Taiwanese banks venture overseas

Low credit growth amid global macroeconomic uncertainty has marred the past year for lenders in Asia.

For Taiwanese banks, already battling the twin problems of a low return on assets and a highly fragmented banking market at home, seeking and seizing growth opportunities overseas has become even more critical.

“The vision we have as a bank and as an organisation is to be a meaningful regional player and continue to grow,” said Frank Shih, chief strategy officer at CTBC Bank, the third largest in Taiwan by assets.

“The home market is our stable, a cash cow but it does not provide the fuel needed for growth. The [Taiwan] economy has been flat.”

The Taiwanese economy grew 2.03% year-on-year according to preliminary Q3 figures from the country’s National Bureau of Statistics and the agency estimates GDP will grow 1.87% during 2017. That slower growth at home has long encouraged Taiwanese banks to look offshore. And until recently, borrowings by Chinese companies were the main source of overseas loan growth. However, in 2014, Taiwanese regulator Financial Supervisory Commission (FSC) sounded caution on lending to China as the economic slowdown there intensified. It instead pushed banks to diversify their loan exposures by bulking up elsewhere in the region, especially in southeast Asia.

One way Taiwanese banks have increased their exposure is by acquiring minority stakes in franchises in Asean countries to gain a foothold and access local deposits, which allows them to scale up.

The regulator acted as an enabler on this front by permitting the insurance arms of major financial institutions to use their funds for overseas investments. These insurance companies have plenty of cash at their disposal, making them well positioned to acquire prized assets overseas. 

One bank that has made an aggressive push into southeast Asia is E.Sun Commercial Bank in Taiwan. It has assets totalling NT$1.9tr ($57bn), making it roughly one-third the size of Bank of Taiwan, which is state owned and the country’s largest lender. 

In 2016, the bank became the first Taiwanese lender to be granted a branch licence by the Central Bank of Myanmar, opening its first branch on October 3. The bank views Asean as its primary target market ex-China.

“Many Taiwanese corporates have operations in China and Asean to leverage growth opportunities in those countries. E.Sun wants to follow those clients and provide them with quality cross-border financial services. This is why E.Sun chose to enter Cambodia, Vietnam and Myanmar,” said a spokesman for E.Sun in an emailed response.

“Secondly, E.Sun has also set up branches in financial hubs of Asia Pacific, such as Hong Kong, Singapore, Sydney, and Tokyo (in progress). In these financial centres E.Sun can find more banking opportunities, such as international syndicated loans, bond investments and FX interbank borrowings.”  

Although Asean is the lynchpin of Taiwanese banks’ growth plans abroad, they have also successfully arranged syndications for borrowers that are culturally and physically remote, such as those from India and the Middle East.

CTBC Bank, for example, secured its first sole mandate for an Indian syndicated loan with a well-received $130m transaction for Yes Bank in July. It was later joined by Taiwan Co-operative bank as a fellow mandated lead arranger and bookrunner.

The bank is focused on originating and arranging borrowings for non-state owned banks in India and is working to bring one more from that set to the Taiwanese syndicated loan market in the next six months, said a banker close to the matter.

Unlike most compatriots, CTBC Bank has a long history in India, having set up its first branch in New Delhi in 1996 and following this up with a second, in Chennai, which opened in 2012.

“In the past, India was quite remote for us,” said Shih.

“Not many sizeable Taiwanese businesses have a manufacturing base there. But activity is speeding up under the new premier [Narendra Modi]. There will be more, foreign direct investment including from Taiwan and we feel we are better positioned to capture that [compared to Taiwan banks without a presence in India].”

“In India because our size is still relatively small compared to the market, we should be able to achieve 30% growth [in balance sheet] on annual basis. In southeast Asia we are targeting growth of about 15%,” he said.

Competitor Mega International Commercial Bank, meanwhile, was chosen by Doha Bank to bookrun its latest borrowing that ended up at $180m from the launch size of $100m.

The Taiwanese lender is planning to boost its presence in the Gulf region with a forthcoming branch in Abu Dhabi.

“The Middle East market is important for Mega,” a banker at the firm told Asiamoney’s sister publication GlobalCapital Asia in May, shortly after the Doha loan was launched. “The economic situation of countries in the UAE and their GDP is still stable,” he said, explaining the reason behind Mega’s interest in the region.

Another factor was the buoyancy of the crude oil market, which has since subsided. Taiwanese banks first started applying for a branch licences in the Middle East a few years ago, when oil money was still hot, said Andy Chang, director, financial services ratings at Taiwan Ratings Corp. Although that has changed, the region continues to offer business opportunities in corporate banking, he said.

The willingness of Taiwanese banks to explore cross-border opportunities is also attracting borrowers from outside the region to target Asia for their syndications. Latin American names have proved particularly keen this year.

Among them are Panamanian lender Global Bank, which sealed a bigger $135.5m loan in June and Banco CorpBanca Colombia, which launched a $200m transaction in September and is syndicating a slice in Taiwan.

In the case of both loans, the bookrunner group was composed of international banks. Global Bank was well supported by Taiwanese lenders during syndication and the early signs for Banco CorpBanca were also positive, despite several lenders having no existing lines to Colombia.

The rigorous credit work that goes behind establishing a new country has not dissuaded even smaller, retail players from trying, according to a banker on that trade.

“Taiwan banks have abundant US dollar liquidity,” he said. “They do not have significant exposure to Latin America so there is room for growth and these [Global Bank and Banco CorpBanca Colombia] are well recognised in their home markets so they [Taiwanese] are more comfortable with the credit.”

Such loans are generally originated by the New York or US branches of the bookrunners and then distributed in Taiwan, he added.

Teething trouble

Not that it’s been all plain sailing for Taiwanese banks as they go offshore. With global ambition but relative inexperience in operating in overseas jurisdictions, lenders have faced some setbacks.

On August 19, the Department of Financial Services of New York (DFS) slapped a $180m fine on the New York branch of Mega International Commercial Bank Co (Mega ICBC) for violating local anti-money laundering regulations.

“The compliance failures that DFS found at the New York branch of Mega Bank are serious, persistent and affected the entire Mega banking enterprise and they indicate a fundamental lack of understanding of the need for a vigorous compliance infrastructure,” the New York regulator stated on August 19.

“DFS's recent examination uncovered that Mega Bank's compliance programme was a hollow shell, and this consent order [signed by the bank] is necessary to ensure future compliance.”

Many high profile names have been caught in the fallout. Mega ICBC’s parent, Mega Financial Holding, has sacked several senior executives, including chairman McKinney Tsai. The chairman of the FSC too, tendered his resignation in October, amid questions around the regulator’s effectiveness.

"This was definitely credit negative with regards to the bank's compliance function,” said Sonny Hsu, a vice president in the financial institutions group at Moody’s. “They didn’t have dedicated compliance staff in the bank's New York branch and those working in compliance also had business operation responsibility, which presented a conflict of interest. If you’re in business operation, you drive business growth. The compliance function has to ensure frontline staff adhere to all regulation.”

But improving compliance in a marketplace where banks globally are tightening up their internal procedures means it won’t be easy. A shortage of qualified compliance personnel has meant the cost of hiring them has been increasing, he said. This will push up Taiwanese banks’ cost of doing business.

“Compliance costs are rising, but the key for proper compliance is not just increasing staff. It’s about culture also. If business lines do not respect or are not familiar with compliance policies and procedures, then simply beefing up compliance staff headcount would not be of much help."

Some Taiwanese banks have prioritised business expansion and not considered compliance as important a part of the overseas drive. But the Mega affair has prompted a rethink, said market observers.

It’s not just compliance. Breaking into well banked markets in major financial centres requires a large and long-term investment. As a result, banks including Cathay United Bank and Taipei Fubon Commercial Bank, have closed their US branch operations for strategic reasons, said Chang. 

“There has been limited expansion in US and EMEA markets not only because the compliance costs are significant compared to southeast Asia but also because those countries have a higher standard of living and HR costs are quite high,” he said.  “I think the reason for Cathay United Bank [to shut the US branch] was not about compliance but a strategic business decision,” he said.

But the issue of compliance and due diligence is not limited to the US. Even closer to home, Taiwanese banks sometimes struggle.

In part this is because some do not have a deep enough infrastructure or on ground presence in the countries of companies to which they lend.

As a result, Taiwanese banks have tended to rely heavily on the mandated lead arrangers and bookrunners for information on the borrowers. But this means when things go wrong, Taiwanese banks can find themselves heavily exposed.

This problem peaked in 2014, when a spate of restructurings, defaults and corporate governance missteps by Chinese companies spooked these banks. The offenders included Chinese shoemaker Ultrasonic that raised $60m from Taiwanese banks in 2014. After that deal went sour, a consortium of six Taiwanese lenders launched legal proceedings against lead Nomura in June, alleging misconduct and fraud.

More recently, Indonesian trader Royal Industries failed to repay the first instalment of its $405m loan in August this year. It has since asked lenders to defer the date of the first instalment and asked for additional funds to help it get back on its feet. 

Such experiences have made Taiwanese banks wary and encouraged them to strengthen due diligence, said a ratings agency source.

“According to our conversations with those banks, they are gradually trying to establish due diligence by themselves in addition to reference provided by foreign lead banks. They will catch up quite soon,” he believes.

The Mega incident has led to a system wide rethink. Bankers at the branches of Taiwanese banks in Hong Kong and Singapore reported that their head offices were demanding extra credit work on potential and existing clients in the aftermath.

Getting this right will be key if Taiwanese banks are able to continue with their overseas expansion. Taiwan’s banking market remains an important source of retail liquidity for loans from across the globe. But only by convincing the syndication market that they are able to assess risk accurately, will they be able to gain a real foothold overseas.