May 10 (Bloomberg) -- Taiwan's banks, barred from China, are losing out to overseas rivals that can fund expansion by the island's companies in the world's fastest growing major economy, said Daniel Tsai, chairman of Fubon Financial Holding Co.

Tsai, 51, said Citigroup Inc. and Standard Chartered Plc's takeover of two local banks in the past year exerts ``tremendous pressure'' because they can exploit their offices in China and Hong Kong to win Taiwanese customers.

``We're already in intensive care,'' Tsai said in an interview in Taipei, where his company is the fourth-biggest financial holding company by assets. The inability to expand in China ``is taking our oxygen away. It takes three legs: China, Hong Kong and Taiwan. We have only two.''

Taiwan companies and individuals are the biggest investors in China, having poured $150 billion into the country, their biggest trading partner. Taiwan's banks are barred from opening branches in China because of the legacy of a civil war that effectively ended in 1949 when Mao Zedong's communist forces drove Generalissimo Chiang Kai-shek into exile on the island.

The return on equity of Taiwan's financial services industry plunged to a negative 0.43 percent at the end of 2006, from 4.8 percent a year earlier, according to the Web site of the financial regulator.

The 42 domestic banks are trying to escape a bad-loans crisis caused by lax controls on credit cards and competition. Interest rates that are the lowest in Asia outside Japan and excess liquidity in the banking system mean lenders face an uphill struggle to improve profitability.

At the same time, foreign banks are increasingly targeting corporate customers wanting banking services to support their factories in China, and individuals looking for higher yielding offshore investments. An estimated 1 million Taiwanese live and work in China, and the island also has an estimated 1 million small and medium-sized enterprises, many of which have factories on the mainland.

StanChart, Citi

Standard Chartered, which earns two-thirds of its profits from Asia, announced a NT$40.5 billion ($1.2 billion) purchase of Hsinchu International Bank in September. The buyout boosted the London-based bank's branches on the island to 86 from four.

Citigroup, the most profitable international bank in Taiwan, agreed last month to buy Bank of Overseas Chinese for NT$14.1 billion, increasing its branches sixfold to 66. Founded in 1961 by Chinese living abroad, Bank of Overseas Chinese set up a unit in Hong Kong in 1999 to help provide services to Taiwanese manufacturers in China.

``That's going to help them build their customer base at a much faster pace and in a much larger way,'' Tsai said. ``Our foreign competitors can combine their operations in China, Hong Kong and Taiwan, and that of course is going to put even more pressure on Taiwanese banks.''

Once Married

In 2000, Citigroup paid NT$23 billion for 15 percent of Fubon to form a strategic alliance. The U.S. company began selling down the holding in 2004, saying it wanted to pursue its own strategy.

New York-based Citigroup led a group in December that bought 86 percent of Guangdong Development Bank in China. The firm also plans to increase its stake in Shanghai Pudong Development Bank Co. to 19.9 percent from 3.78 percent.

Because overseas rivals mainly target high-end customers and their relatively low-risk appetite will limit their penetration, the threat to domestic banks isn't imminent, said Jerry Chen, president of Ta Chong Bank Ltd., the island's fifth- largest by market value.

``There's still room for us,'' Chen, 56, said in an interview. ``China is not a solution for everything. Management quality is still the most important factor.''

Standing Out

Fubon Financial plans to invest in a mainland bank through its Hong Kong unit when regulators allow it. The company is in preliminary talks with targets in China, Tsai said, without giving details.

The Taiwanese lender signed a memorandum of understanding to buy an undisclosed stake in Xiamen Bank for NT$2 billion in September. The plan to buy the bank in China's southeastern province may fail because of the restrictions, the Economic Daily News reported on May 2, without citing anyone.

``With the China factor, you can leapfrog and make yourself stand out from other competitors,'' Tsai said. ``Then perhaps the market wants to start to reward people who're running faster and try to punish people who are lagging behind.''

Fubon Financial paid HK$3.24 billion ($414 million) for about 75 percent of International Bank in 2004 to become the first Taiwan lender to operate a branch network in Hong Kong. Fubon hasn't yet been able to make full use of the bank as a bridgehead into China because of regulatory issues, Tsai said.

Profit at Fubon Financial is expected to grow at least 30 percent this year because of fewer write-offs and expansion of consumer banking services, Tsai said. Net income at the Taipei- based company, which owns Taiwan's largest non-life insurer, fell 22 percent last year to NT$8.23 billion.

To contact the reporter on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net;

Last Updated: May 10, 2007 00:01 EDT