At a time when the government’s consistency and credibility in encouraging financial consolidation is being questioned, the Ministry of Finance’s surprise victory in securing a majority in the Chang Hwa Bank board of directors last week did not help restore the public’s faith in the government in terms of public-private partnerships.
Mergers among financial institutions remain a sensitive issue. In 2005, Taishin Financial Holding Co outbid six competitors to grab a controlling 22.5 percent stake in then-debt-ridden Chang Hwa Bank, becoming the bank’s largest shareholder. Ideally, the deal would have resulted in synergic benefits, with state-run Chang Hwa holding a strong franchise in corporate lending and Taishin Financial’s banking arm, Taishin International Bank, gaining expertise in consumer banking, Treasury markets and wealth management.
However, there has been little cooperation between the two over the past nine years, because the ministry has been against Taishin Financial’s potential merger with Chang Hwa Bank. On Monday, the ministry surprisingly secured six out of nine seats on Chang Hwa Bank’s board, leaving Taishin Financial with just three. This means that the ministry has the power to appoint a new chairman for the bank and make objections to whatever is favorable to Taishin Financial.
The prospects of the planned merger of Taishin International Bank with Chang Hwa Bank look extremely slim after the boardroom showdown. However, the conglomerate has not taken the defeat lying down and has filed a lawsuit seeking an interpretation of its 2005 contract with the ministry. The conglomerate is also seeking NT$10 billion (US$320 million) in compensation for damages linked to the investment.
For Taishin Financial, the legal action is the right response to safeguard the interests of its shareholders, because without majority board representation it will have to change its accounting treatment of Chang Hwa Bank and recognize a one-off loss of NT$14.8 billion. Moreover, the conglomerate may have to reduce its stake in Chang Hwa Bank to cope with requirements set in the Financial Holding Company Act (金融控股公司法), which stipulate that financial holding companies cannot have a more than 5 percent stake in two similar financial companies if they are not its subsidiaries.
Clearly, losing control over Chang Hwa Bank will not only affect Taishin Financial’s earnings outlook, but also make it even more difficult for it to diversify and expand into the Chinese market, where Chang Hwa Bank has a branch in Kunshan, Jiangsu Province, and one in Dongguan, Guangdong Province. It is no wonder that Taishin Financial last week also lodged a complaint with the Control Yuan, asking it to investigate whether the ministry was involved in any misconduct in the boardroom battle.
The ministry said that it is confident it will win the lawsuit, as the 2005 pledge is no longer valid or binding. Triumphant or self-vindicating, as that may be, with the case now in the hands of judicial authorities, it shows that Taiwan has failed to follow through on its promise to facilitate financial consolidation through mergers.
The ministry is to face a new battle in the coming months to defend actions, while the loss of mutual trust between the private and public sectors is a critical issue facing the nation as a whole. As for the government’s policy of building state-run financial institutions into regional players, with the ministry’s persistent fears of private banks exploiting state-run lenders, and a lack of willingness to inject new capital into state lenders, there is little chance of this policy being achieved in the foreseeable future.
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