Taiwanese banks face a tough task. They are suffering from razor-thin net interest margins, they are struggling to expand fast enough overseas, and they are facing fierce competition. These factors only exacerbate one another, but most bankers say the problem is clear — there are too many banks bidding for too little business.
There is one obvious solution: consolidation of the domestic banking sector. Some loans bankers at privately-owned institutions fear that such a move would create domestic giants, but their main fear is the enforced mergers of state-owned banks. The merger of privately-owned banks would reduce competition without killing it entirely, the perfect compromise for an industry under pressure that still needs to face the realities of the free market.
But although cutting the number of banks and increasing the asset size of smaller players through mergers may sound like the most logical option, bankers should not get their hopes up. It is easier said than done, and even if it were to happen, it still might not help.
Government no help
The government is reluctant to make things happen. It appears to be all in favour of consolidation among state-owned banks, but this is hardly surprising. After all, the end result will still be a state-owned lender. But government officials are reluctant to promote the privatisation of state-owned assets, which largely rules out mergers between private and public banks, say analysts.
There have been a few examples of privately-owned banks taking large stakes in public lenders, but they have not inspired confidence. Taishin Financial acquired 25% of state-backed Chang Hwa Commercial Bank in 2005. But earlier this year, when it mooted the idea of merging its banking unit with Chang Hwa, the finance ministry dismissed the move, arguing that it would “significantly hurt public interest” and adding that it was “satisfied with the current separation of state-owned and private banks”.
There is another big hurdle in the form of the country’s strong labour unions, which have previously hindered acquisition plans in an attempt to prevent job losses. This opposition is not set to change anytime soon, and for mergers to work, they would need to reduce costs, meaning some people would have to lose their jobs.
But consolidation, even if it did happen, would not be the panacea the market needs anyway. It would deal with the problem of competition if mergers happened in good numbers, but there are plenty more issues to tackle.
The domestic market is simply not growing fast enough, for one. Banks can grow their loan books by multiple times with an acquisition, but that will be a one-off. They will then have to get used to a glacial pace of growth once again. The offshore market is the natural place to expand, but there they will face a lot more than competition from local lenders — they will be stepping up to tussle with the global banks.
Consolidation may seem like a nice solution to the problems facing Taiwanese banks, but it is practically a non-starter. They will find it almost impossible to achieve in any significant size, and the end result is sure to be disappointing.