A recent push by Taiwanese financial institutions to expand overseas looks set to accelerate after the country’s new government unveiled initiatives to encourage greater outbound investment.
These initiatives to encourage local banks to carve out a bigger presence in Asean nations are part of a wider southbound policy put forward by Taiwan’s first female president Tsai Ing-wen (pictured), who was sworn in on May 20. They form part of a broader strategy to establish closer bilateral ties with fast-growing Southeast Asia and help lessen Taiwan’s economic dependence on mainland China.
“One of our international priorities is to build up our relations with our neighbours in Southeast Asia and the Indian subcontinent,” Tsai said in a press conference in January as part of her presidential election campaign. “Strengthening our overall relations is a natural choice for Taiwan as we diversify our economic and trade ties.”
As part of this southbound policy, Taiwan’s new government will set up a national think-tank focused on Asean and South Asian studies later this year, as well as establish a policy office to integrate ideas and resources.
In the banking sector, local banks are allowed to increase their overseas credit exposure after the government relaxed the credit limit for foreign institutions earlier this year.
According to Taiwan’s Financial Supervisory Commission, domestic banks are now permitted to lend up to 15% of their net asset value to foreign institutions. Before the new rule came into effect in late May, local banks were allowed to have a maximum foreign credit exposure of 5%.
Taiwanese politicians estimate that such a policy could increase total borrowings by local banks by as much as $10 billion.
Domestic banks are also being encouraged to take over foreign banking institutions in Southeast Asia to increase their exposure to these fast-growing economies. That is in contrast to many European banks, which since the global financial crisis have either withdrawn from or shrunk their operations in these jurisdictions to reduce costs and adhere to new constraints on their use of capital since the Global Financial Crisis of 2008.
CTBC Financial has been one of the most active overseas buyers this year, even before the government came to power, having announced the acquisition of a 35.6% stake Thailand’s LH Financial Group for $469 million in March and Royal Bank of Scotland’s Malaysia operations for $188 million in April.
Other examples of foreign investment by Taiwanese banks include Cathay Financial’s minority investment in the Philippines’s Rizal Commercial Banking Corp in 2014 and Indonesia’s Bank Mayapada International last year.
E.Sun Financial also bought a controlling 75% stake in Phnom Penh-based Union Commercial Bank in 2013.
RATIONALE
Apart from the government’s politically motivated push, Taiwanese banks are also attracted to better growth prospects overseas. In Taiwan the banking scene is ultra competitive, said Ross Darrell Feingold, a Taipei-based senior adviser at DC International Advisory, a political risk and market access consultancy.
“Taiwan’s financial industry is over banked, over brokered, over insured, and over asset managed,” Feingold told FinanceAsia. “The current environment for financials to be profitable in Taiwan is stable but not exciting. With little potential for domestic expansion, Japan, Korea and Asean are the obvious potential options.”
According to Taiwan’s Financial Supervisory Commission, Asia accounted for 80% of Taiwanese banks’ overseas branches last year, an increase of 32% from a year earlier. Vietnam is the most popular destination with 55 Taiwanese bank branches as of the end of last year.
Feingold believes the expansion of Taiwanese banks in Southeast Asia could accelerate in the longer term as the new government discourages business expansion in China across all sectors.
LIMITATIONS
Taiwanese financial institutions intent on expanding southwards also face some headwinds ranging from protective policies in some Southeast Asian countries to a lack of operational experience in developing markets.
It is not a simple task to compete in Southeast Asian markets because many governments have imposed a 40% cap on foreign investment in local banks, Vivien Hsu, president of Taiwan’s Fubon Financial Holding, said in a press interview earlier this year.
DC International Advisory’s Feingold said taking minority stakes in Southeast Asian financial institutions could only be regarded as passive investments that provide stable returns but not something Taiwan’s new government is pushing for in its southbound strategy.
The outbound expansion strategy of many Taiwanese financial institutions has also been rather conservative to date. Rather than setting up multi-business platforms to penetrate local markets in several directions, Taiwanese banks have generally followed a strategy to support the needs of Taiwan corporates overseas by offering trade finance, foreign exchange, and corporate banking services to support manufacturing activities.
Most Taiwanese banks have pursued corporate banking in Southeast Asia instead of offering a full-range of banking services that include retail banking, wealth management, and sales of insurance-related products.
The only exception is Fubon Financial, which tapped into the South Korean insurance market through the purchase of a 48% interest in Hyundai Life Insurance last year.
So Taiwanese banks will need to be more aggressive and step out of their comfort zones if the government’s outbound expansion hopes are to be realised.
