Financial Services

Developing Taiwan's Financial Services Industry to be a Regional and Global Player

January 1, 2005 marked the kick-off of the government's four-year development plan to promote twelve service sector industries in Taiwan. Chief among these industries is financial services, the development strategy and outlook for which has been closely watched by local and foreign investors alike.

The Regional Financial Services Center Promotion Plan has played a pivotal role in the development of Taiwan's financial services industry. Emphasizing the principles of liberalization, innovation and efficiency, the plan aims to build a finance and banking environment and legal framework in line with international norms and that effectively supports industrial development needs, raising Taiwan's overall competitiveness in the financial services industry, with the ultimate goal of transforming Taiwan into a regional financial services center. More specifically, the plan has established five major strategies and 50 response measures to create an overall sound financial and banking environment, promote Taiwan as a regional hub for raising investment capital, promote asset management services, develop diversified financial services, and strengthen the fundamentals of Taiwan's financial markets. Targets under this plan include:

• raising the financial services industry's GDP contribution to 13% by 2008;
• having between one and three Taiwan-based banks with a regional operational footprint;
• increasing foreign shareholding in the local stock market to 25%;
• doubling the capital raised by international companies and organizations in Taiwan;
• increasing the securitization of assets by a factor of four; and
• and to grow the total asset value of financial institutions as a whole by 30%.

On October 20, 2004, the president's economic advisory group approved the Finance Industry Reform Phase II Goals submitted by the Council of Economic Planning and Development. Targets to reach by the end of 2005 goals included bank mergers to create three banking institutions with more than 10% market share each and the reduction of state-controlled banks to half the current number from 12 to 6. Also, a target for reducing the number of financial holding companies from 14 to 7 through mergers by the end of 2006 was set. Moreover, a target of at least one financial institution that is 100% foreign-owned and operated or that is publicly listed in an international market was set to promote foreign investment in Taiwan's banking and finance services and speed up the industry's expansion and internationalization as a whole.

The quick pace of measures carried out to meet these goals, such as offloading bad debt and reducing the overdue loan ratio of the banking industry, shows the government's determination in developing and enhancing Taiwan's financial services industry. Meanwhile the average NPL ratio of domestic banks has fallen from more than 8% in 2002 to less than 2.5% in the first half of 2007, signaling a vast improvement in asset quality. During a second round of financial industry reforms dozens of mergers were instituted, but as of March 2007 Taiwan still had 14 financial holding companies. Market consolidation gained new momentum in 2006 with an influx of foreign investment on an unprecedented scale. These included foreign financial institutions buying stakes in domestic banks such as Japan’s Shinsei Bank investing in Jih Sun Holdings, GE Consumer Finance from the United States investing in Cosmos Bank, and Singapore’s Temasek Holdings in E. Sun Bank as well as the first foreign takeover of a domestic bank as the Standard Chartered Group bought Hsinchu International Bank.. In April 2007 Citigroup completed a merger agreement with the domestic Bank of Overseas Chinese (BOOC) and in June 2007 ABN-AMRO won a public tender for Taitung Business Bank..

Policy Changes

In pursuing its goal of becoming the financial center of East Asia, Taiwan has revised many of its financial policies to bring them in line with international standards. Examples of such policies include:

• Lifting constraints on offshore banking units (OBUs) -- Policies include expanding the depth and breadth of foreign currency market, and broadening the offshore banking units market and foreign currency overnight rate market to attract foreign financial institutions and enhance Taiwan's position as a regional funding center. Taiwan will therefore expand its stock and bond markets, improve market regulation and efficiency, and promote the internationalization of the securities market. Foreign investors can buy and sell securities, bonds and public warrants freely without restrictions of time or location, have more versatility in managing investments, and vitalize the market.
• Ongoing liberalization of capital markets for foreign investors -- the ROC government has opened up its stock market to foreign investors with minimal restrictions. With the introduction of more financial commodities in the market and more diversified channels for funds, Taiwan's capital markets are opening to increasing foreign investors, who are now allowed to manage derivative financial products instead of spot commodities. In addition, foreign capital is now permitted in the private placement market, and these newly available commodities are attracting more foreign investment.
• Increasing the liquidity of financial capital in the stock market -- The Securitization of Financial Assets Law was implemented on July 24, 2002, with the aim of improving and increasing the liquidity of financial assets, including fully liberalized foreign investments in the public and private placement of securitized financial assets. Several domestic banks are in the process of cooperating with foreign financial institutions in this regard.

Further Enhancing Taiwan's Position as a Regional Financial Services Center

Over the next few years the government will be focusing on the following objectives to further enhance Taiwan's position as a regional finance hub:

• Bringing monitoring and supervisory systems that regulate financial markets and banking in Taiwan in line with international standards, for example revising regulations on capital adequacy ratios to meet BASEL II requirements.
• Improving corporate governance by requiring financial institutions to strengthen their internal control systems.
• Easing restrictions on the hiring of foreign banking personnel.
• Further encouraging mergers between banks and financial institutions; growing the overall size of Taiwan's financial services market; and enhancing the operational efficiency of Taiwan's financial services industry.

Moreover, to improve the regulatory framework and administrative efficiency of Taiwan's financial services industry, the government is working on the following:

• Creating a Single Financial Services Supervisory Body: As global financial services have already crossed over into other business areas such as insurance, securities, etc., finance and banking groups have been compelled to follow suit, with laws and regulations being revised to create a single law and supervisory body to meet the changing needs of a globalized economy.
• Establishing a Financial Services Law that focuses on functional rather than business issues: Presenting a greater challenge, this plan aims to integrate all of Taiwan's finance-related laws and regulations such as the Banking Act, Securities and Exchange Act, Trust Act, etc. The Financial Supervisory Commission is drafting a comprehensive Financial Services Act with the aim of creating a comprehensive framework that will meet future market demand for diverse offerings in the financial services industry.
• Shifting model of individual industry (banking, insurance, securities, etc.) supervisory controls to a more functional supervisory approach.

Comparison of Taiwan, Hong Kong, Singapore and South Korea Financial Markets

Notes: (1) 2002 data; (2) includes direct and indirect investment; (3) market turnover (4) shareholding (capital)..

Source: Financial Supervisory Commission, Yazhou Zhoukan, WFE Annual Report 2006, Hong Kong, Singapore and Korean Government websites

 

Taiwan's Competitive Advantages & Market Strengths

Taiwan's financial services industry is relatively large and enjoys strong demand for sophisticated products. Aside from strong economic fundamentals and high sovereign credit ratings by Fitch Ratings and Standard and Poor's, Taiwan presents the following key advantages and market strengths in the financial services area:

• Taiwan's financial holding companies already operate across several financial services areas
• The previous overdue loan situation in Taiwan's finance and banking industry has significantly improved, providing good opportunities for mergers and acquisitions.
• Many of Taiwan's financial services enterprises are highly competitive with flexible operational structures, giving them the ability to respond quickly to new market opportunities.
• Taiwan enjoys a high level of foreign reserves, low external debt, and abundant capital resources.

 

Investment Opportunities and Market Potential

According to the rules for MFN and National Treatment, foreign invested banks in Taiwan can compete on an equal footing with domestic banks. They are all granted licenses and can operate as fully-functional branches in Taiwan. In addition, as stated in the Banking Law and Financial Holding Company Law, a foreign financial institution may invest up to a 100% stake in a domestic bank. Moreover, foreign banks and financial holding companies that have sufficient experience and a good reputation can hold shares of up to 100% under their original name.

Foreign financial groups may merge with Taiwan's local financial institutions under the Merger Law for Financial Institutions, which has been established for the purpose of regulating the merger of financial institutions, expanding economies of scale, enhancing the efficiency of financial institutions and protecting proper competition environments. The law provides a friendly legal environment and mechanism for the operation of Asset Management Companies. Taiwan has great potential to become an important regional asset management center because of the great wealth within the Greater Chinese community, providing financial services to some of the world's most affluent individuals and businesses in the world.

Another opportunity comes from the newly established pension fund market. Taiwan’s new labor retirement pension system started in July 2005 which enables financial institutions to manage pension funds of estimated US$10 billion every year. To further strengthen international competitiveness and facilitate Taiwan's development into a regional financial services center, the Securities and Exchange Act was amended in 2005 and took effect on January 13, 2006. The amendments focus on promoting corporate governance, expanding the business scope of securities firms, and establishing closer cooperation with overseas authorities (e.g. by signing of MoU and strengthening mutual cooperation to prevent securities trading crime).

As a growing number of global industries migrate to the Far East, Taiwan is an ideal location to establish a financial base. Multinational companies in Taiwan have access to more precise information on the Asia-Pacific region as they expand their business. Thus, with Taiwan's dynamic capital markets, opportunities also exist for developing regional investment banking services.

 

CASE STUDIES

Standard Chartered Group British banking group Standard Chartered www.standardchartered.com.tw has a history of over 150 years in banking and operates in many of the world's fastest-growing markets with an extensive global network of over 1,400 branches (including subsidiaries, associates and joint ventures) in over 50 countries around the world. Listed on both the London Stock Exchange and the Hong Kong Stock Exchange, Standard Chartered employs almost 60,000 people of more than 100 nationalities worldwide. In Taiwan Standard Chartered Bank opened its first office in Taipei in 1985, followed by branches in Kaohsiung and Taichung. With the acquisition of Hsinchu International Bank in 2006, the first foreign takeover of a domestic lender, Standard Chartered became the international bank with the largest presence on the island. Since the completion of the merger in July 2007 the merged entity, which has 86 branches islandwide, operates under the name of Standard Chartered Bank (Taiwan) Limited.

Citigroup Inc.

Citigroup Inc, the world's largest financial services company, has some 200 million customer accounts and does business in more than 100 countries. . Citigroup opened its first CitiBank in Taiwan in 1965, and Citibank Taiwanhas meanwhile expanded its presence to 11 branches and 3,350 employees and is the most profitable foreign bank. The banking group from the U.S. pironeered wealth management banking in Taiwan, taking the island’s banking services to a new level. In April 2007 Citigroup completed a merger agreement with the domestic Bank of Overseas Chinese (BOOC), which will add 55 branches to the foreign banks’ local network, making it the 13th largest on the island. Meanwhile Citibank has gained regulatory approval to set up a financial holding firm to proceed with the merger.

ABN-AMRO Bank

ABN-AMRO is a prominent international bank with a history going back to 1824. ABN AMRO ranks eighth in Europe and 15th in the world based on tier 1 capital, with more than 3,700 branches in 52 countries, a staff of over 110,000 full-time equivalents and total assets of EUR 986 billion (as of 30 June 2006).

The Dutch bank has a 30-year history in Taiwan including the acquisition of Continental Bank in 1988 and the consumer finance business of the Bank of America in Taiwan in 1999. Currently, ABN-AMRO has branches in Taipei, Banciao, Taichung and Kaohsiung. In June 2000, ABN-AMRO Bank acquired 100% of Kwang-Hua Securities Investment Trust Corporation and Kwang-Hua Securities Investment Consulting Corporation for approximately NT$5.3 billion (US$163 million). ABN-AMRO Bank’s investment demonstrates its confidence in Taiwan's securities market. In June 2007 won a government auction for the acquisition of Taitung Business Bank. The transaction will bring the bank’s outlets in Taiwan to 37 from its original five branches.

HSBC Group

The HSBC Group is one of the largest banking and financial services organizations in the world. The Group has over 9,800 offices in 77 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa, serves over 110 million customers and has assets of US$1,467 billion at 30 June 2005. With listings on the London, Hong Kong, New York, Paris and Bermuda stock exchanges, shares in HSBC Holdings plc are held by around 200,000 shareholders in some 100 countries and territories. The shares are traded on the New York Stock Exchange in the form of American Depository Receipts.

In Taiwan, the HSBC Group's history dates back to 1885 when The Hongkong and Shanghai Banking Corporation Limited appointed an agent in Tamsui, with a full branch being established in Taipei in 1984. HSBC now has eight branches island-wide, including Taipei, Chien Kuo, Panchiao, Tien Mu, Taoyuan, Taichung, Tainan and Kaohsiung. The HSBC Group's main subsidiaries in Taiwan include The Hongkong and Shanghai Banking; Corporation Limited, HSBC Investments (Taiwan) Limited; HSBC Insurance Brokers (Taiwan) Limited; HSBC Investment Managers (Taiwan) Limited; HSBC Securities (Asia) Limited, Taipei Branch; and Hang Seng Bank, Taipei Representative Office. In May 2001, the HSBC Group's "HSBC Asset Management (Europe) Limited entered into an agreement with China Development Industrial Bank Inc. to acquire 52.87% of China Securities Investment Trust Corporation for approximately NT$3.3 billion (US$103 million). The acquisition highlights HSBC Group's commitment to expand its asset management business in Asia and complements its growing wealth management business in Taiwan.

 

As of 2002, 15 local and international asset management companies (AMCs) had established operations in Taiwan to help local financial institutions dispose of over NT$160 billion in non-performing loans (NPLs). AMCs in Taiwan include Lone Star Asia-Pacific, GE Capital, Deutsche Bank AG, Merrill Lynch, Salomon Brothers, GMAC Commercial Mortgage Japan, K. K, Colony Capital Asia Ltd., Cerberus Asia Capital Management, and Lehman Brothers Commercial Corporation Asia Ltd. The total investment towards the purchase of bad debt from domestic banks and finance organizations has already surpassed NT$27 billion.

 

Sources: Council for Economic Planning and Development, Financial Supervisory Commission, Banking Bureau website, Taiwan External Trade Development Council (TAITRA), Citibank Taiwan website, ABN-AMRO Bank Taiwan website, HSBC Taiwan website, Standard Chartered Bank website ,Taipei Times

 

(Updated September 2007)

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