The Taiwan Banker

On June 29, 2010, Taiwan and China signed the Economic Cooperation Framework Agreement (ECFA). In the middle of that year, the Financial Supervisory Commission (FSC) approved the first batch of domestic banks to set up branches in China (Land Bank, Taiwan Cooperative Bank, Chang Hwa Bank, First Bank, and Cathay Bank). After that, many more Taiwanese banks entered China. Initially, they hoped to be able to enjoy the fruits of its rapid growth and higher interest rate spreads than in Taiwan after qualifying to undertake RMB business, riding the train of RMB internationalization and appreciation. It seemed the possibilities were endless.The past 10 years have seen the opportunities from the Shanghai Free Trade Zone established in September 2013, the Belt and Road Initiative that also began in September 2013, and the Asian Infrastructure Investment Bank established in October 2014. Starting in May 2015, Made in China 2025 also ushered in opportunities in personal housing and consumer finance brought about by increased local purchasing power. Nevertheless, foreign banks (including those from Taiwan) never exceeded 2% of China’s local banking industry, by either revenue or assets. Shanghai, China’s top financial center, attracted many foreign banks to relocate from Hong Kong or other major financial centers in Asia, helping them shorten the distance to customers, and also to earn business opportunities in new fields and large-scale transactions. However, following escalating tensions between the US and China, the restructuring of global supply chains, and the impact of repeated lockdowns, coupled with the “common prosperity” theme emphasized by Chinese leader Xi Jinping in August 2021, the outlook for foreign financial institutions in China is precarious. It is also instructive to observe statistics from headhunting agencies and the migration of foreign financial executives to get a more detailed view of the situation. Limited growth opportunities, and inferior product offeringOn the ground, Taiwanese banks in China are mainly divided into subsidiary banks and branches. The main difference between the two is that subsidiary banks are legally established in China, and can provide credit card and RMB business for Chinese citizens.Regarding branch types, nine banks have set up 25 local branches (with eight sub-branches under their jurisdiction). In terms of asset portfolio, business focuses on corporate finance, including individual and syndicated lending. Considering that inter-bank funding is rapidly becoming scarcer, most inter-bank credit is conservative short-term lending (less than seven days). In terms of investment (including bonds), due to the need for investment to build risk control and information systems, branches lack advantages of scale. Also, because bond markets have been unstable recently, their development has been relatively limited.In terms of subsidiary bank types, five lenders operate as subsidiary banks (with 47 branches under their jurisdiction). Corporate lending, regardless of whether it is individual or syndicated lending, is still a bulk business dominated by Taiwanese banks; the exact proportions depend on individual bank policies. Retail banking has high capital costs, and mortgage lending is restricted by total amount per local jurisdiction. There are no economies of scale for these Taiwnaese lenders in China, and their offers are not attractive to locals. Regarding wealth management, only Fubon Bank (China), which was the first to expand its local business and has a broader business license, developed rapidly. Its wealth management product line and rate of return are still inferior to those of big local banks.The scale of Taiwanese banks in China is small, with few subsidiaries and branches. Their ability to absorb RMB deposits is inherently lacking, giving them higher capital cost and lending rates, and worse credit availability than Chinese banks. Unless Taiwanese banks can provide unique services or add value that local banks cannot provide, such as convenient cross-border capital flows to Taiwan or overseas, they will never be very competitive in China. From a macro perspective, according to FSC statistics, the exposure of domestic banks to China in the second quarter of 2022 was about NT$1.19 trillion, accounting for 29.11% of their net worth last year – both figures reaching new lows since statistics began in 2013 (see Figure 1). Since 2019, no bank’s net exposure ratio to China has exceeded the 80% limit the FSC originally set. Since 2020, none has exceeded 70%. The maximum in 2Q 2022 was 59%, and only three banks exceeded 50%. Source: FSC, collected by authorIt is notable that the progress of three banks approved by the FSC to set up branches in China has been suspended: the Bank of Taiwan Shanghai Branch Free Trade Zone Sub-branch was approved back in February 2014, the Xiamen Branch of the Huayin Shanghai Subsidiary of Cathay Bank was approved in May 2016, and the Xiamen Branch of Land Bank was approved in August 2017. This may indicate changes in the local operating environment, as well as banks’ views on local business.Banks each have their own strategiesWorld affairs are like the opening to a chess game. Looking at changes in the operating environment of Chinese banks, considering that their decisions to open and close branches are not autonomous and are highly affected by local politics and other non-commercial factors, perhaps foreign banks can give us further information.According to the statistics from the China Banking and Insurance Regulatory Commission, 329 foreign-funded commercial banks applied for withdrawal from 2007 until the beginning of September 2022, when data are available. Following a peak from 2016-2018 (Figure 2), 19 foreign banks withdrew from the beginning of 2022 up to September. However, seven new banks also applied during that time, revealing that some foreign banks still find a favorable cost-benefit balance. Taiwanese banks have generally increased their risk awareness in response to the new situation. In terms of strategic direction, applications to set up branches in China have been postponed for now. Banks have also adopted stricter credit and lending reviews, and credit customers have mostly turned to familiar Taiwanese partners. As for the large number of large non-performing syndicated loan cases in recent years such as Lumena, Ultrasonic, Firstextile, Zhaoheng Hydropower, and Kingsbridge, banks have learned from that loans in listed companies and key emerging industries led by foreign banks are not guaranteed, and have protected their creditor’s rights by offsetting borrower deposits and initiating relevant litigation. All of this is the tuition for a valuable education.Operational strategy and risk control are the keysChina’s factor-driven economic development model for many years following its accession to the WTO, and its expanded fiscal and monetary policy following the 4 trillion RMB bailout after 2008, indeed brought significant growth. However, resource allocation distortion over the long term planted the seeds for a variety of problems, and it is not surprising to see the fruits now appearing.Looking ahead, China will face more complex variables and risks, and the private sector will further retreat. Taiwan's banking industry has been affected by factors such as China’s deteriorating business environment, a gradual increase in costs, China’s escalating conflict with the US, the impact of zero COVID on production and logistics, and global supply chain restructuring. Risk factors such as NPLs and RMB exchange losses have already increased local risk awareness, and banks have reduced lending and investment in local companies. Of course, some banks are still optimistic about China’s economic volume and subsequent business opportunities from growth of domestic demand, and have continued investing in China.Each bank will have to make its own plans based on its judgements of China's future economy and finances. They will examine whether their conditions for doing business in China still match their original strategic intention. Some will try to maintain existing business, while others will jump ship. Regardless of whether their strategy is limited or aggressive, their choice now will determine success or failure within a few years. China-related economic and financial risks and corresponding asset preservation measures will be the decisive factors affecting the future profitability of banks industry in China. When the tide goes out, Taiwan-funded banks will not be the ones swimming naked. The author is Deputy Director of the TABF Communications and Publication Center