Taiwanese banks have been at the heart of the action in the dollar loan market this year. They have pledged bigger amounts than ever before in a bid to offset dwindling net interest margins and cope with fierce domestic competition.
For example, Taiwanese lenders took big tickets in Alibaba Group’s jumbo $8bn financing in July. Cultural connections and geographic proximity make China the obvious target for business.
But Taiwanese banks are now running out of steam, and are blaming rules imposed by the island’s regulator, the Financial Supervisory Commission.
The regulator has capped the exposure levels of domestic banks to Chinese companies to 100% of banks' net worth — a ceiling that lenders are demanding be raised to at least 150%.
Taiwanese lenders have an average exposure of only 40%-50% to Chinese credits but their arguments for raising the cap have merit nonetheless.
Chinese borrowers are taking on more loans and domestic borrowing is becoming expensive meaning Chinese corporates are expected to tap the offshore dollar loan market in droves.
There were 23 dollar deals by Chinese groups in the first quarter this year, according to Dealogic, jumping to 33 deals in the second, before falling slightly to 27 in the third amid talk of a reduction in US quantitative easing.
This number is set to rise again in the current quarter, and Taiwanese banks want to be first in line to capture a large slice of the pie. But this won’t happen if the FSC sticks with its current rules.
Analysts say discussions between the authority and domestic bankers have so far brought no agreement, diminishing hopes of any reform in the near future. A lack of political will is to blame.
The pro-China ruling party, Kuomintang, is suffering in the opinion polls and lacks a majority. In a bid to appease the more anti-China opposition, it is failing to take action on this issue.
Raising the 100% cap would be the easiest solution to Taiwanese banks’ problems when it comes to their exposure to China. But just because the regulator finds that unpalatable does not mean it should do nothing. After all, it would like the country's banks to be able to compete better on the international stage, particularly in Chinese business, although it would prefer them to do this by becoming more powerful through consolidation.
Even if the threshold stays untouched, there is plenty more the FSC can do to support growth of its domestic banks.
For starters, it could exclude from the 100% limit those loans that have been guaranteed either by a highly-rated lender or by the borrower’s parent. Secondly, it should also leave out short-term borrowings provided by banks to Chinese corporates.
Demand for six to nine month bridge loans is likely to increase, thanks to a strong outlook for mergers and acquisitions-driven financing from Chinese companies. By taking on these higher yielding shorter term deals, Taiwanese lenders have at least some opportunity to boost profitability.
Thankfully, the regulator has already shown some flexibility on this point, allowing a handful of exemptions from the threshold for such loans. But it should be even more willing to do so.
But a political stalemate means risks putting Taiwanese banks in an impasse. Something has to give — and the regulator needs to make the first move.