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Cablegate: Taiwan State-Owned Bank for Sale

This record is a partial extract of the original cable. The full text of the original cable is not available.

280748Z Mar 05

UNCLAS SECTION 01 OF 02 TAIPEI 001413

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR SCOTT KI

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

SENSITIVE BUT UNCLASSIFIED

E.O. 12958: N/A
TAGS: EINV EFIN ECON TW
SUBJECT: Taiwan State-owned Bank for Sale


SUMMARY
-------

1. (U) In mid-March 2005, two foreign consortia bid on the
Changhwa Commercial Bank (CCB), slated to become the first
Taiwan state-owned bank sold to foreign investors. If the
bid price is too low, Taiwan may reconsider the proposed
sale. The sale of CCB to foreign investors is a key part of
Taiwan's second-stage financial reform goals. In the first-
stage, Taiwan cut the non-performing bank loan ratio (NPL)
by half from early 2002 to the end of 2004. End Summary.

Global Depository Receipts (GDR)
--------------------------------

2. (SBU) On March 18, two groups of foreign investors
submitted bids for CCB GDRs to Credit Swiss First Boston,
the underwriter for the sale. One consortium is headed by
the Shinsei Bank of Japan; the other is composed of ING,
Carlyle, and Lone Star. The CCB will award 1.4 billion GDR
shares, equivalent to 22% equity, to the foreign consortium
with the higher bid. The GDR bid winner will then be
permitted to purchase another 18% ownership stake in CCB
directly from the government. This will enable the winning
bidder to have effective control with a 40% equity stake.
(Taiwan officials have repeatedly stated their intention to
allow the foreign purchaser real control over management
decisions.) Media reports claim the bids were 50-75% of the
CCB current share price. Using these figures, the total
sale would be US$2-4 billion. CCB will review the bids and
then send them to the Ministry of Finance for a final
decision in June 2005.

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Promoting Taiwan
----------------

3. (SBU) Finance Minister Lin Chuan led a team of
government officials to promote the sale of Taiwan banks to
investment banks in New York in early March 2005. Andrea
Lee, Deputy Director of the Financial Supervisory
Commission's (FSC) International Affairs Department, told
AIT/T that the trip was very successful. He said that the
team's discussions with executives of Citibank, JP Morgan,
and Morgan Stanley had concentrated on the pending sale of
CCB, which he described as a "a landmark case" that would
set the tone for future bank sales. FSC Chairman Kong Jaw-
sheng will organize another team to visit Europe in October
2005 and promote sales of local financial institutions.

4. (SBU) According to Deputy Director Lee, the Taiwan
government has resolved CCB labor union's opposition to
privatization. Lee said an agreement with labor has been
reached, so the purchaser will be able to accurately assess
the risks and costs of labor. Lee noted that this labor
protection agreement and other factors require that CCB sell
at a significant discount from the open market price of the
shares (currently at NT$19.6). Another reason for a
discount is CCB's relatively poor financial status.
According to CCB's latest financial statement, its NPL ratio
as of December 2004 was 7.97%, higher than the local average
of 6.1%. CCB's rates of return were 0.12% return on assets
(ROA) and 2.3% return on equity (ROE), both lower than
international standards of one percent ROA and 15-20 percent
ROE.

Second stage Financial Reform
-----------------------------

5. (U) The sale of CCB is the second stage of Taiwan's
financial reform program that began October 20, 2004. One
of the stated goals of the second stage is that foreign
investors should acquire and manage at least one state-owned
bank before the end of 2005. Another related goal is
consolidation of Taiwan financial institutions, specifically
to reduce the number of state-owned banks by half to six,
and the number of financial holding companies by half to
seven. Taiwan officials hope that through mergers and
acquisitions the three largest Taiwan banks can each raise
their market share above 10%. During the first stage of
financial reform, Taiwan lowered local banks' average NPL
ratio (using the internationally accepted standard of
principal or interest over three months overdue) from a high
of 11.7% in March 2002 to 6.1% in December 2004.

6. (U) Taiwan President Chen Shui-bian told a group of
foreign insurance company executives on March 22 that the
second stage of financial reform will bring Taiwan's
insurance practices in line with those of developed
countries and make it easier for foreign insurance companies
to operate in Taiwan.

Will Low Bids Be Accepted?
--------------------------

7. (SBU) In what might be a sign of looming problems in the
CCB sale, the Ministry of Finance responded to a Financial
Times report that a discount of up to 50% from market price
would be needed to make CCB attractive to foreign buyers by
announcing on March 22 that it will not approve the sale if
bids are far below the market price.
PAAL

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