The Taiwan Banker

In April, Citigroup announced that it would sell its consumer finance businesses in 13 markets, including Taiwan. In fact, some private banks in Taiwan have surpassed Citibank in the local consumer finance and wealth management businesses. To explore the new blue oceans in banking, future development must lean towards product diversification, financial digitization, large scale, and division of labor. In early 2021, when Citi Taiwan executives visited the Financial Supervisory Commission (FSC), they still promised to increase investment and expand their financial business in Taiwan. Headquarters nevertheless eventually decided to withdraw from the Taiwan market, in which they had invested for many years. Local players eclipse foreign multinationals Hau Min Chu, Adjunct Professor of Finance at Chengchi University, said, “It’s understandable why Citibank is withdrawing from the Taiwan consumer finance market.” The global financial industry has rapidly expanded in scale due to the rise of online finance, which has been accepted by the next generation of consumers, threatening physical services. The consumer finance business has always been “high volume but low profit.” In addition, Taiwan’s competitive landscape is very saturated. Citibank’s sale of its Taiwan consumer finance business is not due to pessimism regarding the Taiwan market, but rather a necessary resource allocation trade-off. Chu also emphasized that Citibank’s departure will not have much impact on the local market. Taiwan’s financial industry has rich human resources, including former Citibank staffers. Over the years, Citibank has cultivated many new financial pioneers in Taiwan to be in line with international standards and expertise, making Taiwan much stronger than before. In addition, Taiwan’s financial market has liberalized and diversified. Service standards, especially for private banks, have improved. Jack Huang, Chief Economist at SinoPac, noted a key point. “Some private banks in Taiwan are more competitive in local consumer finance and wealth management businesses than Citibank (Taiwan).” Bank financial data show that, for example, China Trust, Cathay United, E.SUN, Taishin, Taipei Fubon, and even SinoPac earn as much or more in consumer finance and wealth management as Citibank. If Citigroup can’t effectively follow up on its business growth, considering limited resources, it faces an inevitable choice. Citigroup helped cultivate financial talent Alan Lee, General Manager of Cathay United Bank, who became a Management Associate (MA) of Citibank in 1991, said that Citibank MAs are well-trained, rotated across departments. They even experience cross-national and cross-market cooperation, helping cultivate their international outlook. Many private domestic banks have introduced similar systems. For example, Cathay United already has more than 16 classes of MAs, many of whom are already in charge of overseas branches. Taiwan ranked 12th in the 2019 Global Competitiveness Report of the World Economic Forum (WEF), an improvement of 1 place from 2018. Its ranking for “financial system” rose from 7th place to 6th, indicating that its financial market is continuing to become more competitive. “Taiwan's top private financial holding companies are actively observing and learning from top international institutions, and constantly improving their market competitiveness and profitability,” Li said. The most important thing for financial institutions is to earn customer recognition for their services. Only through branding can they compete with world-class institutions. Taiwan's private financial holdings companies are working hard to improve their capabilities in this area. They have made certain progress over the years in terms of products, talent, and related infrastructure. Jia-Wen Chen, General Manager of CTBC, who also came from a foreign bank, recalled that after Citibank entered the Taiwan market, it introduced many products and services for the banking industry. It also trained many professionals with global outlooks, who indeed played an important role in the internationalization of Taiwan’s banking industry. Accelerating transformation and expanding internationally Chen noted that following years of study and development, the current market leaders in Taiwan have foreign shareholding ratios of close to 40%, and their share price-to-net value ratios have more than doubled during the epidemic, performing better than their Asian counterpart banks. Regional markets have emerged with a certain level of international competition. In the next stage of their growth, Taiwanese banks should focus on business scale, international footprint, and operational transformation to become regional leaders. Taiwanese banks have proven themselves able to compete with foreign banks in Taiwan in terms of profit, recognition, and service quality. However, Chu and Huang also pointed out that Taiwan’s banking industry may need to strengthen three things if it is to go global. First, a shortage exists of people with international perspectives and foreign language capabilities. Huang also pointed out that Citibank and other well-known foreign banks have a meticulous division of labor and financial consultants. “It's like a teacher-student ratio,” he said. “One wealth manager at Citibank may only be responsible for only 10 VIP clients, while Taiwanese wealth managers have dozens of clients. The experience is different.” The second is a global layout. The century-old Citigroup has offices in 200 countries. If a customer on their platform wants to go to any market for growth or capital operations, their cash services can go with them, making funds adjustment extremely convenient. Zhu said bluntly, “If banks want to establish overseas bases, they must cultivate more international talent. Taiwan's financial industry is small and lacks experience. Most banks still focus on local businesses.” This is a problem with which Taiwan’s banking industry has been struggling for many years. To go to overseas, the home market must have a certain scale to support that expansion. There are too many banks in Taiwan in fierce competition, and consolidation is not easy, slowing growth. "In the future,” he said, “it may be necessary to expand, whether organically or not.” Diversification to narrow the gap with foreign banks The third is product diversification. Although Taiwan has been financially liberalized and it uses a negative list, it is after all a country with a continental law system. With a high degree of consumer rights protection and exchange rate controls and other considerations, its markets cannot be as unrestricted as foreign countries. As described by Huang, 200 bonds is already considered to be a rich product line for Taiwanese wealth managers, but when his students go to European banks, their portfolio includes 2,000 bonds with rates ranging from 2.5% to 25%. Huang said, “Those banks can underwrite customers’ bonds and allocate them to investors everywhere. Banks also provide a variety of financing solutions for corporate customers.” Citibank has been widely praised for its wealth management and private banking, and it is indeed a global leader. Mr. Lee said that global banks have a high-asset customer base, which is further divided into private banking services for medium-to-high and very high asset customers. “Foreign banks have been in this business for a long time. Many private Swiss banks have histories of 100 years. It’s unlikely that Taiwan will surpass foreign banks in terms of wealth management within a short period.” But Lee emphasized that the “Wealth Management 2.0” policy of the FSC will help the industry accelerate its development, allowing capable banks to work under flexible regulations to narrow the gap with foreign banks. But this will take time. “Just as with credit cards and other financial fields, we can break into these markets, we just need a bit of time,” he said. All of the interviewees pointed out that the competitive niche of Taiwan’s banking industry is the global layout of Taiwanese businesses, who continue to grow stronger. Mr. Lee said that private banks’ KYC procedures have definitely become better than foreign banks in recent years. United World Chinese Commercial Bank (the predecessor of Cathay United Bank), for instance is over 45 years old, and has had relationships with customers for generations. This deep, meticulous, and warm care and service is beyond comparison with foreign banks. Mr. Chen also pointed out that as the government offered preferential policies to encourage Taiwanese capital to return onshore, high-asset customers often increased their proportion of asset allocation in Taiwan. Many customers calculated that Taiwan could become a more stable asset management center in the current geopolitical situation. In the future, Taiwan’s banking industry can also focus on family inheritance and attractive local investment targets. Taiwanese wealth managers have a deeper understanding of Taiwan’s high-asset customers than foreign banks, and local banks have more capacity to plan asset allocation and inheritance in Taiwan. In the future, they can gradually give domestic high-asset customers more products, as well as practical advisory services and sales, and also further integrate their services with Hong Kong and Singapore. According to a financial inclusion evaluation study the FSC recently released, Taiwan has 18 bank branches and 161 ATMs for every 100,000 adults. The convenience of financial services is higher for Taiwanese people than the global average, but this also shows that Taiwan’s banking industry is excessively competitive. The traditional foreign exchange deposit business is already a “red sea” market. It is extremely difficult for any bank to rely on organic growth to get a market share of 20% or even 10%. Therefore, Taiwan’s top three or five banks do not have a combined market share of more than half, as in Hong Kong and Singapore. Doing business all over the world How can Taiwan's banking industry find the next blue ocean market? Mr. Huang said that they will keep striding forward in four directions: product diversification, financial digitization, large scale, and division of labor. The wealth management business will become larger, and banks must go overseas. Taiwan’s strongest competitive advantage lies in international trade. To earn money, you can’t just have Taiwanese customers. In the future, banks must do business with foreign customers and gradually expand their scale. Over time, as customers accumulate, they can first become leading banks in the Greater China market, and eventually become global champions. “Scale is definitely an important aspect,” Mr. Lee said, but the sound operations and profitability are more important. Bank stocks are actually quite cheap now, all priced under their book value, and many Japanese banks even have price-to-book (PB) ratios under 0.5, although they are not necessarily available for purchase. It is important to expand through acquisitions, but such inorganic expansion must also be able to earn returns for shareholders. Mr. Lee noted that acquisitions and organic growth are both possible ways to expand. With reference to the growth model of fintech companies, the market has begun to grow by leaps and bounds due to digitization, technology and big data development, and the emergence of some new models. Therefore, Cathay United is also in the process of learning and observing. It is also working with different strategic partners in foreign markets to find new development models, hoping to more quickly grasp the needs of customers. Mr. Lee said that Cathay United would rather spend more resources to improve its operations at this stage, just like runners need a long period of training before winning marathons. Only when the opportunity appears, will they be able to win. Cathay United has been working hard to transform and improve its management capabilities. Mr. Chen also said that banking has always been an industry with significant economies of scale. With digitalization, these economies of scale will shift from branches to digital platforms, customer bases, and cross-industry cooperation. Only large leading banks will be able to fully integrate themselves with leaders in other industries. In recent years, CTBC has also been innovating and digitalizing, exploring customer pain points, and seeking solutions, aiming to be at the forefront of the market. For Taiwan’s banking industry, overseas business is an indispensable part of future growth. The importance of scaled overseas platforms is self-evident. Mr. Chen said that Asia’s leading regional banks are mostly twice the size of CTBC. If CTBC can now gain a firm position in the region, it will have the opportunity to eventually develop an overseas business platform on the same scale as other foreign banks. “Our overseas business will be on a new level.”