Taiwanese banks attract buyers

Strategic buyers as well as financial sponsors are acquiring banks in Taiwan, attracted by the high-growth opportunities on offer.

The banking sector in Taiwan has been a hotbed of activity in 2007, continuing a trend that started last year. Foreign banks are seeking opportunities to acquire other banks in order to grow their presence, while private equity firms are buying into opportunities to extract value from the islandÆs institutions.

ôTaiwan is rife for banking sector consolidation as it is a fragmented market offering reasonable valuations,ö says Willard McLane, head of financial institutions at Morgan Stanley. ôThe island is also strategically important as it offers a platform to do business in other fast-growing economies in the region.ö

For global banks, Taiwan presents some compelling prospects. As income levels rise, there are more opportunities to provide lucrative wealth management services. On the corporate front, Taiwanese companies are registering high rates of growth and a number of them are expanding into other Asian and non-Asian markets.

Further, TaiwanÆs government does not currently allow domestic banks to open branches in mainland China. Foreign banks can do both, which allows them to leverage their existing branch network and create follow-on revenue-earning opportunities. Thus, foreign banks have an immediate advantage over TaiwanÆs domestic banks in servicing China.

From a valuation perspective, the Taiwan stockmarket has not witnessed the meteoric rise of a number of other Asian markets, perhaps because political uncertainties have had an impact on performance. Also, retail investors who comprise a large part of the investor base, continue to focus on book value rather than earnings when valuing stocks.

In June, ABN AMRO announced that it had emerged the winner in a government auction for the loss-making Taitung Business Bank. ABN AMRO added TaitungÆs 32 branches to its own five and significantly grew its footprint. Taitung had already been referred to the Financial Restructuring Fund (which in Taiwan is referred to as the RTC because the US fund upon which it was based is called the Resolution Trust Corp) for receivership and was sold via a government-initiated auction. The auction, led by Pricewaterhouse Coopers, was hotly contested as the winning bidder got non-location specific branch licenses, which means ABN AMRO can now relocate any branches it wishes.

Citi made its own Taiwan announcement in April, acquiring the Bank of Overseas Chinese for NT$14.1 billion ($427.3 million). Citi de-listed BOOC from the bourse and then integrated its own Taiwan operations into BOOC creating a combined entity with 66 branches. BOOC was profit-making and the deal was transacted at a book value multiple of 1.3 times.

Multiples were higher when Standard Chartered acquired Hsinchu International Bank in the fourth quarter of 2006 û the Credit Suisse advised sale began the current wave of foreign bank activity. Standard Chartered, advised by Morgan Stanley and UBS, paid around 2.3 times book value, reflecting the larger size of the target and the transformational nature of the deal for Standard Chartered.

Branch licenses in Taiwan were in focus again when Standard Chartered announced the acquisition of American Express Bank on September 18. In its analyst presentation, Standard Chartered highlighted the valuable branch licenses it would add in Taiwan.

The decision of the owners of both BOOC and Hsinchu to sell out is indicative of the realisation dawning on a number of banks in Taiwan, say sources, that the sector is growing more competitive and those who succeed will need capital: financial, technological and intellectual capital.

"We have been expecting consolidation in Taiwan's banking sector for some time,ö says Roger Denny, head of M&A Asia at Clifford Chance. ôAs happened in Hong Kong in the 1990s, it has been somewhat slow in coming but it does appear that there is finally some momentum."

The opportunity to create value in the banking sector is also attracting private equity firms to Taiwan. Indeed, Taiwan has become the new Korea for financial sponsors investing in banks.

On August 31, SAC Private Capital Group (Steve CohenÆs private equity fund) and GE announced they would take over loss-making Cosmos Bank. The acquirers, represented by Citi, will invest $900 million in Cosmos for new shares that will recapitalise the bank. (Cosmos currently has a negative book value.) In addition a debt-to-equity swap with a haircut will take care of another $400 million of debt on CosmosÆ books. The deal announcement was a photo finish as it came just days before Cosmos would have had to be referred to the RTC.

GE was already a shareholder in Cosmos, attracted by the opportunity to buy into one of the leading players in the ôcash cardö business in Taiwan. Cosmos was having some asset quality problems when GE invested but, as consumer credit problems intensified and the cycle went down, the financial situation at the Taiwanese bank deteriorated much faster than anyone could have expected.

But the ômeaningfully negative book value did not deter a number of private equity firms from scouting around the opportunityö, comments one banker. Bain and KKR are said to have been among players who were in the running for the asset. Morgan Stanley conducted a limited auction on behalf of Cosmos. The SAC-GE investment emerged as the best candidate on various parameters.

ôGE felt the best solution for Cosmos Bank was to co-invest with a financial investor who was experienced in bank turnarounds,ö says Morgan StanleyÆs McLane.

Other private equity firms that have invested in Taiwan in 2007 are Carlyle and Longreach.

In July, Carlyle announced it will lead a consortium that will invest NT$21.5 billion in Ta Chong Bank for a 35% stake. Carlyle, advised by Morgan Stanley, acquired the stake using a combination of common shares, preferred shares and convertible bonds. Ta Chong, represented by UBS, had total assets of NT$337 billion and 50 branches in Taiwan. It had turned loss-making in the first six months of calendar 2007.

Japanese fund Longreach is investing NT$23 billion to acquire 51% of EnTie Commercial Bank. EnTie, represented by Lehman and Aexcel Corporate Finance, has 53 branches and was loss-making in calendar 2006 and the first half of calendar 2007. The price represents a multiple of 1.4 times book value or 2.5 times adjusted book value after accounting for some provisions and losses.

The structure whereby most of the funds were invested in new and convertible perpetual preferred shares of EnTie (with only a small portion being paid to existing EnTie shareholders) enabled Longreach, advised by Citi, to put most of its investment to work to turn around the bank. Longreach also structured capital protection for the loan portfolio of EnTie via a convertible bonds issue to the existing shareholders, Hung Tai group.

ôWe expect TaiwanÆs banking sector to remain active,ö says Morgan StanleyÆs McLane, who puts this into context with the rest of Asia by adding: ôWe are optimistic about bank consolidation across Asia although some markets, for example China, could witness more outbound activity in the medium term and others such as India could take a little longer given the prevailing regulatory framework.ö

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