The government’s efforts to promote the consolidation of state-run financial institutions will not reverse their structural weaknesses, even though the move might help them to better compete in Asia, Fitch Ratings Inc said in a recent report.
State-run financial institutions command 50 percent of the market by assets, but they tend to be less commercially oriented in operations, which leads to depressed loan pricing and weak margins compared with their private peers, the report said.
Surplus liquidity coupled with weak domestic credit demand weighs on the sector’s profitability, the report said.
The Ministry of Finance and the Financial Supervisory Commission have encouraged consolidation among state-run financial institutions to help address longstanding issues and in the hope that one or two might become regional powers.
Toward that end, the regulators recently signaled their willingness to give state-run institutions greater flexibility by extending their merger-and-acquisition targets to include private peers.
The idea of building regional champions remains alive, but has gained little headway so far, Minister of Finance Chang Sheng-ford (張盛和) said earlier in a meeting of the legislature’s Finance Committee.
While consolidation would increase the scale of Taiwanese lenders, it is unlikely to produce substantial operational synergies to boost the sector’s structural strength, said Jonathan Lee (李信佳), a senior director at Fitch who covers financial institutions.
Taiwanese state banks have a lower capitalization compared with large private banks, and they are not in a strong position to withstand potential shocks from overseas operations, especially in emerging markets, Lee said.
Implicit policy roles — branches in unprofitable regions and offering preferential interest rates on deposits to public school teachers, civil servants and military personnel — will continue to burden the profitability of state-run banks, Fitch said.
A less flexible compensation has also contributed to their limited product differentiation and significantly weaker fee income generation compared with large private banks, Lee said.
In addition, resistance from labor unions and political opposition would constrain operational efficiency gains linked to branch and headcount decreases in the wake of mergers, Fitch said.
Consequently, consolidation is not expected to enhance state banks’ credit profiles in the near term, although it would reinforce the systemic importance of the banks, Lee said.
Fitch expects Taiwanese regulators to remain highly supportive of the banking system and state-run banks in particular.
Potential resolution regimes for major banks have been a key point of discussion in Europe, the US and Asia in recent years, but Taiwan is unlikely to follow suit in the foreseeable future, Fitch said.
The government often calls on state banks to support or merge distressed financial institutions to maintain the system’s stability.
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