Taiwan Banking Consolidation Remains Elusive

In one of only two cases of bank consolidation in recent years, Yuanta Financial Holding purchased Ta Chong Bank this January In one of only two cases of bank consolidation in recent years, Yuanta Financial Holding purchased Ta Chong Bank this January (Photo: CNA)
In one of only two cases of bank consolidation in recent years, Yuanta Financial Holding purchased Ta Chong Bank this January (Photo: CNA)

 In January, outgoing Financial Supervisory Commission (FSC) chairman William Ming-chung Tseng (now a member of the Legislative Yuan) highlighted the slow pace of consolidation in the banking sector as a major regret of his FSC tenure.

When he was appointed head of the FSC in 2014, Tseng called for consolidation in a bid to streamline Taiwan’s saturated banking sector and build regional champions. The FSC aimed to create one to two large regional banks, analysts say. Yet just two small-scale deals were completed in the domestic banking sector on Tseng’s watch: China Development Financial Holding Corp’s acquisition of Cosmos Bank in 2014 and Yuanta Financial Holding Corp’s purchase of Ta Chong Bank this January.

Hyper competition has long plagued the Taiwan banking sector as 38 banks offering similar services compete in the small domestic market. Surplus liquidity and weak domestic credit demand have pushed margins to wafer-thin levels.

As of December 2015, government data showed banks’ loan-to-deposit ratio as just 73.8%, down from 90% a decade ago. The banks have more than NT$9 trillion (US$269.7 billion) in idle deposits on their books.

State banks, which have an aggregate 50% market share by assets, tend to perform worse than their private-sector counterparts. Fitch Ratings analyst Cherry Huang notes that state banks “are not proactive in generating income.” The banks’ “implicit policy roles,” such as setting up branches in unprofitable regions and taking policy deposits at an above-average cost, weigh on their profitability.

Individually, the state banks are also too small in terms of asset size to compete in Southeast Asia against well-capitalized regional players like Singapore’s DBS. “They are not in as strong a position to withstand potential shocks that could emerge from overseas operations, especially in emerging markets,” Huang observes.

With that in mind, the FSC’s push for consolidation among state banks was well intended. But it has floundered in the face of opposition from powerful labor unions, Huang notes. Given overstaffing at state banks, “it is impossible that there would be no layoffs in the event of a merger,” she says.

Furthermore, consolidation would be unlikely to buttress the state banks’ credit strength in the near term, while it would “reinforce the systemic importance of the banks which merge, and government’s propensity to support them,” she says.

Shifting gears

In March, the FSC signaled that it was shifting gears with respect to its promotion of consolidation. The regulator said it supported recommendations from state banks that do not involve regulatory amendments, such as altering guidelines to permit the buying and selling of bank branches in Taiwan “between peers.”

“The government’s stance is in support of consolidation,” FSC Banking Bureau Director-General Austin Chan told reporters at a press conference. “Up to three banks have indicated their interest in purchasing branches from their peers.”

The regulator has also voiced support for the increased digitization of Taiwan’s financial-services sector. Banks hope to implement video authentication to verify the identity of clients applying online for loans and credit cards. In addition, Fitch Ratings’ Huang expects the FSC to help banks restructure their branch organizations. “The regulator sees branch value diminishing in the medium to long term as a growing number of transactions are being processed online,” she says.

Following a mid-March meeting, the FSC is currently evaluating several other requests from the nation’s banks. These include the easing of restrictions on the transfer of bank branch licenses into Taiwan’s special municipalities, of which there are now six (Taipei, New Taipei, Taoyuan, Taichung, Tainan, and Kaohsiung). Huang says that previously the regulator typically did not grant permission for such moves, which is a matter of regulatory discretion rather than a stipulated regulation, to avoid an over-concentration of branches in high-density areas.

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