The nation's financial sector is continuing consolidation activity following the government's successful auctioning of the ailing Enterprise Bank of Hualien to Chinatrust Commercial Bank last week.
On Thursday, the government announced it would subsidize Chinatrust to the tune of NT$4.49 billion (US$136.1 million) for acquiring the fragile Hualien bank, which is under government supervision after being taken over by the Central Deposit Insurance Corp in early January.
The auction has several ramifications.
For Chinatrust itself, this includes an expanded branch network of 142 nationwide up from 111 previously, making it the largest private lender in this country and on par with Cathay United Bank in terms of branch numbers.
With the addition of 31 branches to its network and an option to relocate 16 of them within five years to anywhere it wants, Chinatrust is likely to gain from its wealth management expansion strategy.
This also gives a big boost to the bank and its parent, Chinatrust Financial Holding Co, which is still haunted by punishments meted out last year by the Financial Supervisory Commission over a flawed takeover bid for the state-controlled Mega Financial Holding Co.
For the banking industry, the auction calls public attention to what a reasonable value for banks should be when the financial regulator lifts a five-year ban on opening branches -- a ban aimed at cutting costs and increasing profits in the nation's crowded banking sector but which generated unjustifiable acquisition prices.
With the commission planning to issue new licenses by mid-next month, upcoming government auctions of two other financially troubled banks -- the Taitung Business Bank and The Chinese Bank, which together operate 68 branches nationwide -- are expected to become even more fierce.
A key problem with selling struggling banks to encourage consolidation is that these purchases do not guarantee a bigger market share.
A better way for banks to grow would be to target well-managed counterparts that possess solid customer bases and sound portfolios.
Citigroup Inc's purchase of the Bank of Overseas Chinese for NT$14.1 billion in early April and Standard Chartered Bank's purchase of Hsinchu International Bank for US$1.2 billion last September serve as good examples of how foreign rivals are acquiring quality local lenders.
Taiwan has 42 banks and about 300 credit unions which compete head-to-head. Despite huge losses on unsecured consumer lending through credit cards and cash cards over the past two years, most have adjusted by providing loans with higher margins and increasing fees to improve the bottom line.
Even so, there is growing pressure for lenders to look for merger targets. This has been confirmed by the Chen administration's new push for consolidation announced just last month.
If there is anything the government can learn from past experience before resuming its "second-stage financial reforms," it is the lesson that it cannot lecture banks, either privately run or state-owned, in facilitating industry-wide consolidation.
The government may dispose of holdings in state-controlled lenders to achieve consolidation, but more important is the agenda of improving industry fundamentals with better incentives and corporate governance. The market, not the government, will be the ultimate arbiter on consolidation.
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