In recent months, the Taiwanese press has been full of reports concerning the government's plan to speed reform of the financial sector and meet a NT$291 billion ($8 billion) budget deficit by privatizing a number of state-owned banks. Privatization is one of the key planks of the government's overhaul of a financial sector, which has long been teetering under the weight of a staggering 52 banks, 300 credit co-operatives and about NT$1.03 trillion ($30 billion) in NPLs.
According to analysts' estimates, the Taiwanese government currently controls roughly 58% of the domestic banking sector, with stakes in 12 major banks (see table 1). By 2006, it has said it would like to privatize all state-owned banks and by 2010 reduce its stakes across the entire system to less than 20%. This also includes the three wholly-owned, quasi policy banks - Land Bank, Taiwan Co-operative and Bank of Taiwan.
Last July, the government formally set the process in motion by announcing its intention to divest one of three major listed government banks by the end of 2003. First Commercial, Hua Nan and Chang Hwa were pinpointed the most likely candidates. A few months later, it confirmed that it hoped to sell a 23.7% stake in First Commercial to a strategic investor and 12.3% to overseas investors, with 11% of Hua Nan also slated for overseas investors.
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Govt ownership |
Private |
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Overseas Chinese Bank |
100% |
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Grand Commercial Bank |
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President's group |
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Chang Hwa Bank |
27.2% |
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Hsinchu International Bank |
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Wu family |
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Shanghai Commercial Bank |
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Rong family |
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Farmers Bank of Taiwan |
45.1% |
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First Commercial Bank |
40.6% |
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Taiwan Co-operative Bank |
100% |
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EnTie Commercial Bank |
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EnTie/Sanchung grps |
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Cathay United |
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Cathay Financial |
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Da Chong Bank |
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Sanyang/Formosa |
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Land Bank of Taiwan |
100% |
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Hua Nan Bank |
41.2% |
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E Sun Bank |
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E Sun Financial |
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Fubon Commercial Bank |
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Fubon Financial |
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Bank of Kaohsiung |
municipal govt |
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Far Eastern Bank |
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Far Eastern group |
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Bank Sinopac |
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Runtex group |
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Industrial Bank of Taiwan |
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Loc family |
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CDIB |
KMT related |
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Taishin International Bank |
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Shin Kong group |
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At the same time, banks have been made to start improving their Capital Adequacy Ratios (CAR) and some have contemplated turning to the GDR market to replenish tier 1 equity. In order to force consolidation across Taiwan's defective financial system, the government initially gave banks until 2004 to reduce NPLs to 5% and improve capital ratios to 8% under what is known as target "258".
The implication was that those unable to comply would be taken over, or forced to merge with stronger rivals. Threat of merger consequently prompted huge NPL write-offs during 2002 ($11.88 billion according to government estimates) and increased use of the domestic subordinated debt markets to boost tier 2 capital.
As of December 2001, Taiwanese banks were averaging an overall CAR of 10.4% and tier 1 ratio of 10.6%, down from 10.75% and 10.82% the year before (table 2). When 2002 figures are made available, the average is likely to be considerably lower again. And unlike most jurisdictions, tier 1 in Taiwan tends to be higher than the overall CAR because of capital deductions from unconsolidated subsidiaries.
According to UBS Warburg estimates, meeting "258" should lead the CAR average to drop by three to four points. In a report published last year analyst Rachel Wu said, "Among the 52 local banks, 31 may see their CAR fall below 8% or even become negative and only around seven to nine banks should still have significant amounts of excess capital."
First Bank and Chang Hwa have already said they are looking at the GDR market to raise up to $1 billion each, while FIG bankers estimate that Hua Nan also needs about $500 million in equity. Taken together, just the three banks at the top of the privatization agenda alone could potentially unleash $3 billion to $4 billion in combined secondary and primary offerings over a one-year period.
However, local bankers and FIG experts believe that not one of these deals is likely to see the light of day by the end of 2003. As the Taipei-based head of one US investment bank puts it, "The government is making a lot of noise, but it's hard to believe that it's anything other than hype. What it should be trying to do is merge Hua Nan, Chang Hwa and First Commercial. Investors are just not going to be able to make any distinction between them at all, as their asset profiles are all too similar. Were they to be combined, however, Taiwan would have a proper mega bank along the lines of a Kookmin."
While bankers acknowledge the government's determination and considerable progress made so far, most believe its targets are simply too ambitious. A number further argue that unless the government is prepared to sell assets cheaply, a combination of politics and market reality will increasingly prevail and slow the process down.
Indeed, the Chen administration appeared to extend the time limit for "258" yesterday (Wednesday), when Bureau of Monetary Affairs director general Gary Tseng said the government intended to give banks a two-year grace period to meet new overdue loan definitions that will be announced towards the end of April. At the same time, however, he also said the government plans to incentivize those banks which accelerate write-offs.
Lack of transparency concerning the true level of NPL's is cited by almost every single industry expert as the chief hurdle to greater foreign participation in the domestic banking system. Officially, NPL's stood at 8.86% at the end of 2002, down from 11.74% at the end of 2001.
However, Taiwan currently adopts a six-month past due standard rather than three-months and analysts believe the real figure is considerably higher. As Moody's analyst Patrick Winsbury comments, "forward-looking classification of impaired loans is not generally practiced, and NPL's are reported net of expected recoveries, which may be optimistic because in recent times collateral disposals have often failed to realize valuation prices."
So far, Taiwan has been a magnate for vulture investors picking over NPL portfolio sold by banks via auction. In 2002, analysts estimate that domestic banks offloaded up to NT$185 billion ($5.3 billion) NPLs this way and expect at least similar levels of activity again this year.
But specialists also believe the reform process is at far too early a stage to attract much interest from strategic or institutional investors. As one FIG head argues, "The government would love to start selling off banks, but I think it recognizes there's still a very long way to go first in terms of shoring up operational and asset quality. Investors just don't trust the valuations assigned to these banks. They're also waiting to see how much more merger activity there'll following the establishment of the 14 financial holding companies."
So too, government has also failed to attract much interest from financial investors like a Newbridge or a Carlyle and strategic commercial banking interest from the likes of an HSBC or a Citibank. Largely this has been because it has not been offering operational control. But many of the foreign commercial banks are already established local players in their own right, with Citibank, for example, ranking as one of the top five credit card issuers.
Where portfolio managers are concerned, specialists say it will be very hard to attract interest unless valuations are extremely compelling. Most institutional investors are said to find it difficult to differentiate between one listed state-owned bank and another.
Investment has, therefore, tended to be directed towards the more aggressive private sector commercial banking groups such as Fubon, Sinopac and Chinatrust, while holdings of government-owned banks are minimal. Chinatrust, for instance, has a QFII holding of roughly 40%, with Sinopac on 32% and Fubon 23%.
The huge overhang of paper from the government's privatization programme and banks' need for equity capital means that investors will be looking for a huge pricing discount in the event that deals start rolling. Yet local bankers report that both the government and individual banks have pricing targets some way above current share prices, averaging about 1.7 times price to book.
One solution for banks unable to re-build tier 1 through the equity markets is participation in the government's Financial Restructuring Fund. Analysts conclude that many of the smaller banks will have no alternative, though the Legislative Yuan has been stalling on government plans to inject NT$1.05 trillion (roughly $32 billion) into it since late last year.
In the meantime, bankers conclude that financial sector issuance will remain confined to the healthier and better-known private sector banks. Salomon Smith Barney currently holds a mandate for a $120 million convertible for Taishin and a $250 million convertible for E Sun, although local bankers say the latter is rumoured to be a private placement relating to a strategic investment.
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Capital Adequacy Ratios December 2001 |
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Overall CAR |
Tier 1 |
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Overseas Chinese Bank |
5.05% |
5.17% |
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Grand Commercial Bank |
8.38% |
10.05% |
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Chang Hwa Bank |
8.62% |
9.88% |
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Hsinchu International Bank |
8.74% |
8.65% |
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Shanghai Commercial Bank |
8.94% |
18.49% |
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Farmers Bank of Taiwan |
9.11% |
8.84% |
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First Commercial Bank |
9.28% |
8.89% |
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Taiwan Co-operative Bank |
9.39% |
5.91% |
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EnTie Commercial Bank |
9.42% |
11.39% |
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Chinfon Bank |
9.43% |
8.7% |
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Cathay United Bank |
9.47% |
9.11% |
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Da Chong Bank |
9.5% |
8.75% |
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Land Bank of Taiwan |
9.65% |
7.28% |
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Hua Nan Bank |
10.68% |
9.89% |
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E Sun Bank |
11.01% |
12.3% |
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Fubon Commercial Bank |
11.47% |
15.43% |
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Bank of Kaohsiung |
11.63% |
13.03% |
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FarEastern Bank |
12.48% |
12.79% |
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Bank Sinopac |
14.37% |
14.68% |
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Industrial Bank of Taiwan |
25.22% |
50.59% |
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CDIB |
41.68% |
113.40% |
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source: Central Bank of China |
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