Mon, Aug 20, 2007 - Page 8 News List

Editorial: Profitability of bank merger limited

The government announced last week it would complete preparations for establishing a national financial holding company by the end of the year that aims to group three government-owned lenders: the Bank of Taiwan, Land Bank of Taiwan and the Export-Import Bank of the ROC.

Under the government's merger proposal, the Taiwan Financial Holding Co would become the largest local financial institution with an estimated market share of 18.8 percent for loans and 19 percent of deposits.

With approximately US$158.8 billion in aggregate assets, the new holding company would also rank as the 18th largest bank in Asia and 89th in the world, according to government estimates.

But it is beyond belief that in this competitive and fast changing financial environment -- where players offer services on the basis of lower costs or better management -- the government said it has no plans to streamline the work force at the new holding company nor list or privatize it in the future. Instead the government said it would ensure employee interests during the merger process.

It needn't be so. Like it or not, the new holding company will have to adopt a private, professional management model in view of increased market competition and more foreign rivals. Its management will also need to be allowed to take full control of decision-making relating to lay-offs and branch closures. Otherwise, there is no way to resolve the excess headcount.

Vowing to ensure employee interests may help the government push the planned merger through without internal opposition, especially from union members. But the costs of staying on this course may consume the potential benefits of the merger in the long term, failing to create a new holding company as efficient and competitive as its private rivals.

Even though the government promises to ease regulations on employee compensation and expenses to enhance the holding company's competitiveness, it will still have to reorganize the company's work force.

It is hard to reject the government's optimism about the new holding company in terms of the company's capitalization, number of branches and asset quality, but the government should realize that what's common to the state lenders is their mediocre profitability and undiversified business profile constrained by policy-related obligations.

Therefore, the fact that the new holding company is still a state-owned entity and that the government has no plans for its privatization is worrisome. Will the new company still face the same problems associated with policy obligations? If so, how will the new company improve profits and manage to avoid the typical costs of these obligations?

Finally, no one should be so naive to think that the establishment of the new holding company will consequently help kick-start a consolidation move within the industry, yet the government is.

To be honest, the establishment of the new holding company will at best merely reduce the number of government banks in the market. It will be far from a real competitor to its private rivals unless it shows better operating expense controls and offers innovative and competitive products in the market.

Taiwan does need to expedite its financial reform and make real progress in the consolidation of its banking sector, which have been delayed by political and regulatory changes over the past few years. But if we remember correctly, the government first initiated the merger proposal in 2001 and failed to materialize the plan in the following years because of a lack of strong political will and opposition from the union members. It remains to be seen what will be different this time.

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