New China Ties Offer Glimmer of Hope for Taiwan Banks

Signs of renewed life in banking ties with China may be the one bright spot for Taiwan's banks this year as they struggle with an overcrowded home market and a global economic environment set to crimp their profit outlooks.

Jeremy Woodhouse | Digital Vision | Getty Images

Taiwan recently announced it will allow banks from political rival China to take stakes of 5 percent in local ones, while Hua Nan Financial is bidding to become the first Taiwan bank to make a direct investment in a Chinese peer.

Hopes of a bright future for banks grew after Taiwan and China signed a trade deal in June 2010 that brought ties to their best in 60 years of hostility and held out the promise of access to the huge and lucrative mainland banking market.

But little progress was made since the deal, largely due to sensitivity over a reciprocal opening of Taiwan's financial sector while China still retains its political aim of taking control of the self-ruled island.

"The prospect for the banking industry looks dim, at least in the first quarter, depending on how much worse the euro zone debt crisis gets," said J.J. Lee, chief investment officer at the fund unit of Fubon Financial.

"A stake investment by mainland banks would offset the downside of the outlook and could be the biggest story of 2012 for financial shares," he said.

Two of the mainland's four big banks, Industrial & Commercial Bank of China (ICBC) [601398.SS? Loading...? ? ? () ? ] and China Construction Bank (CCB) [601939.SS? Loading...? ? ? () ? ], are widely expected to be the first to invest in Taiwanese counterparts.

The other two, Bank of Communications [601328.SS? Loading...? ? ? () ? ] and Bank of China [601988.SS? Loading...? ? ? () ? ], have been given permission to upgrade their Taiwan offices to branches.

Meanwhile, Hua Nan Financial is seeking a 20 percent stake in China's Fujian Haixia Bank, according to a company source, in a potential T$10 billion ($333 million) deal that would be the first direct banking investment between Taiwan and China since the 2010 trade pact.

Challenging Fundamentals

Taiwan's banks face challenging fundamentals, operating in a crowded market and with little in the way of overseas operations to fuel growth.

They are seen posting a 0.53 percent return on assets (ROA) in 2011, the lowest among banks in Asia excluding Japan, according to Fitch Ratings in Taiwan.

Financial sector shares dropped 25 percent in 2011, trailing the benchmark index's 21 percent fall, which was its worst since 2008.

"Most banks target low to mid-single-digit loan growth in 2012 versus double-digit growth in 2011... Fee outlook is unclear due to a weakening investment atmosphere," according to a report by Royal Bank of Scotland published on Thursday.

Moreover the likelihood of a further global slowdown in 2012 has already seen the central bank stop its cycle of rate rises, crimping banks' income from loans. With Taiwan's economy dependent on exports, the slowdown could also cut demand for corporate lending.

Many banks are also heavily exposed to the island's memory chipmakers, and may have to make provisions in case those loans go bad as the chipmakers struggle with falling prices and stiff competition.

In addition, Taiwan is holding presidential elections in two weeks, so any new government initiatives or policy decisions won't be likely for several months.

"We see no reasons at this point to get excited about the financial sector, unless China gives significant incentives," said a banking analyst at a U.S.-based brokerage, on condition of anonymity.

Others caution that the value of any China ties might be more in the way of boosting sentiment towards banking shares, given the global economic backdrop.

"A 5 percent stake means nothing in earnings contribution. The only way it would make sense is non-economic, expanding their exposure to Taiwan," said Andrew Lee, chief financial officer of EnTie Commercial Bank.

"Any such investment is ripples in the pond, stirring up excitement in the short term. Eventually investors will focus on the sector's fundamental side. And we all know it's not going to be pretty next year."

Meanwhile, talk of a domestic consolidation has returned having been on and off the agenda for the last three years.

It has been fuelled in part by No.1 financial holding firm Cathay Financial's decision to buy a 3.45 percent stake in Taishin Financial for T$4.7 billion from private equity fund Newbridge Capital.

The financial regulator has also broached the subject, saying last week it hopes to push consolidation between state-run banks after seeking consensus with the finance ministry.

Copyright 2012 Thomson Reuters. Click for restrictions.

Source: http://www.cnbc.com/id/45879847?__source=RSS*tag*&par=RSS

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