bank's market share in this niche is only 12 percent due to strong competition. But because of its past weakness in credit appraisal in its role as a funding channel for particular economic sectors, this lender has lost an average of NT$1.6 per share in each of the past four years.

Critics are concerned that the ministry's failure to sell its stake in Taiwan Business Bank may lead to a more cautious approach by potential buyers of domestic banks, given higher-than-expected integration risks such as strained labor relations. Market observers also worry that the four-day work stoppage by the bank's union could inspire other state bank unions to follow suit and obstruct mergers in the future. Chang Hwa Commercial Bank's (彰化銀行) union, for instance, is reportedly seeking proxy votes to counter a takeover plan by Taishin Financial Holding Co (台新金控) at an extraordinary shareholder meeting this Friday.

Moreover, the Taiwan Business Bank incident has caught lawmakers' attention, and may prompt them to demand reviews of every government proposal on disposing of state bank shares. It will certainly increase uncertainty for investors and make it more difficult to reach Chen's target.

The planned privatization of the Central Trust of China (中央信託局) therefore deserves our attention. Central Trust, whose business operations include banking, insurance, trade and warehousing, is scheduled to submit an auction proposal to the legislature for approval later this month, hoping to finalize its privatization before the end of the year. It remains to be seen whether the failed sale of Taiwan Business Bank will impact Central Trust's privatization.

Even so, the government should learn something from the incident and act to respond to investors' demands for a more open and transparent bidding process. Most importantly, the government needs to convince the market of its political will to proceed with privatization. If the government stops pushing forward, the market will take it as a sign that something is terribly wrong with the policy.

Labor disputes may have been the straw that broke the camel's back as far as Taiwan Business Bank is concerned. But even before those troubles, the bank's poor asset quality and performance made potential buyers far underbid the finance ministry's price targets.