The recent establishment of financial holding companies in Taiwan provides an opportunity for some institutions to shake up the financial sector and may also become a major catalyst for ratings changes, Moody's Investors Service said in a report released yesterday.
Moody's said in the report on its rating methodology for local financial holding companies that it expects the most successful companies to exhibit strong strategic focus, expertise in their chosen lines of business, integrated management and operational cultures, and strong risk management practices.
Since late 2001, the government has encouraged local banks, securities houses and insurance companies to cooperate.
"In a relatively short space of time, the financial holding company has become the dominant business model in Taiwan's financial system," said Patrick Winsbury, the report's author and a Moody's vice president and senior analyst.
"Fourteen financial holding companies have been formed so far, encompassing virtually all of Taiwan's major financial institutions," he added.
"The creation of financial holding companies has the potential to prompt more rapid change in the ratings of Taiwan financial institutions than would otherwise be the case," he said.
According to Winsbury, the financial holding companies will promote consolidation of the nation's fragmented and competitive financial system and this could lead to improved profitability.
The report concludes that the country's financial system is now at the end of its first round of consolidation.
Most potential major financial institutions have already formed holding company structures, with minimal effects on their ratings.
"Now, as we enter the second and third rounds of consolidation, the ratings implications become more important," Winsbury said.
In the second round, Moody's expects to see smaller independent financial institutions absorbed into the major groups, a process that has already started.
However, in many cases, this second round will have little effect on ratings, with acquisition targets bring small and their benefits offset by their relatively weak financial state.
In the third round, consolidation among financial groups is expected to create much larger shifts in ratings. However, it could also take much longer to materialize, given the strong aversion shown so far to mergers.
A final element of volatility for ratings will be the influence of China.
"As Taiwan financial institutions conduct increasing proportions of their business on the mainland, their relative success or failure in this major new market will become an important determinant of ratings," the report said.
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