Taking On Taiwan's Banks

Can Kong Jaw-sheng reform a crowded, poorly performing sector?

The year of bank reform. That's what Taiwan's Ministry of Finance dubbed 2001. But almost four years later, little restructuring or consolidation has taken place in Taiwan's troubled banking sector -- despite new laws making mergers and foreign investment easier in what had been one of Asia's most cosseted financial arenas. The culprit is a dearth of political will and strong opposition from state-owned banks that control half of all assets. But that deadlock may finally be broken by a new financial watchdog, the Cabinet-level Financial Supervisory Commission (FSC), and Kong Jaw-sheng, its 49-year-old, gung ho chief.

Taiwan's banking system has two big problems: too many banks, and loan policies that have traditionally lavished financing on government-backed projects, many of which were bad credit risks. Kong sees his job as paring the number of banks, opening bank operations to independent scrutiny, and modernizing management via privatization and foreign investment. "If we succeed, it will help profitability, enhance competitiveness, and make the market more attractive to foreign institutions," Kong says.

Consolidation is a high priority. Taiwan has some 50 banks and 313 credit cooperatives serving a $675 billion banking market with a population of only 23 million. As a result, Taiwan has 1.4 branches for every 10,000 people -- more than double that of other Asian markets. In the past four years just three banks and nine credit cooperatives have been absorbed by other lenders. With few economies of scale, profit margins are low. Over the years the banks have also done a poor job of managing risk. Since 2001 the industry's load of nonperforming loans -- currently $23 billion, or 4.9% of total lending -- has barely budged.

FSC Chairman Kong, a former Credit Suisse First Boston (CSR ) banker and friend of Taiwanese President Chen Shui-bian, wants to shake things up. His most controversial plan: forcing troubled banks to accept state-funded bailouts through the Financial Restructuring Fund, Taiwan's answer to the U.S. Resolution Trust Corp. That will give the government more leverage to force reform on bank management. Kong's hope is that foreign banks will also take big stakes, then institute better business practices. "We will base these on unsolicited bids," says Kong. "Leading international banks from the U.S. and Europe are interested in our proposal."

Kong's move comes just as foreign banks appeared ready to write off Taiwan in favor of more welcoming and lucrative markets. Citigroup (C ) pulled out of a four-year alliance with privately owned Fubon Financial Holding Co. in June, unwinding a 10.2%, $775 million stake after its attempts to exercise influence in the bank were frustrated by management. "They want[ed] more control," acknowledges Victor Kung, Fubon chief financial officer.

Analysts say the two bank outfits that prospective foreign investors find most attractive are Mega Financial Holdings, which owns International Commercial Bank of China, and First Bank. Together, they have a combined market share of 13%. While the banks say they aren't opposed to outside investment, they deny they are takeover bait. "We are quite interested in a big foreign institution starting a strategic alliance with us or taking a shareholding, but we don't think we are a takeover target," says Joseph Shieh, Mega Financial Holdings Co. executive vice-president.

It isn't just the banks that are fighting Kong's reforms. While he has the backing of Taiwan's President, resistance is building in Parliament and among labor unions that fear layoffs of bank workers. Up to now, opponents have blocked the sale or merger of any of the big state banks. And despite Kong's welcome, most international banks are not eager to jump into the Taiwan market. "Local banks will have to make themselves look more attractive by writing off nonperforming loans and cleaning up their balance sheets," says Renee Tsai, a banking analyst at KGI Securities Co. in Taipei. So bank reform will remain an uphill battle for years to come -- and a test of Kong Jaw-sheng's considerable tenacity.

By Matt Kovac in Taipei

    Before it's here, it's on the Bloomberg Terminal.