TAIWAN BANKERS IN A BIND | COUNTRY REPORT

“In Taiwan, the way we differentiate ourselves is through innovation and risk management,” Jao says. “We have our own risk management team. Most of the other banks in Taiwan basically utilize services from outside providers. But our in-house capability allows us to be faster in response, more nimble.”

Taishan has exported this culture to China.

“A leasing company is not a bank. It is not allowed to take deposits. The credit side is doing well, but on the funding side we do have some difficulty. We are only allowed to leverage up  to ten times the capital injected. Risk management is therefore extremely important. The Peoples’ Bank of China has a centralized credit system, and we’re currently working with local banks to obtain that kind of credit information.”

Jao says that with the bank’s nonperforming loan ratio at around 3% in China, “we’re doing okay.” Nonetheless, Taishin sees fit to charge a higher interest rate there, reflecting the rise in China’s risk premium.

“Fingers crossed,” he says, “we’re still hoping that we will be able to set up commercial banking in China.”

When the government removes its OECD rule, Taishin will export some techniques it has been developing in its home market, including the use of big data. Says Jao: “This will allow us to know customer behavior better, helping us to avoid risk and look for business opportunity. It will also help us build a more diversified portfolio. When we’re ready, we can transfer this to China.”

At the moment, Taishin is actually behind the curve there. On December 16, five banks in China—the Bank of China, Bank of Communications, China Minsheng Bank, Bank of Nanjing and the China Development Bank—and five Taiwanese institutions—Fubon Financial, Bank of Taiwan, Taiwan Cooperative Bank, Land Bank of Taiwan and CTBC—signed a memorandum of understanding (MOU) for cross-strait syndication cooperation. Under the agreement, banks can refer clients in their respective jurisdictions and share industry information for syndicated loans business.

Fubon’s Hsu says the agreement will help it develop new clients, cross-sell services including trade finance and cash management, and benefit from loan syndication, without taking on extraordinary levels of risk. “We expect the benefits will come from various perspectives under the MOU,” she says.

The rating agencies acknowledge that China is creating formidable growth opportunities for Taiwan’s banks. Fitch says that offshore lending, primarily to China, has grown at an annual compound growth rate of 21% from 2010 through the first half of last year. In comparison, lending in Taiwan for local banks grew only 4% during the same period.

Fitch also concedes that despite the high China growth rate—it has come off a low base—that banks’ China exposure “has not had a significant credit impact yet.”

But the pace of lending is accelerating. Fitch expects loans by Taiwanese banks’ offshore units will rise to 19% of total loans by end-2016, from 15% at the end of June last year. “Chinese loans alone should account for 12% of total lending by end-2016,” says Fitch’s Huang. She says trouble could be brewing as a result.

“Taiwanese banks’ ratings could come under pressure,” Huang warns, “especially if they are not adequately mitigated through higher risk buffers.” Adding to the problem, Taiwan’s banks are generally not as well-capitalized as other internationally active banks in the region, Huang says. “This limits their relative capability to withstand potential economic or other credit-quality shocks.”

That scenario doesn’t deter the likes of E.Sun Bank, whose investor relations head, Anthony Cheng, insists that the relative weakness of Taiwan’s banks compared with international competitors in the realm of credit could be a competitive advantage to E.Sun. “We’re a conservative lender, and we’ve never been in a rush to expand beyond our capacity to manage risk,” he says. “This has been hammered into our culture as a bank. It’s going to help us as we expand overseas.”

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.

~ Cherry Huang, Fitch Ratings

A report by Moody’s Investor Service last year supports Cheng’s claim. The rating agency upgraded E.Sun Bank, saying “On the lending front, the bank has increased its business focus towards higher-margin businesses, such as lending to small and medium-size enterprises versus lower-margin segments, such as residential mortgages. It has achieved this shift without weakening its asset quality.”

E.Sun Bank’s parent company, E.Sun Financial, has repeatedly raised equity and funneled the proceeds into strengthening the bank’s capital adequacy ratio, a factor that also led to the upgrade. Cheng says that E.Sun is now ready to use this strength in China and Southeast Asia, where risk-conscious banking coupled with innovative marketing could carry the day.

He describes the banking environment as “exciting” and welcomes the challenges that the rating agencies contend lie ahead. Says Cheng: “May the sturdiest competitors win.”

GFmag.com data Summary: Taiwan

* Estimates                                                                                                              
Source: GFMag.com Country Economic Reports