Taiwan’s CTBC Pursuing Overseas Profit May Buy Mainland Bank

CTBC Financial Holding Co., Taiwan’s third-largest publicly traded financial firm by market value, is in talks to buy shares in a Chinese bank as the island’s lenders seek profits outside their crowded home market.

“We may buy the stake in the target only or also let them buy a stake in us,” Rachael Kao, a Taipei-based spokeswoman at CTBC Financial, said in a phone interview today, declining to name the lenders her firm is negotiating with. “We’ve been in touch and in discussion with some Chinese banks.”

CTBC Financial wants to increase the share of pretax profit generated overseas to as much as 40 percent of total earnings in the next three years from about 20 percent now, Kao said. The company already runs the largest overseas banking network among its domestic rivals, with 68 outlets as of June, data from Taiwan’s Financial Supervisory Commission show.

Taiwan is urging its 39 local banks to expand outside their home market of 23 million people, where competition has squeezed lending margins to the second-narrowest in the Asia-Pacific region, according to data compiled by Bloomberg. Financial institutions are also following their customers abroad as manufacturers expand on the mainland and in Southeast Asia.

Shares of CTBC Financial lost 0.3 percent to NT$19.70 in Taipei. The stock has climbed 25 percent this year, compared with the benchmark Taiex Index’s 8.4 percent gain.

“Investors and banks are all eyeing the mainland market,” Tom Liang, a Taipei-based analyst at Masterlink Securities Corp., said by phone today. “As economic ties between Taiwan and China are increasing, it is positive to see Taiwanese banks getting a bigger presence on the mainland. This will boost their profit.”

Larger Population

Net interest margins at Taiwan’s banks average 1.38 percent, the lowest rate of 16 territories after Japan’s 1.32 percent, data compiled by Bloomberg show. Banks on the mainland, where deposit and lending rates are regulated by the government, have an average margin of 3.24 percent.

China, with a population more than 50 times larger than Taiwan’s, is attracting the island’s banks as relations warm since Ma Ying-jeou became Taiwanese president in 2008. Governed separately since a civil war six decades ago, the two sides signed their first trade accord, the Economic Cooperation Framework Agreement, in 2010 to promote banking services and cross-strait investment.

Eleven Taiwanese banks have established profitable branches on the mainland as of August, data from the FSC show. CTBC Bank currently has a branch in Shanghai and a representative office in Beijing.

‘Growth Driver’

“Overseas operations are the key growth driver for Taiwanese banks,” Alan Lee, a Taipei-based spokesman at Cathay Financial Holding Co., said by phone Oct. 21. “Taiwan is a small island with intense competition caused by overbanking. We need to target the larger markets in Southeast Asia and China.”

Cathay United Bank, a unit of Cathay Financial, is seeking to boost its overseas pretax profit to 60 percent of the total in the next three to five years, Lee said. That compares with about 40 percent in the first half of this year.

The banking unit, the most profitable Taiwanese lender in China, plans to open a mainland branch in each of the next three years, Lee said. Cathay United Bank reported NT$217 million of pretax profit from its mainland branch in the first eight months of this year, FSC data show.

Ownership Limit

Taiwan’s lenders are limited to 20 percent stakes in banks across the strait. The cap on Chinese banks’ ownership of some lenders on the island is set to rise to the same level, from the current 5 percent, if a new agreement on trade in services is approved by the parliament in Taipei.

Fubon Financial Holding Co., Taiwan’s second-biggest publicly traded financial company by market value, said in December it will buy 80 percent of First Sino Bank for 5.65 billion yuan ($929 million). Because First Sino is a joint venture between mainland and Hong Kong owners, it’s not subject to the 20 percent limit.

Taiwan’s banks have followed their corporate customers to the mainland as manufacturers took advantage of warming relations to tap into a cheaper labor pool in the People’s Republic.

As worker costs rise and those companies look beyond the mainland to Southeast Asia, the lenders are following. Taiwan’s banks have almost half of their overseas outlets in the Association of Southeast Asian Nations, where foreign direct investment from the island grew fivefold last year.

‘Competitive Edge’

“Taiwanese banks with strong U.S. dollar funding have a competitive edge in expanding in Southeast Asia,” Hsu Chung, a Taipei-based analyst at Credit Suisse, said in a phone interview on Oct. 22. “They can lend to corporates when other banks are tight with funding.”

That may push the lenders’ overseas profits to a record this year. Their pretax income from abroad reached NT$54.6 billion as of August, compared with NT$74.4 billion, or 31 percent of the total, in all of 2012, Financial Supervisory Commission data showed.

After riding out waves of bad debt on corporate credit in 2000, consumer lending in 2005 and international syndicated loans in 2008-2009, Taiwan’s banks are primed for international growth, Hsu said.

“Taiwanese banks have just recovered, and can now spare the time and the capital to focus on overseas expansion,” he said. “They can now focus on marching overseas in the next five to 10 years.”

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