TAIWAN BANKERS IN A BIND | COUNTRY REPORT

Taiwan’s banks at first blush seem to be in an enviable position. The nation’s economy is in recovery, even as Asia feels the headwinds of a slowing China, which in early March offered its lowest growth target for decades at 7%. Meanwhile, Taiwan has been revising its projections upward on the back of stronger US demand, robust domestic consumption and lower energy prices.

In an unusual circumstance, the wind seems to be at Taiwan’s back—at least for now.

GDP will grow by 3.8% this year, the government said in early March, an improvement over the 3.7% growth reported for 2014 and better than the 3.5% figure that was the consensus of earlier projections.

The nation is doing better thanks to exports, which account for over 60% of Taiwan’s GDP. That improvement has occurred even though the New Taiwan dollar has depreciated less than the Japanese yen and Korean won during the recent rise in the US dollar. Vivien Hsu, president of Fubon Financial, told Global Finance this could attract foreign investors and fund flows.

Taiwan’s relative stability, in her view, may be an asset as growth on the mainland slows. “China’s economy is experiencing a transition from high-speed growth to a modest yet more sustainable pattern,” says Hsu, noting that Taiwan has already gone through such a transition.

As banks, we need to survive in this congested environment. Going overseas will be very important to us.

~ Joseph Jao, Taishin Financial Holding

All this is to Fubon’s benefit, she asserts. The bank’s 50-year history will provide the institutional knowledge necessary to enable Fubon to “seize the growth opportunity in China,” Hsu claims, adding that this expected pickup in business has already begun. She points to strong premium growth in Fubon’s China insurance unit, noting that “Fubon Bank China presented an improving trend in asset quality in 2014 [against] the backdrop of the economic slowdown.”

But such interest on the part of Taiwanese banks in China and elsewhere in Asia has not gone unnoticed by the rating agencies, where it is registering with some alarm. 

OFFSHORE EXPOSURE

Fitch Ratings, for instance, observed on March 1 that Taiwan banks’ offshore exposures will continue to grow as a percentage of all assets. It seems likely. The country’s legislature at the start of the year amended the national banking law, raising the cap on banks’ overseas investment to 40% of net worth. The previous limit had been 40% of paid-in capital. According to the rating agency, the higher ceiling means the banking sector will have an additional 400 billion to 500 billion New Taiwan dollars
($13.3 billion to $16.7 billion) to invest in offshore acquisitions.

“The regulatory changes indicate that the authorities are prepared to adopt a more accommodative position when it comes to offshore investment, rather than stifle the banks’ growth, since domestic prospects are more muted,” notes Cherry Huang, financial institutions analyst for Fitch in Taipei. She adds, “The rule changes also point to efforts to diversify regional exposure and reduce concentration risk in China.”

 So what’s the problem? As Fitch sees it, Taiwan’s banks have little choice but to seek their fortunes overseas in Asia, and their risk management is likely to be tested as a result. The best-case scenario is that risk is not built up exclusively in China but diversified into developing markets across Asia.

“Taiwan is a very competitive market,” Taishin Financial Holding president Joseph Jao told Lloyd’s List, estimating its size at $500 billion. “Basically, the market is very congested.” The economic boom years are over, he concedes. “We don’t expect to see the economy ever grow at 10% per annum,” Jao says. “As banks, we need to survive in this congested environment. Going overseas will be very important to us.”

REGIONAL EXPANSION

Banks are indeed looking beyond China for expansion opportunities this year. Taishin as well as First Bank, Cathay United Bank and E.Sun Bank opened branches in Myanmar last year. Mega International Commercial Bank, Shin Kong Commercial Bank and Bank of Taiwan have received licenses to set up representative offices in the nation. Several banks opened representative offices in Laos in 2014. CTBC has extended a sizable footprint into neighboring countries in Southeast Asia, with 11 branches in Indonesia, 24 in the Philippines and offices in Singapore and Vietnam.

And the expansion is not just restricted to the “frontier” markets of the Association of Southeast Asian Nations (Asean). Taiwanese banks, for example, have opened branches in Mumbai, India.

But the rush to Myanmar is an instructive example of why diversification from China risk is easier in theory than in fact. Competition is so intense in Taiwan’s banking market that as soon as the government granted permission to establish a presence in Myanmar’s recently opened economy, virtually all the banks moved to recreate the same competitive situation they were fleeing at home.

In fact, banks don’t leave competition at home when expanding in Southeast Asia, where the environment is increasingly saturated and the size of the economies relatively small—compared with the mighty mainland. In China, banks face a market where competition may be fierce in commoditized banking, but as Hsu of Fubon Financial implies, a bank with experience can find a lucrative corner and grow safely, or at least hope to do so.

That’s why Taiwan’s bankers see little alternative but to tackle the challenge of China. Some are pushing the limits with their investments. Hsu says that Taipei Fubon Bank’s China exposure was around $4.9 billion as of January 15, in compliance with Taiwan regulators’ rule that banks’ aggregate China exposure should not exceed a bank’s book value.

But the definition of exposure is broad, including traditional lending, interbank lending, investments in the China subsidiary itself and other investments related to China counterparties. That requires the banks to apply all their risk management acumen. “We take precautions to manage China risks along with the growth,” says Hsu. These include pre-screening of clients’ profiles, using criteria that include qualifications of a client’s charter public accountant firms, as well as a client’s market position and financial ratios. Many other steps come into play, from analyzing industries comprehensively to setting a high level of approval authority on credits to creating detailed know-your-customer profiles.

Taishin Bank, which has a leasing unit in China, is waiting for the government to remove an obscure banking regulation that has kept it from opening a full-blown commercial banking branch there. The rule requires Taiwan banks that open a branch on the mainland to also have a presence in an Organization of Economic Cooperation and Development country.