Mon, Oct 09, 2006 - Page 8 News List

Editorial: Fools rush in when rules change

Just when many of us had concluded that bad loans would destroy the bottom lines of Taiwanese banks this year, along comes a bid by Standard Chartered to purchase Hsinchu International Bank, reigniting some interest in the sector.

The purchase by the British bank, announced late last month, has not only delighted government officials already hit by the nation's declining competitiveness ranking in the World Economic Forum survey, but has also led to a frenzy among investors for shares in Hsinchu International and other local lenders on the assumption that more takeover bids are on the way.

Based on Standard Chartered's offer of NT$24.5 per share for the Hsinchu bank, the British buyer is paying a premium of more than 30 percent in a deal totaling NT$40.5 billion (US$1.22 billion), which is more than twice the local lender's net asset value.

Little wonder, then, that a Financial Supervisory Commission official said last week that Taiwan could be the most attractive Asian market for foreign investors looking for takeover targets, especially compared with Japan and South Korea, where targets are drying up as consolidation runs its course.

This could be a turning point for the nation's financial sector because Standard Chartered's purchase is linked to some influential trends. It is the first outright acquisition of a local bank by a foreign rival in the nation's history; it may speed up the internationalization of the financial sector; and it will accelerate consolidation in a sector that has been ravaged by mounting credit-card defaults since the second half of last year.

But it would be foolish for investors to chase financial shares believing that the sector's fundamentals are turning a new leaf. The point is that while the fallout from the bad-debt issue is less damaging now, local banks are still operating in a tough environment in which several negative factors -- severe market fragmentation, depressed margins and cross-strait restrictions -- continue to constrain development.

Investors know that the share price of a company generally climbs when the market is strong, the company is well managed and its products or services are in demand. They also look for consistency and a history of strong performance and steady growth in assessing a potential investment.

Hsinchu International, however, stands out as a special case, considering the lender's relatively small market share -- and its poor track record.

Standard Chartered was attracted by its underexploited branch network, particularly in the area of wealth management and wholesale banking, which the London-based lender will exploit for regional expansion.

To investors, the surprisingly high premium for Hsinchu International may spur a speculative rally for other smaller lenders or possible takeover targets. But the rally should be short-lived, given its weak fundamentals.

What is certain is that more takeover bids by foreign banks are heading this way now that the government has loosened control on the sector. Foreign banks, mainly from the West, are offering access to additional capital and introducing new financial products and investment opportunities that Taiwanese businesses are unable to access through local lenders.

As the industry scrambles to face this new challenge, local banks should enhance their capabilities to avoid losing out. And the government must strive to maintain a consistent policy and provide a level playing field for all industry participants.

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