Cablegate: Big Taiwan State-Owned Banks to Merge
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SUBJECT: Big Taiwan State-owned Banks to Merge
REF: (A) TAIPEI 336
1. SUMMARY: Taiwan announced a three-year plan to merge the
operations of the three largest state-owned banks into one financial
holding company. The world ranking of the new firm's banking unit
will move up to 89th, and its market share in Taiwan will increase
to 18%, well ahead of the next largest bank's share of less than
10%. The plan is a step forward, but it will not reduce the public
sector's control of the financial sector. One wonders if this new
entity will keep its world ranking for long if it remains a
state-owned enterprise. END SUMMARY.
Bank Consolidation Plan Gets the Green Light
2. On August 15, the Executive Yuan formally approved a three-stage
financial consolidation plan submitted by the Ministry of Finance
(MOF). The plan calls for the MOF to set up by the end of this year
a new state-owned entity called Taiwan Financial Holding Company
(TFHC), which will comprise three state-owned banks - Export-Import
Bank of China (EIB), Land Bank of Taiwan (LBT), and Bank of Taiwan
(BOT). In July, BOT had already merged with another state-owned
bank, Central Trust of China (CTC) (reftel). As part of the
reorganization, TFHC will set up two subsidiaries, one transformed
from CTC's life insurance department and the other a merged CTC and
BOT securities operation. The three banks, however, would initially
be managed independently.
3. Prior to the end of 2009, however, BOT will merge with EIB, with
the new entity still called BOT. EIB's insurance department will
be split off and merged into the TFHC's insurance subsidiary. LBT's
securities department will merge into TFHC's new securities firm.
By the end of 2010, the enlarged BOT will merge with LBT, with the
new entity's name remaining BOT.
4. As part of the plan, the MOF guaranteed the 14,200 bank
employees there would be no layoffs for at least three years. These
employees have seen themselves as civil servants, but after the
reorganization, TFHC operations will no longer be regulated by the
budget, and civil service rules and regulations will no longer
apply. Salary caps will be removed for top managers for example.
Government bureaucrats are hoping that the new entity will operate
more like a private company.
One of the World's 100 Largest Banks
5. The MOF projects that after the merger, TFHC's new banking
entity will, in terms of assets, be ranked 89th in the world. This
puts it larger than Singapore's United Overseas Bank (ranked 102nd),
but still smaller than South Korea's Shinhan Bank (ranked 82nd).
The new banking entity's assets will increase to US$158.8 billion,
and it will have 308 branches, including 16 overseas. Its market
share in terms of loans and deposits will rise to 19%, far higher
than any other bank in Taiwan, the next largest having market share
of below 10%.
Is Bigger Better?
6. The MOF asserts the planned merger will reduce costs and
increase efficiency. The firms will also bring different strengths
to the new bank. CTC, prior to July, was Taiwan's sole insurance
provider to public employees and the major public procurement
contractor. BOT is the leader in corporate banking and foreign
exchange services, and LBT is the largest in the mortgage, real
estate trust, and securitization service supplier. EIB specializes
in financial services for overseas trade and investment. The merged
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institution should continue to dominate all of these sectors.
Or Just Bigger?
7. Some financial observers in Taiwan have expressed concern that
TFHC will become a new financial giant that banks will have
difficulty competing with. One analyst of a foreign bank disagreed,
however, noting that he expected the larger state-owned entity to be
just as inefficient as the banks it absorbed.
8. This plan is a political compromise and it shows. By not
privatizing the institutions and guaranteeing no layoffs, much of
the political opposition was removed, allowing the consolidation to
move forward. It may also, however, have removed the chance for the
new bank to compete on an equal footing with its rivals. It will
indeed be bigger, but it is unlikely to outmaneuver nimble
non-government competitors who will also be seeking to serve an
increasingly discerning market.