When the Grand Commercial Bank opened in Taiwan three and a half years ago, it was the first new bank to enter the market in more than a decade. Since then, one new bank after another has joined the fray, luring customers with flashy advertising campaigns, special promotions, high-interest deposits, and low interest loans.
This sudden surge has come about largely because of changes in the ROC Banking Law, which before 1990 severely restricted the entrance of new financial institutions into the market. The decision to revise the law was part of a government policy since the late 1980s to deregulate the financial industry and stimulate Taiwan’s development as a regional financial center. Another factor attracting new banks is the overall economic growth of recent years, and the resulting expansion of the domestic financial market. At the end of 1994, for example, total outstanding deposits at all local banks reached US$334 billion, nearly 15 percent more than the year before, and outstanding loans stood at more than US$320 billion, up almost 18 percent. This growth has fostered greater financial sophistication, and a public that is demanding more efficient and competitive banking services.
The new banks, sixteen in all, are fostering tremendous change. Although they still represent a small percentage of the financial sector, they have secured a solid footing. More significantly, as highly competitive, privately run firms, the new banks are posing a clear threat to the government-owned banks that have long dominated the market. But while the increased competition is bringing a new level of quality and service to domestic banking, it is also giving rise to concerns about future market stability, especially because many of the new entries are developing into powerful financial conglomerates.
The quick success of the new banks has amazed industry observers. According to the Central Bank of China, outstanding deposits at all sixteen of them topped US$34.6 billion at the end of 1994, accounting for 9.5 percent of banking market shares, up from 6.6 percent the year before. For the same period, outstanding loans at these banks totaled more than US$33 billion, or 10.3 percent of banking shares, up from 7.1 percent in 1993. Ten of the new banks recorded a 90 percent increase in deposits in 1994, while seven enjoyed at least a 70 percent growth in loans.
With paid-in capital at more than US$390 million each, these firms also enjoyed average pre-tax profits of 6 percent in 1994, compared with an average of 3.9 percent for the 1992-to-1994 period. EnTie Commercial Bank, which was inaugurated in April 1993 as the latest entry to the market, had last year’s highest profits, with a pre-tax rate of 7.6 percent.
Today’s depositors have more money and more sophisticated ideas about how it should be handled. Meeting their expectations is an essential key to success in an increasingly competitive financial market.
Such gains are especially impressive considering the obstacles these banks face. They are competing with forty long established financial institutions, most of which spent decades building client trust and business connections as well as a large pool of experienced personnel and a broad network of islandwide branches. Most of these older banks have also enjoyed the benefits of their government-run status, which at one time gave them priority in financing public projects and providing loans to state-owned companies. Besides this tough frontline, the new entries are in keen rivalry among themselves for a share of the market.
To meet the competition, many of the new banks have undertaken aggressive headhunting campaigns, soliciting experienced staffers from existing banks by offering them attractive managerial posts, better salaries, and, in most cases, a large lump-sum payment to compensate for the loss of a secure job and seniority record at their old firms. Many of those who took up the offer recognized intangible benefits as well, including an end to the bondage of bureaucratic regulations and promotion schedules common at government banks. “In addition to higher pay, one major attraction of the new banks is the greater operational freedom and wider room for career development,” says EnTie Commercial Bank assistant manager Chen Lai-feng (陳賴鋒), who formerly worked at the city-run TaipeiBank.
This greater freedom has been an essential key to success for the new banks. People such as Chen have been able to work in a much more aggressive and flexible manner than was possible in their government-affiliated positions. Among other things, they have made an all-out effort to expand their loan business by targeting clients and market niches that were neglected by the old, more conventional banks. For example, Bank SinoPac, which opened in 1992 with the financial backing of Taiwan’s majority political party, the Kuomintang, has been highly active in the consumer financing business. It has offered auto loans at an unprecedented low interest rate of 13.8 percent, compared to as much as 20 percent previously charged by the older banks—if they would even bother to extend such a small-scale loan. Overall, consumer lending accounted for a whopping 47 percent of SinoPac’s loan business in 1994, the highest among the new banks. Union Bank of Taiwan ranked second, with 42 percent of its loans going to consumers, followed by Taishin International with 38 percent and Dah An Commercial with 34 percent.
While such an emphasis on consumer lending is a long-established practice in the United States and other Western countries, it represents a new direction for Taiwan banks. The government-run institutions of the past largely ignored this sector of the market in favor of large, cost-efficient business loans. Traditional thinking categorized small scale consumer loans as risky, partly because it was difficult to acquire reliable credit information on such clients. But this type of thinking is going by the wayside. “Consumer lending is actually quite safe and has substantial market potential,” says Dah An Commercial Bank’s general manager, Keng Ping (耿平). “The island’s rapid economic development over the past few decades has fostered a large middle class with strong economic power. It’s quite rare for a middle-class person with, say, ten years of steady employment, to default on a bank loan.”
Safe deposits? Clients’ valuables may be secure in any bank vault, but will their money be as safe? Some observers fear that the huge manufacturing groups behind many new banks may use depositors’ funds for their own benefit.
At Dah An, a client who has already mortgaged collateral for a loan with another bank can borrow a larger amount of money, use part of the new loan to payoff the old loan, and then mortgage the collateral with Dah An. “We’re willing to take the risk that the client might not use the money to pay back his old loan, thereby depriving our loan of the protection of the collateral,” Keng says. In many cases, the new banks offer loans equivalent to 100 percent of the market value of their collateral, rather than the 70 percent common among older banks. In such cases, the bank treats 70 percent of the money as a secured loan and 30 percent as an unsecured loan, the latter requiring a higher interest rate.
The new private banks are also more willing than the older banks to extend loans to small and medium-sized businesses. Despite the increased risks involved, the potential profits are much greater than when dealing with large companies that can demand lower interest rates. Three of the new banks, Grand Commercial, Baodao Commercial, and Asia Pacific, have been especially active in loans for small and medium-sized businesses, which accounted for more than 30 percent of their total loans in 1994.
To support such an aggressive loan business, the new banks have made major efforts to attract depositors by offering higher interest rates. Passbook depositors, for example, enjoy rates of about one and a half percentage points higher than elsewhere. Most of the new firms are also promoting a “flexible composite account,” which automatically transfers any passbook deposits exceeding a certain amount into a higher-interest time deposit account.
The new banks are also venturing into non-banking services such as credit cards, stock investments, and foreign exchange dealings. While the old banks have long had a hand in such services,especially foreign exchange, the new ones have pursued it much more aggressively. Stock investment has been a particularly important source of profits. EnTie, for instance, earned US$7.9 million from investments in stocks and bonds in 1994, accounting for 26 percent of its pre-tax profits of US$29.5 million.
Improved customer service is another key to success for the new banks. Their clerks are much more likely to greet customers in a friendly and helpful manner, compared with the bureaucratic, can’t-be-bothered attitude common at government-run banks in the past. Staff members are also more eager to promote and explain the bank’s various services. Even the floor design and decor is generally more attractive.
All of this has had an impact on the government banks. Although the old financial institutions have also made some gains in recent years, they have done so largely because of the island’s overall economic expansion. For example, while aggregate outstanding deposits at the provincial government’s three commercial banks (Chang Hwa, First Commercial, and Hua Nan) grew 3.8 percent to US$70 billion in 1994, and their outstanding loans grew 5.8 percent to US$62 billion, they are still being squeezed out of a growing percentage of the market. These three banks, among the largest in Taiwan, have seen their total market shares drop from more than 30 percent five years ago to 20 percent at the end of 1994.
Catering to the little guy—The new banks have made great strides by extending loans to consumers and small and medium-sized businesses. These sectors of the market were largely ignored by the old banks in favor of big-time corporate customers.
To meet the competition, many older institutions have greatly improved their treatment of customers and their marketing strategies. They have also begun to tap the consumer loan market. As a result, the average difference between deposit and loan interest rates in the domestic banking market as a whole was driven down to 2.47 percentage points in 1993, compared with 4.27 points in 1982. In addition, the government is drafting a Law for the Management of Government-run Banks, which will largely remove the shackles of bureaucratic regulations that govern everything from budget decisions to personnel and administration at these institutions.
The new banks have also grabbed a considerable amount of business from underground financiers, who have long played a major role in the Taiwan economy. The Directorate General of Budget, Accounting, and Statistics estimates the scale of underground banking at US$4.7 billion, but market insiders believe the actual amount is much larger. A major reason for their success is the previous refusal of many banks to deal with individual customers. Illegal money lenders thus became one of the main sources, outside of relatives and friends, for consumer and small business loans. But this is changing. With interest rates among underground bankers sometimes as high as 50 percent, they are now having a hard time competing.
Having secured a solid footing in the market, the sixteen new banks are working to expand their market share. They have two major goals in mind: enlarging the scale of their business, which is still only about one-tenth that of the three provincial banks, and maintaining their profit levels above 6 percent for three consecutive years, thereby allowing them to be listed on the Taiwan stock exchange.
One of the first steps toward achieving these goals is to attract more customers, mainly by opening more branches around the island. As EnTie’s Chen Lai-feng remarks, “It is essential to have a large number of branches in order to attract passbook deposits, since location is a primary consideration for depositors.” But one of the major difficulties is a legal restriction that allows banks to open no more than five branches per year. As a result, most of the new banks now have about a dozen branches islandwide, compared to 150 each for the three provincial banks. Still, it is only a matter of time before they catch up. “When the number of branches for new banks reaches thirty,” Chen says, “the level of competition will be entirely different.”
On-the-job exercising—By building an energetic and friendly staff, new banks have developed an advantage over their government-run competitors, who have a reputation for unhelpful, bureaucratic service.
In the meantime, many new banks are getting a head start by installing numerous automatic teller machines (ATMs). As of August 1994, they had opened 534 ATMs, with Taishin’s 43 topping the list, at such convenient locations as supermarkets and department stores.
Most of the new institutions have also established branches that handle international transactions, a major growth area in view of the island’s numerous overseas investors. Cosmos Bank, Taiwan, opened in 1993, registered US$970 million in forex-related business last year and expects to double the amount to US$1.8 billion this year. Likewise, Dah An Commercial’s forex dealings shot up to US$900 million in 1994, more than double its 1993 figure, and the bank expects to hit US$1.5 billion this year.
Dah An also achieved a milestone in its international banking business this March when it organized a major syndicated loan of US$50 million for Wyse Technology (Taiwan) Co. Ltd., a manufacturer of computer monitors, to acquire its American parent company. Dah An will be responsible for US$29 million of the loan, with the remainder to be provided by three subordinate lenders, all of them new banks: Grand Commercial, Union Bank, and Hsinchu Business Bank.
Some new banks have also established a foothold in the overseas market. The Rebar Group, which owns the Chinese Bank, now also owns a bank in the United States, as does the Tainan Textile Group, owner of Grand Commercial Bank. Bank SinoPac is currently negotiating the acquisition of a bank in California.
Moreover, in line with the government’s policy to develop the island’s financial markets, some new banks have been expanding into other business sectors, such as futures trading, bills financing, and securities financing. Of the fourteen new futures trading companies that were inaugurated in mid-1994, three are backed by new banks: Baodao Commercial, Pan Asia, and Union Bank of Taiwan. In addition, Dah An Commercial is a major investor in the Tachung Bills Financing Co., which will be established this year, breaking the long-standing monopoly of this sector by three existing firms. Several other bills financing firms will also open shop this year, and most of them are backed by new banks, including Cosmos, Our Commercial, Grand Commercial, and Union Bank of Taiwan. These new businesses benefit by drawing on the bank’s clientele pool, credit investigation expertise, and automation know-how. And the banks themselves are falling in line with the international trend toward “financial department stores.” While the old banks are also starting to follow this trend, they are quickly falling behind.
One reason for the aggressive expansion among new banks is that many of them are backed by large, highly competitive manufacturing enterprises. These companies already have much experience in expanding into new fields. They are now eager to enter a wide range of financial markets as a more promising alternative to their traditional businesses. As a result, many of these companies are developing into financial conglomerates.
The President Group, the island’s leading food product manufacturer, is a typical example. President is associated with the Tainan Textile Group and is the primary owner of Grand Commercial Bank. It is expanding into a wide array of other financial businesses as well: securities brokerages, securities investment trusts, and futures trading. It also cooperated with Eagle Star Co. of Britain to set up a life insurance company in March. A bills financing firm is also in the works, and President plans to establish a loan company later this year if the government proceeds with a plan to deregulate that sector.
Luxury and lucre—Attractive and inviting interiors are just one way new banks are drawing business. Offering extensive non-banking services such as stock investing and forex dealings is another.
Kao Chin-yen (高清愿), chief executive officer of the President Group, points out that the financial market offers an ideal outlet for investing the profits of its affiliate companies. Although profits earned by financial firms are thinning as the competition grows, Kao says these businesses are still much easier to operate than manufacturing. President, therefore, plans to move into every new financial sector that the government opens up.
Likewise, the Changyi Group, a pesticide manufacturer and owner of Pan Asia Bank, has invested in the futures and credit card businesses as well. The Shin Kong Group, which set up Taishin International Bank, already owns Shin Kong Life Insurance Co., the island’s second largest, and the Shin Kong Fire & Marine Insurance Co. The so-called “Sanchung Gang,” a powerful group of family-run construction companies based in the city of Sanchung, has also moved into banking (Union Bank of Taiwan and EnTie Commercial), as well as the bills financing sector. And the Rebar Group, the cement manufacturer that opened the Chinese Bank, has ambitious plans to move further into the financial market in the next several years. According to a recent inter view in the Economic Daily News, Wang You-tseng (王又曾), Rebar’s chief executive officer, believes an increasing number of large enterprises will take ad vantage of the government’s deregulation of the financial industry.
Many insiders see the trend toward financial conglomerates as inevitable. Dah An’s Keng Ping, for example, believes that only by allowing big businesses to make inroads into this sector can Taiwan meet the market trend of integrated financial services, cope with increasing foreign competition, and achieve the goal of developing into a regional financial center.
Other observers, however, fear that if large enterprises eventually dominate the financial markets, they will take advantage of the opportunity to use huge amounts of the public’s money for their own benefit. Even the new governor of the Central Bank, Sheu Yuan-dong (許遠東), has expressed concern about the involvement of big business groups in the financial industry. In a March 20 press conference given shortly after his appointment, Sheu cautioned these enterprises not to forget that their banks are meant to serve the public. Some observers warn that the trend could result in a major financial crisis much like the 1985 scandal of the Tenth Credit Cooperative, which used depositors’ funds for what turned out to be bad investments in its affiliated companies. When depositors found out, they made a run on the cooperative, as well as on Cathay Trust, which was operated by a brother of the Tenth Credit’s chairman. Both banks collapsed, and many depositors lost their savings.
So far, no major irregularities have been uncovered among the new banks, but insiders say they are involved in some illicit practices, such as buying the stocks of their affiliate companies, purchasing real estate from their affiliates at prices above market value, and over-assessing the value of collateral when extending loans to their affiliates. Keng Ping admits the need to establish regulations to prevent big enterprises from using their financial affiliates for their own benefit. The government has instituted some precautionary measures. The Banking Law, for example, includes strict regulations concerning the ratio of share holdings in anyone bank by related individuals and groups, as well as the ratio of maximum loans that can be extended to individuals or corporate bodies related to executives of the banks. But in general, Keng says, the island still lacks a complete legal framework.
Some industry insiders believe problems may surface in the next few years. At that time, many of the veteran bankers who were lured to the new private banks will come to the end of their contracts, most of which were signed for a three-year period. Owners of the new banks may gradually begin to replace these experienced staff members with their favorite managers from within the bank’s parent company. These are likely to be people who lack banking expertise but are more willing to comply with any instructions handed down from their superiors, some of which may favor the interests of the company over those of the bank’s clients.
Moreover, the increasingly large scale and growing complexity of the financial market make it difficult, if not impossible, for the government to monitor the industry effectively. The legal operations of financial institutions and the overall order of the market, many banking experts say, will depend to a substantial extent on self-discipline and professionalism among the financial institutions themselves.
Yet competition itself may be the most effective disciplinarian. The sixteen new banks will continue to face an increasingly intense contest as time goes on. As the government continues deregulating the financial sector, a growing number of new competitors are joining the market. Over the past two years, for instance, China Investment and Trust Co. and Cathay Investment and Trust Co. have been converted into banks under the latest deregulation measure. To facilitate the island’s bid to join the World Trade Organization, the government has also largely relaxed the conditions on foreign banks, allowing more to enter the market and increasing the number of Taiwan branches each may open. In addition, many local financial institutions such as credit cooperatives will be allowed to convert into banks and extend their operations island wide. With this kind of heated competition, as well as the growing sophistication of banking customers, only those institutions that conduct business professionally and ethically will be able to establish the trust and reliability necessary to succeed.
Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly newspaper published by the United Daily News Group.