Taiwan’s ambitious plans to develop offshore wind power spur a need for project financing.
International banks have held a rather limited market share in Taiwan, but one area in which they have a potential competitive edge by virtue of their technical expertise in the financing of major projects. In recent years, such projects have been scarce, but that may soon change as a result of the Taiwan government’s determination to develop green energy.
Taiwan aims to meet 20% of the island’s energy needs with renewable sources by 2025 and has been highlighting the development of solar and offshore wind power as means to achieve that goal. While regulatory holdups and environmental impact concerns have delayed progress, projects requiring financing are gradually getting underway.
“It’s the first time in maybe five or six years that there are actually things that need to be financed,” says Godwin Chang, Group Country Head of Société Générale (SG). “Local banks don’t have the expertise or the appetite to handle risk assessment for offshore wind projects on a project-finance basis, but many of the foreign banks like SG do. We know how to assess the risk and how to package and structure the project financing. These projects offer the opportunity of combining the foreign banks’ project-finance expertise with the very strong funding capabilities of the local banks.”
The government will need to provide steady guidance to steer these projects in the right direction, creating the foundation for them to be clearly financeable from an international perspective, says Chang. He emphasizes that power purchase agreements must be in line with international banking standards, and cautions that the government will have to show flexibility in designing incentives to attract both foreign and local investors to build the necessary infrastructure for the offshore wind projects.
“Foreign banks can help in developing the local expertise in project finance and take part in the financing, but they must also involve the local banks, because most of the financing will be done in NT dollars,” Chang explains. “There are a few projects already getting started. Once one or two projects are done and we develop a workable template, things will start to move very quickly. There’s a lot of foreign money ready to pour into these projects.”
Cynthia Chan, Chief County Officer of Deutsche Bank in Taiwan, notes that the development of offshore wind power “provides a lot of business opportunities for banking institutions like us who can provide various funding options, [including] acting as underwriter or adviser for foreign issuers of Formosa Green Bonds.”
In July, Crédit Agricole Corporate and Investment Bank became the first foreign issuer of a Formosa Green Bond. The US$120 million issuance was joint-lead managed by domestic underwriters including Cathay United Bank, Capital Securities Corp., E.Sun Commercial Bank, KGI Bank, Mega Securities, and Taipei Fubon Commercial Bank.
As leaders setting the bar in banking around the world, foreign banks in Taiwan are committed to sustainable investment. “Most international banks today will not, for example, finance coal-fired plants, because of the environmental impact,” says Godwin Chang. “So if you’re not financing coal-fired plants, you need to find other business to do. These renewable projects are perfect: good for the economy, good for the environment.”
“Expertise is really needed to properly structure the financing,” says Chang. “There’s a lot of appetite by the foreign banks to do that, and many international developers obviously want to do a project in Taiwan, because it’s a new area where they can grow very quickly. The money and the willingness to invest in Taiwan are there, provided the structure is sound. Unfortunately, we’re not quite there yet.”
A crowded market
In what is a highly crowded and competitive market dominated by state-owned financial institutions and marked by tight profit margins, the opportunities for foreign banks are based on their global connections and unique products and services.
Anthony Lin, who moved from Shanghai to Taipei in February to become CEO of Standard Chartered Bank (Taiwan), says he is undaunted by the crowded banking landscape since “we can find our niche, find our strength, and play it well.” Noting that Taiwan is an attractive market of 23 million people and over 1.3 million small and medium enterprises (SMEs), he says the task is to “align and adjust ourselves to capture the right opportunities.”
The market is crowded in part because it boasts unique assets. “Taiwan investors are very sophisticated, and investors here structure their investment options for an enhanced yield,” observes Godwin Chang. Internationally it is quite rare for banks to have departments devoted specifically to structured investment products, he says, but in Taiwan most banks maintain such specialized departments. Customers look to foreign banks to bring new product ideas and innovative services to the Taiwan market.
The Taiwanese investors also have the resources to invest. “One of the most important characteristics of the Taiwanese financial market is its abundant liquidity,” explains Cynthia Chan of Deutsche Bank. “With deep pockets to dip into, Taiwanese investors have a constant appetite for yields across asset classes and currencies. This brings a lot of business and innovation opportunities for financial services institutions who can structure products to bridge the two sides of the markets: companies seeking financing and investors seeking returns.”
Foreign banks, with their worldwide network of products and solutions, excel at serving as that bridge. Their scope of financial services runs the gamut from cross-border trade financing and foreign exchange deals to M&A advisory, offshore investment, and cash management. “I see foreign banks’ importance in Taiwan continuing to deepen as the country becomes more and more embedded in the intra-regional and global trade and investment flows,” Chan adds.
Paulus Mok, Country Officer of Citigroup in Taiwan, says “the roles that foreign banks have been playing in Taiwan include initiating product innovation, providing top service quality and global connectivity, and introducing investment into Taiwan.” He notes that Citi has maintained a leading position in the market.
“Taiwanese companies are emerging as champions in many industries and we play a very significant role in helping them continue to expand overseas,” says Mok. “We provide a full range of financial services to help them build competitive and efficient businesses by supporting their efforts to scale globally. Such services include capital markets financing, hedging and cash management solutions, M&A advisory, etc.”
Global banks are important partners for global companies, Mok says. “Citi is a truly global financial institution with an unprecedented network around the world. If Taiwanese companies want to expand their businesses no matter in the U.S., Europe, Latin America or Asia, we’re there to support and would like to become their most important and most trusted bank.”
Major foreign banks are also well-positioned to provide regional services to Taiwanese companies, Mok says. “Our SME clients, which have factories outside of Taiwan, are served by Citi in China, Vietnam, Indonesia, and other countries. We have Mandarin-speaking teams in those areas who can support them in their own language.”
Regulation vs. innovation
In many ways, Taiwan offers a favorable environment for the banking business. “Taiwan is a mature market in terms of well-established regulations and strong government stability,” says SG’s Chang. “The transparency is quite good, with strong IP protection and good rule of law.”
Chang also credits the government with realizing about a decade ago that the banking industry needed to consolidate, and consequently allowing foreign banks to expand their market reach by buying local banks. “All the multinational banks that have retail operations in Taiwan didn’t start it from scratch – they bought a local bank,” he says. “This helped improve the local banking environment, as the foreign banks were able to bring in international best practices and global access to new products.”
Yet as rapid advances in technology radically transform how banks interact with consumers, Chang sees the need for government policy to respond more rapidly. “What’s hindering the growth of Taiwan is conservative policymaking,” he says. “It’s too difficult for the government to adapt quickly to the changing environments by revising regulations. The biggest hindrance to growth is that regulators” tend to be overly protective of investors. “For that reason, they are reluctant to open things up quickly and allow market forces to operate fully. Without that, it will be very difficult for Taiwan to become a financial hub.”
Multiple banking executives interviewed by Taiwan Business TOPICS cited regulatory obstacles to needed expansion of product development and distribution opportunities as a crucial issue. They cited currency- and interest-rate-linked products as well as offshore bonds and bond platforms as areas in which business innovation is stifled by conservative regulations.
At the same time, Citibank’s Mok considers the regulatory environment could also be a strategic opportunity for foreign banks. “The world after the financial crisis is definitely a place with much more stringent regulatory requirements for financial institutions,” he says. “Foreign banks operating in Taiwan must meet both the local regulator’s requirements and certain global standards. For example, the standards of cybersecurity and AML (anti money-laundering) are emerging quickly around the world. Being one of the leading institutions in observing these standards, Citi can make a contribution on sharing best practices with our Taiwan regulators and banking peers.”
Mok notes that while many local banks are expanding their scope of services by becoming financial holding companies, foreign banks have generally been moving in the opposite direction since the financial crisis of a decade ago. “Before the crisis, many banks used to provide a rather wide variety of products and services to clients, more like a financial supermarket. But today institutions like ourselves focus on going back to the basics of banking. Citi’s mission is to serve as a trusted partner to our clients by responsibly providing financial services that enable growth and economic progress. We are deeply committed to helping our clients get connected to the world with products and solutions that can truly serve them in a very effective way.”
Global financial institutions have revamped their structures to prioritize financial prudence and security, Mok says. “In the last few years, we’ve become simpler, smaller, safer, and stronger. Whether you look at our liquidity positions or capital adequacy and leverage ratios, it is evident that we are championing those values in the industry.”