Still no traction in banking sector consolidation
The FSC’s latest action plan provides M&A incentives, but banks adopt wait-and-see attitude
Su Jian-Rong, finance minister of Taiwan, struggles to contain a smile when asked about consolidation and privatization of local state-owned banks.
Granted, overseeing the ministry of finance and thus the largest shareholder in four wholly state-owned banks as well as a number of semi-private banks, he is often asked the question.
“At this time, the most important thing is not M&A,” he quickly dismisses the idea. “First, efficiency (of state-owned banks) needs to be improved. Although they control roughly 50% of assets in Taiwan’s financial industry, their share of profitability is less than 40% of the industry.”
“But people often forget that sometimes one plus one does not always equal two. If there are no synergies between banks, then adding one and one will result in less than two.”
At less than 8%, return on equity among Taiwanese financial institutions is roughly half that of the sector average in Asia – and most state-owned and semi-private banks fare considerably worse. Consolidation, though, is not the panacea that it is often made out to be in his mind.
“We are now considering the issues at state-owned banks and looking to improve their operational efficiency,” Su says and also observes: “A lot of things need to be changed. If two publicly-held banks merge, it will not fix anything.” Even if the ministry found consolidation with the private sector to be the best route forward, it would face a long and difficult road to make it happen, he adds: “Frankly, we have a lot of legal limitations. For example, for 100% state-owned banks, it is very hard to privatize. It would need approval from the Legislative Yuan.”
Analysts and private sector shareholders often cite a startling statistic: there are as many 7/11 shops as there are bank branches in Taiwan. And nearly as frequent, news emerge that suggest industry consolidation is in the cards once again. 2018 has been no different in this respect as the Financial Supervisory Commission’s Financial Development Action Plan, released in draft form in June, shows.
Though it stays clear of mentioning state-owned banks, the plan promotes industry consolidation among privately-held banks, providing incentives by lowering the threshold of what the regulatory will consider an initial “strategic stake” acquisition to 10% (previously 25%). At the same time, favourable treatment is given to invested capital when calculating a bank’s capital adequacy ratio. Together, these measures are designed to translate into faster and cheaper paths to control for buyers.
Su knows not only of the workings at state-owned banks, where a large coverage and continuous customer trust are met with outdated core banking systems, lack of innovation and ill-suited government-appointed leaders. Through his previous role in the Taipei city government, he had also sat on the board of Fubon Financial Holding Company, and can therefore compare firsthand how commercial financial institutions run their business. The pressure that consolidation among private FHCs would inflict on state-owned banks is therefore not beyond him.
“Consolidation among private owned banks will be good to raise competitiveness internationally, (but the strategy is) posing a big challenge to the scale advantages of government-owned financial institutions.”
Private sector consolidation could indirectly lead to reforms at state-owned and semi-private banks as well. Yet, analysts are in unanimous agreement that the FSC incentives will either fall flat altogether – or lead to insignificant consolidations without a real impact on the sector only.
“Few of our covered FHCs will likely be keen to take action despite their open attitude, given already sufficient domestic scale (Cathay, CTBC, E.SUN) in banking and/or capital constraints (Yuanta),” reasons Anthony Lam, equities analyst at HSBC.
“Given state bank consolidation and acquisition is excluded, we see limited impact on industry competition profile given potential M&A activities are still likely on smaller private banks (such as Yuanta-Ta Chong and KGI-Cosmos in recent years),” notes Jemmy Huang, FI analyst for APAC at J.P. Morgan.
Timing is another roadblock. Listed Taiwanese financial institutions have outperformed all but one market in Asia this year. As a result, shares in any of the attractive banks demand an all-time high premium to earnings.
“Our discussions with companies suggest returns on capital, by taking into account potential synergies, is still the key factor for M&A consideration, based on which we struggle to find any attractive candidates, if M&A premiums of 10-30% need to be applied on top of current valuation,” Huang finds.
One caveat applies to this line of reasoning, though. Like in a Wild West shootout, a single meaningful acquisition could lead to a domino effect across the industry. The question might just be who fires first. “However, management does reckon reactive M&As are possible if there are large-scale deals done by others that are meaningful enough to change the industry competition landscape,” explains Huang. “It is thus interesting to see whether the final results on the Taishin-CHB lawsuit could trigger state bank consolidation.”
In 2017, the High Court had sided with Taishin FHC in a long-running dispute over its stake in Chang Hwa Bank and the fact it had been barred from gaining control over CHB’s board despite it being the bank’s largest stakeholder. The Ministry of Finance had, however, appealed and thus leaves the Supreme Court to make the final decision.
A popular target (of speculation)
Even though actual traction has been lacking, speculation on possible merger constellations have featured widely in local media. Banks such as O-Bank (formerly Industrial Bank of Taiwan) have been named as a possible target, while others such as Mega have brought themselves into the mix by stating they are exploring acquisitions that could add a life insurance business line to the group.
One name that surfaces in most conversations on sector consolidation is E.SUN FHC – Taiwan’s best performing bank this year by a number of measures. “E.SUN is a target but could be an acquirer, too,” says Ryan Shen, portfolio manager at Capital Investment Trust Corporation, whose fund holds a 3% stake in the bank. “There are too many FHCs in Taiwan, any acquisition would be a good thing.”
Local press has speculated that E.SUN could be involved in market consolidation, but given its valuation premium and unique corporate culture, its role as a target is questioned by analysts such as Huang.
Joseph Huang, president and CEO of E.SUN FHC, is noncommittal when asked about his bank’s plans. “In the long term, consolidation can improve efficiency and effectiveness of the market,” he tells The Asset. “But M&A is like marriage, it should be friendly. At the moment, we do not have a target in mind and are just watching the environment. We do not rule out any possibility.”
Huang dismisses the idea that E.SUN could become subject to a hostile takeover. About 20% of shares are owned by the bank’s employees and their family members, he says. Relations with foreign institutional investors, which own another 45% of shares, are also strong, adding to stability in ownership, he notes.
Shen agrees that a hostile takeover of E.SUN – or any other bank – is extremely unlikely to occur. The likelihood of friendly takeovers, as eyed by the FSC, is also low in his opinion.
“This initiative is no more serious than any of the previous ones,” he concludes. “It will probably take another financial crisis for any meaningful consolidation to happen.”
While the FSC may need to go back to the drawing board, then, Taiwanese consumers likely will continue to be spoiled for choice for banks.