In Pursuit of a Route to China, Taiwan Rivals May Copy Fubon
A rare cross-border bank deal this week has sparked speculation that Taiwan financial institutions, blocked from setting up their own operations in China, may find their way into the mainland market by buying small and midsize Hong Kong banks.
The flurry of talk follows the announcement Monday that Fubon Financial Holding, Taiwan's largest privately owned bank, will purchase 55% of Hong Kong-based International Bank of Asia from Arab Banking of Bahrain for 2.37 billion Hong Kong dollars (US$303.9 million). (See related article.)
In the near term, Fubon plans to use IBA to increase Hong Kong-dollar lending to its 1,000 corporate clients in Hong Kong and mainland China, a person familiar with the deal said. In the longer term, this person said, Fubon plans to use IBA to expand into China's banking sector. Under World Trade Organization guidelines, China must widen the door to the sector to outside banks in 2007.
Investors and investment bankers are considering whether other big Taiwan banks, such as Chinatrust Financial Holding and Cathay Financial Holding, might also use Hong Kong banks to gain entry into China. Chinatrust says it isn't seeking a deal for a Hong Kong bank; calls to Cathay weren't returned.
Signs of Consolidation
Monday's deal, following two bank acquisitions in August, strengthens arguments that a long-awaited wave of consolidation is beginning in Hong Kong's overcrowded financial sector. Banking analysts have been shouting themselves hoarse calling for the city's small banks, many of them family-controlled, to get together. Analysts say several factors are creating a favorable environment for mergers and acquisitions: The banking sector's weak stock prices favor deals, Hong Kong's economy is on the rebound and China's banking sector is opening.
"We are in the midst of a consolidation wave, and I think we will see more," said Sunil Garg , an analyst at Fox-Pitt, Kelton investment bank in Hong Kong.
The Taiwan angle could accelerate the process. "Given the Taiwanese restrictions on direct investment in China, it makes sense for Taiwanese banks to position themselves in Hong Kong to get into China," said Ching Ho, a bank analyst at Morgan Stanley in Hong Kong.
Taiwan's banks have been frustrated for years by their government's restrictions on doing business in China, where hundreds of their corporate customers have established a major presence. Taiwan companies have poured as much as $100 billion into China in the past decade, and bankers on the island complain that their inability to join their clients forces them to cede important business to foreign rivals.
Taiwan's government says it can't allow the island's banks to move into China because it has no contact with Chinese regulators and can't ensure lenders follow Taiwan's rules in their China operations. China claims sovereignty over Taiwan and refuses to deal with the island's government.
Easing Restrictions
In recent years, Taipei has begun cautiously dismantling some of its restrictions on Taiwan banks operating in China. Several Taiwan lenders were permitted last year to open representative offices in China, including government-controlled First Financial Holding and Hua Nan Financial Holding, and privately owned Chinatrust. Such representative offices are limited to gathering information, and Taiwan regulators have made clear that bank branches are still off limits. On Tuesday, Taiwan's finance minister, Lin Chuan, said the restrictions apply to any Hong Kong subsidiaries acquired by Taiwan banks.
Fubon executives hope Taiwan's government will soften its stance as the Chinese market opens, said a person close to the bank. Fubon executives also hope to take advantage of rules under China's Closer Economic Partnership Agreement, this person said.
CEPA, which takes effect Jan. 1 and applies to banks in Hong Kong and Macau, lowers the asset requirement for banks to open a branch in China to $6 billion from $20 billion, removes the need for representative offices and allows foreign banks to conduct limited transactions in China's currency. Fubon executives hope to build up IBA, which has $4 billion in assets, to enter China within five years, said the person close to the bank, adding, "I don't think Fubon would have preceded with this acquisition unless they thought it would lead them into China."
Others Might Follow
Fubon has been at the forefront of important changes in Taiwan's banking industry in the past, and other lenders keen to gain more access to China could again follow its lead, analysts said.
Chinatrust, which owns one of Taiwan's biggest private lenders, has said it is looking for opportunities to expand in China, and there is speculation it is searching for deals in Hong Kong. Other leading private banking groups that have said they are looking to expand in China include SinoPac Holdings and Taishin Financial Holding.
Lin Shiaw-pin, a spokesman for Chinatrust, said his company isn't pursuing Hong Kong deals because Taiwan's restrictions on doing business in China would apply to Hong Kong subsidiaries.
While government regulations might dissuade Taiwan lenders from acquiring Hong Kong banks, many analysts say they expect mergers and acquisitions in the sector to continue.
富邦金控醉翁之意不在酒
