Cross-Straits relations have come a long way since the days when the People’s Republic of China and its smaller offshore rival the Republic of China would automatically sever diplomatic links with any country that recognised the other as the legitimate government of China. Since President Ma Ying-jeou took office in Taiwan 2008, the two have signed more than 20 trade and investment agreements, binding them ever closer.
Rumours that this rapprochement might culminate in a Stock Connect scheme, similar to the one between Shanghai and Hong Kong, sent Taiwanese bank and broker share prices soaring in late April. The benchmark Taiwan Stock Exchange Weighted Index briefly even eclipsed 10,000 for the first time since 2000 before falling back again.
Athena Wu, executive vice president at Fubon Securities, told FinanceAsia that she is optimistic a scheme with either Hong Kong or Shanghai could be up and running by the end of the year. “It could help increase trading volumes,” she said.
“Taiwan can also provide an alternative liquidity pool for Chinese companies as it can take a long time to get listing approval on the Mainland,” she said. “In particular, Taiwan could become a tech hub for the Greater China region. Our capital markets have a lot of expertise handling tech companies and investors here like these stocks.”
Allen Wu, senior vice president of Yuanta Financial Holdings, agrees. “From Yuanta’s point of view there is a realistic chance the scheme will be established,” he said.
However, differences of opinion emerge on the likely timing. Many believe Taiwan’s forthcoming presidential and legislative elections in January 2016 will stymie further progress until it becomes clear whether the pro-China Kuomintang or the more independently minded Democratic Progressive Party will be put in charge.
Nevertheless Taiwan’s economic engagement with China has finally enabled its banking sector to embed itself within the wider Asian region. The domestic regulator, the Financial Supervisory Commission, is actively pushing the country’s financial holdings companies overseas after years of failing to engender much merger activity in the overbanked domestic market.
In January the FSC’s amendment to the Banking Act was passed, which eased overseas investment limits from 40% of paid-in capital (share capital) to 40% of net worth (assets minus liabilities).
Fitch Ratings estimates that the revised Banking Act has released NT$400 billion to NT$500 billion ($13 billion to $16 billion) in capital for potential offshore acquisitions.
The country’s financial holdings companies all want to become regional players and their expansion has a twin thrust.
China has always been the prime target given the number of Taiwan’s high-tech manufacturers already operating on the mainland. Fitch estimates that after five years of growth at a 20% compound annual rate, Chinese loans will account for about 12% of the Taiwanese banking total by 2016.
That has made Taiwanese banks big players in both US dollars and renminbi. The rapid growth of the Formosa bond market – bonds issued in Taiwan in foreign currencies – is a direct result of the wash of foreign currency flowing through the Taiwanese banking system.
Most of Taiwan’s big financial firms already have one or two bank branches in China and all plan to scale up.
The most active to date has been Fubon Financial Holding. Last year, it became the first Taiwanese financial holdings company to own a Chinese bank following its acquisition of First Sino Bank, now re-named Fubon Bank (China), which has 15 branches. In May it also became the first Taiwanese entity to secure regulatory approval to buy a Chinese futures firm, Huishang Futures.
Still, foreign bank branches are currently limited to wholesale foreign exchange and renminbi business. To overcome this Mega Financial Holding Company, which owns Mega International Commercial Bank, aims to set up a wholly owned subsidiary in Shanghai that will handle all of its China business, officials told FinanceAsia.
Similar moves are afoot at CTBC Bank. “We’re reorganising all our Chinese branches under sole ownership to facilitate more rapid expansion,” James Chen, chief executive officer and president of CTBC Bank, said.
CTBC’s big recent international push has been in Japan where it acquired Tokyo Star Bank for a knock-down price of $519 million in June 2014. The purchase had a big impact on the bank’s 2014 earnings (a NT$14.8 billion addition to non-operating income) but also on its non-performing loans ratio (0.94% in the fourth quarter compared to 0.27% excluding Tokyo Star).
Management believes it can now import its great strength from Taiwan’s retail banking market. “Tokyo Star Bank gives us an entry point to introduce wealth management products into Japan,” CTBC’s Chen said.
But the Taiwanese banking sector’s second major outward thrust has been in the Asean region, particularly Indochina. Again, it has been a case of following the client.
As Daiwa banking analyst Christie Chien explained, “More and more Taiwanese manufacturers are setting up production bases because of rising labour costs in China. Taiwanese banks are also very good at managing [small- and medium-sized enterprise] loans, an area where Asean banks are relatively weak.”
In 2014 First Financial Holding, Cathay Financial Holding, and E. Sun Financial Holding received permission to open bank branches in Myanmar. Mega will join them this year. First and Cathay are also opening branches in Laos, while Mega opened its second Cambodian branch in Phnom Penh in February.
Further south, in mid-May, CTBC became the first Taiwanese lender to obtain permission to set up a representative office in Malaysia, which is expected to open by the end of the year.
Cathay is hot on its heels. In December it paid $400 million for a 20% stake in the Philippines Rizal Commercial Banking Corp. One month later it paid $271 million for a 40% stake in Indonesia’s PT Bank Mayapada and is now present in nine Asean countries.
First FHC has 11 offices across Asean and has said that it may raise new capital to fund future expansion, particularly in two favoured markets: Thailand and the Philippines.
Taiwanese financial holdings companies believe they have plenty to offer. “The high quality of Taiwanese management is recognised across Asia. Intense competition in our home market has made the sector very proficient in terms of product design service standards and asset quality,” Fubon President Vivien Hsu said.
Aside from providing a more diversified source of income, cross-border growth may also finally help Taiwan’s banks to improve their paltry net interest margins, another by-product of fierce domestic competition. At 3.12% at the end of the first quarter, Thai banking net interest margins are heading towards triple their Taiwanese counterparts.