Bank mergers and acquisitions are once again on the menu after the Cabinet said consolidation among state-run banks would catalyze the financial sector. The call for further consolidation comes as Taiwanese lenders have been seeking opportunities in China, only to find that they might not be competitive enough in terms of business scale and capital strength.
It has become increasingly clear that Taiwanese banks have limited scope for earnings improvement within an overcrowded and fragmented banking sector, a situation that can improve only if there are fewer players in the market.
Last week, Chinatrust Financial Holding Co president Daniel Wu (吳一揆) said at a forum that the nation’s banking system is still fraught with the problems of overbanking and interest margin compression. He warned that domestic banks have limited buffers within their current capital structure to absorb additional shocks from a sudden global financial crisis.
At the same forum, Yuanta Financial Holdings Co chairman Yen Ching-chang (顏慶章) said the still-high market share of state-controlled banks — as high as 50 percent at present — and the government’s intention to encourage state banks to acquire private lenders, rather than vice versa, could negatively impact overall profitability and efficiency and be counter-productive.
On the other hand, LCD panel maker AU Optronics Corp’s chairman Lee Kun-yao (李焜耀) said last week that one of the main obstacles to a potential merger between his company and rival Chimei Innolux Corp is that the putative combined entity would have difficulty borrowing from any bank in Taiwan.
This is because Taiwanese banks are too small and many LCD makers’ borrowings have already nearly reached the banks’ loan ceiling. In other words, based on the government’s capital rules, no bank would be able to lend to a merged AU Optronics and Chimei, Lee said.
The thinking is that size is critical in the struggle against international competition and the government’s support for large-scale mergers and acquisitions among domestic financial institutions is the only way to enhance their competitiveness.
However, this misses the point that the country’s banking system needs more deregulation before such mergers and acquisitions are likely to happen, because current rules are too strict to allow banking consolidation. A restricted business environment also prevents domestic banks from offering diversified and innovative services for niche markets, not to mention the effect it has on them developing the strength to compete with foreign rivals.
Mergers and acquisitions represent the correct direction to move in, even though there have been flaws in the implementation process during the past few years. In the short term, this goal may be hard to achieve because there is still potential opposition from labor unions at state-owned banks, while possible objections by politicians — who have blocked several mergers and acquisitions in the past few years, for fear of benefiting private financial conglomerates — also remain a major obstacle.
The government has vowed to carry on financial reform and said its priority is to catalyze banking consolidation.
However, the truth is that the government is not as determined to force the issue as before, given concerns about the potential social backlash. Moreover, mergers of state-run banks are time-consuming and do not necessarily generate the synergistic benefits expected. Developing an environment that encourages voluntary mergers in compliance with market mechanisms may be the only catalyst for further banking consolidation that the government can provide in the short term.