Taiwan Banks See an Opening in Southeast Asia

Exposure declines in China, though it remains an important market for serving Taiwanese SMEs.

Taiwan has long suffered from a saturated domestic banking market, prompting its banks to foray abroad for new business opportunities. Under the administration of former President Ma Ying-jeou, banks took advantage of the cross-Strait detente to open numerous branches in China.

More recently, Taiwanese banks have targeted Southeast Asia, and they now have a presence in every ASEAN country. The accelerated push into Southeast Asia is part of the Tsai Ing-wen administration’s New Southbound Policy aimed at reducing Taiwan’s economic reliance on China.

Government officials say that the New Southbound Policy is bearing fruit for the financial sector. In the first quarter of this year, Taiwan banks posted record earnings of NT$1.72 billion (US$56.95 million) in countries included within the scope of the policy, which besides ASEAN nations also includes India, Pakistan, Australia, and New Zealand. The highest earnings were recorded in Vietnam (NT$700 million), Cambodia (NT$400 million), and Australia (NT$200 million).

The Financial Supervisory Commission (FSC) has encouraged the state-owned Export-Import Bank of the Republic of China to provide guarantees and insurance for trade contracts. As a result, banks have been more inclined to lend to Taiwanese firms engaged in business deals in the region.

In an email response to Taiwan Business TOPICS, the FSC noted that it has approved the establishment of 10 new outlets of Taiwanese banks this year in Australia, Southeast Asia, and India. Taiwan Cooperative Bank will open a branch in Melbourne; Taiwan Cooperative Bank, Chang Hwa Commercial Bank, and First Commercial Bank will open new branches in Cambodia; Chang Hwa Bank and Taiwan Business Bank will add branches in the Philippines; Bank of Taiwan has permission to set up representative offices in Vietnam, Thailand, and Indonesia; and the Export-Import Bank will open an office in Mumbai.

Local regulations will play an important role in the ability of Taiwan banks to grow their market share in ASEAN countries, observes Cherry Huang, a director at Fitch Ratings in Taipei. “In countries where foreign banks are permitted to have full ownership of local banks, it’s possible to gain a stronger foothold than when only partial ownership is allowed,” she says.

For instance, Yuanta Securities last September acquired full ownership of Tong Yong Savings Bank in the Philippines, which includes headquarters in Manila and two branches in Alabang and Ortigas. The acquisition “not only represents an important milestone in our entry into the Southeast Asian market, but also a foundation for our future development in the region,” said Yuanta Commercial Bank Taiwan president Dan T.Y. Chang in a press release.

The ribbon-cutting ceremony in Manila in September 2016 for Yuanta Savings Bank (Philippines), the new name for what had previously been the Tong Yong Savings Bank. Photo: CNA

Chang lauded the Philippines’ close economic ties with Taiwan and said it “is the ASEAN member nation with the most stable economic growth.” The Philippines currently has seven Taiwanese bank outlets, as does Cambodia. Within Southeast Asia, Taiwanese banks have the most outlets in Vietnam (12), Singapore (12), and Myanmar (12).

Singapore is a unique case, Huang observes. While Taiwanese banks are generally following their manufacturing customers to ASEAN markets or seeking opportunities within the region’s overseas Chinese communities, in Singapore they are involved in regional loan syndication and wealth management because of the city state’s strength as a financial hub.

Meanwhile, Cathay Financial Holding Co., Taiwan’s largest financial group, will gain a foothold in the Malaysian market with the acquisition of the Bank of Nova Scotia’s Malaysia unit. The FSC approved the 1.1 billion ringgit (US$258.58 million) deal in June. Since the Scotiabank unit holds a commercial banking license, Cathay will become the first Taiwanese bank able to conduct business in the local currency. That’s a major accomplishment, as Malaysia rarely issues commercial banking licenses. They were last issued in 2010 to five foreign financial groups.

The surge of interest among Taiwanese banks in ASEAN markets comes as exposure to China steadily falls. In the quarter ended March 2017, lending and investment – as well as inter-bank loans and deposits by Taiwanese banks in China – totaled NT$1.54 trillion, down from NT$1.62 trillion a year earlier, according to the FSC.

In an emailed response to a query by Taiwan Business TOPICS about the reasons for the decline, the FSC said: “Taiwanese banks decide for themselves whether to invest in the mainland market based on an evaluation of global market conditions. The FSC respects their decision.” The FSC added that investment conditions for Taiwanese banks in China remain normal.

Approaches to the China market

Taiwan’s state-owned and private banks approach the Chinese market differently, observes Huang of Fitch Ratings. “For political reasons, state banks need to be very careful about their China exposure, but for private banks, it’s natural for them to serve Taiwanese corporates in China.”

For Taiwan’s SMEs operating in China, it is difficult to get a loan from Chinese banks, which historically prefer to lend to large firms, Huang notes. Taiwan banks thus play a valuable role in the China market for Taiwanese businesses, who can use their assets in Taiwan as collateral for loans.

Still, Taiwanese banks have not been able to gain significant market share in China despite a concerted push into the market during Ma Ying-jeou’s presidency. The primary problem is that “it’s very difficult to get the proper licenses for conducting RMB business that allow a bank to penetrate the local retail market,” Huang says.

Nor have Taiwanese banks been able to grow their presence in China through M&A. A recent deal that would have seen Taiwan’s CTBC Bank acquire a 100% stake in Hong Kong’s CITIC Bank International, a subsidiary of China’s CITIC International Financial Holdings, for NT$11.67 billion (US$368.63 million), and CITIC Bank take a 3.8% stake in CTCB, fell through last August. Reportedly, the deal collapsed because CITIC did not meet Taiwan’s requirement that any Chinese bank investing in a Taiwanese counterpart must have had branches in OECD countries for more than five years.

At a Beijing press conference, CITIC president Sun Deshun attributed the collapse of the deal to regulatory travails and an inability to agree on certain commercial terms. He said that politics did not play a role in the banks’ decision to pull out of the deal. “There is not a single political element to it. We are a commercial bank. We can’t play a leading role in politics,” he was quoted as saying by Reuters.

Sun’s statement could be seen as misleading. CITIC Bank International is part of the mammoth state-owned CITIC Group, founded in 1979 by billionaire (and later Chinese vice president) Rong Yiren. CITIC was established with the blessing of former Chinese paramount leader Deng Xiaoping and has long worked closely with the Chinese government on major economic initiatives.

It is hard to imagine the ruling Democratic Progressive Party (DPP) government giving the green light to a tie-up between a local bank and a Chinese counterpart with such deep ties to the Communist Party establishment.

Liang Kuo-yuan, chairman of the Yuanta-Polaris Research Institute, says that Taiwanese regulators are also concerned about China’s mounting debt – more than 300% of GDP, according to the Institute of International Finance – and how it could affect Taiwan banks with China exposure. Liang notes that Chinese President Xi Jinping highlighted the Chinese Communist Party’s concerns about the issue in a July speech. “We can be certain China’s debt situation is worrisome when the Chinese president is talking about it this directly,” he says.

Becoming globally competitive

One of the main reasons Taiwanese banks have focused on the China market is that the two sides of the Taiwan Strait share a common language and culture. To be sure, the political and business environment is different in China, but that has not deterred Taiwanese businesspeople.

“Taiwanese banks haven’t had to develop a global mindset to do business in China,” says Hank Huang, vice president of the Taiwan Academy of Banking and Finance. “For the most part, they simply serve the same manufacturing customers as in Taiwan. Relying on these customers is not a strategy for sustainable international expansion.”

In ASEAN there are opportunities for Taiwanese banks, but they will need to adapt to local culture – which is different in each Southeast Asian country – and vie with global competitors for market share, he observes.

Taiwanese banks can initially serve the local market in Southeast Asia by focusing on syndicated loans for state banks with acceptable investment ratings, says Fitch Ratings’ Huang. In that case, “the level of risk is manageable,” she says.

Meanwhile, lending to less reputable entities in the region is fraught with risk. “There are transparency problems; fraud and embezzlement are not uncommon,” she says. “It’s very similar to China.”

In the case of China, Taiwanese banks found that out the hard way when a flagging Chinese footwear maker defaulted on a US$60 million syndicated loan in 2014. Cathay United Bank and five other Taiwanese counterparts participated in the unsecured loan to Fujian Ultrasonic Shoes Co. arranged by Nomura Hong Kong. Shortly after Ultrasonic Shoes received the funds, the CEO and COO absconded with most of the company’s cash.

The Chinese footwear maker wasn’t the only party guilty of wrongdoing. Nomura failed to provide its US$9 million portion of the loan, according to a June 2016 report in the English-language Taipei Times. Instead, Ultrasonic Shoes provided the cash after Nomura allegedly told the firm that such practice was standard in international syndicated loans in China. If Ultrasonic Shoes failed to put up the funds, the deal would collapse, Nomura reportedly informed the company.

By email, the FSC said that Taiwanese banks will need to strengthen compliance controls and embrace financial technology (fintech) as they expand overseas. The banking industry should use fintech to improve the efficiency of its services, the FSC said.

The FSC also said that the banking industry should “actively cultivate international financial talent.” Yuanta-Polaris’s Liang agrees. “We need to ask ourselves why Taiwan’s first push into Southeast Asia [during the mid-1990s under President Lee Teng-hui] was unsuccessful,” he says.

Liang acknowledges that the Asian Financial Crisis gave some businesses cold feet about Southeast Asia, but he notes that Taiwanese businesspeople struggled with the foreign languages and cultures of ASEAN countries. Overcoming that challenge is not something that will happen overnight, but utilizing global talent can make an important difference, he concludes.