The never-ending bank M&A story
Taiwan has a multitude of banks but lacks a ‘national champion’. Mergers are a possible way to achieve this but domestic politics and industry complacency make it a challenging task.
31 Oct 2019 | Daniel Yu and Peter Dedi
Taiwan’s 23 million people are serviced by 36 banks. And though most are profitable, the margins are thin and the competition is fierce. Is it time for another push at consolidation in an attempt to achieve economies of scale and create the island’s first regional banking player?
Taiwan’s top financial regulator Wellington Koo, chairman of the Financial Supervisory Commission, tells The Asset in an interview that Taiwan is always ready to encourage consolidation and that the island is trying to build a friendly environment for it. But it won’t be easy.
Banks in Taiwan are basically either state-backed banks, in which the government owns shares, or privately-held banks. Mergers involving state banks have been complicated by powerful trade unions that oppose such mergers fearing job losses.
“When you try to do mergers in Taiwan, the banks with government shareholders are more challenging because the legislators are more concerned about M&A involving these banks,” says Koo.
As for private banks, the impediments to consolidation are less of a financial or political nature and often of a more personal one, stemming from rivalry between owners. Taiwan’s private banks are often controlled by the island’s rich and powerful families.
As a result, Taiwan banks have the lowest concentration ratio among Asia’s largest financial systems, according to figures from Taiwan’s central bank.
This also leaves Taiwan without a “national champion” or a big player, such as mainland China’s ICBC or Bank of China, Malaysia’s Maybank or Singapore’s DBS.
Government and politics
For the past 20 years, there has been an ongoing discussion about the need for consolidation in the banking industry and successive governments have stated that consolidation is their policy.
But few attempts at consolidation have occurred over the years, and the one big attempt – Taishin Financial Holding Company’s proposed sale of its banking unit to state-run lender Chang Hwa Commercial Bank in 2013 – failed to come about after it was opposed by the Ministry of Finance. At the time, the match was described as ideal since Taishin was a specialist in consumer banking and wealth management, and Chang Hwa was known for its corporate banking prowess.
However, despite the talk of the need for consolidation, Taiwan’s multitude of banks are generally profitable and constantly building up assets.
Some banks believe regulators, policy-wise, haven’t encouraged consolidation, especially regarding the state-run banks.
Some people in the market suggest that one possible way to kick off consolidation can be for the government to select a bank to lead the way as a “national champion” and encourage private banks to hold stakes.
The market has even talked about the possibility of selling some state-run banks to the private sector. This would make it easier for the government to select one state-run bank, enable it to grow bigger, go overseas, and become a national champion.
However, the regulator has good reasons to be cautious about this, as merging government banks or moving them to the private sector might cause issues such as job losses.
Domestic complacency
Another explanation for the lack of an enthusiastic drive towards consolidation is that with so many banks competing, and surviving, the corresponding net interest margins are thin leaving them only able to cover expenses but not able to take risks.
These banks exist in a closed eco-system on the island, generating limited profits. In terms of the pace of scaling up, banks in Taiwan lag far behind peers from other markets such as mainland China. Some banks admit they have missed the opportunity to do so.
Another problem for banks, says Daniel Wu, president of CTBC Financial Holdings, is that the scale domestically is so small. For example, if one of the island’s blue-chip firms such as TSMC or Foxconn fail, the smaller banks will likely face serious problems.
The top five banks have only a 37% market share. Taiwan has been lucky in recent years, but “that’s not healthy because eventually something bad will happen,” Wu warns.
To reduce risk, Taiwan banks must look beyond the domestic market and expand their overseas operations.
Even though CTBC is in a dominant position as the biggest and most profitable bank in Taiwan, its strategy is to grow overseas. “Right now, our overseas net income before tax is 40%, and we will try to grow it to 50%,” Wu says. “We will try to distance ourselves from this [domestic] market because it’s too hard.”
FSC’s Koo agrees with this approach. “The banks in Taiwan understand that they need to be bigger so that they can be more competitive overseas. We have announced five companies which are too big to fail. We want their capital to be raised, especially to compete in overseas markets.”
Koo is interested in hearing from these banks on how they believe government policy can help support consolidation. “I still believe there is a chance for banks to integrate,” he says.
Chang-Ken Lee, president of Cathay Financial Holdings, believes consolidation may happen in 10 or 20 years - it did in Japan - but not right now as there is no urgent pressure or incentive to push them into it.
Taiwan’s rich base of customers, with its high liquidity, Lee reckons, offers Taiwan’s financial institutions a very good foundation to sell their products and as a result almost every bank feels it can survive.
Overseas expansion
If Taiwan [banks] want to enter the overseas market, Southeast Asia’s is the most-promising,” Koo says.
He sees online banking as the key to expansion. “Otherwise, how can Taiwan banks compete with overseas banks, such as an HSBC, if their size is not large enough? The internet may be the future.” 
Have you read?