New Business Opportunities in the 21st Century: A Banker's Perspective*
Louis T. Kung (龔天益)**
I.Introduction
It has been over 30 years since foreign banks, including American banks, have
established branches in Taiwan. Since then, foreign banks in Taiwan not only have
progressively participated in the growth of financial markets but also have provided
financial support for the sound growth and development of the ROC economy. The ROC
government has demonstrated the wisdom to allow the prudently paced liberalization
and modernization of the financial markets as they inexorably march towards
internationalization. As such, I believe there will be tremendous business
opportunities that both USA and ROC can work together in the coming 21st century.
I would like to share with you some of my observations firstly on the history of foreign
banks, especially American banks in Taiwan, secondly on US banks performance and
future trend, thirdly the review of current financial environment in Taiwan and lastly
the new business opportunities.
II. History of Foreign Banks in Taiwan
Ever since the Daichi-Kangyo Bank opened its branch in Taiwan in 1959, many foreign
banks have flowed into Taiwan market to cultivate a new financial area. Citibank,
the first American bank, established its branch in 1965, followed by Bank of America
two months later, then Amex in 1967, Chase in 1972, Continental and Irving in 1973
and First Interstate and Chemical in 1974. In the early 80s, Bankers Trust, Bank Boston,
Corestate and other European banks have landed. Now, there are 43 foreign bank
branches and 25 foreign Representative Offices in Taiwan. As of August of 1999, all
loans from foreign banks were NT$387 billions (US$ equiv. 12.2 bn) which equate to
ore than 3％ of total loans outstanding in Taiwan.
In late 60s, the ROC government started to develop its light industry by
establishing Export Processing Zone in Kaohsiung and Taichung. In the early 70s, the
government invested aggressively in infrastructure projects as well as heavy
industries such as steel, shipbuilding and petro-chemicals. All those economic
developments needed foreign capital, banking finance and technology transfer. In this
respect, American banks have brought in needed skills and expertise in areas such
as loan syndication, export promotion loans and F/X management, etc. Besides, given
their wide customer base in the States, American banks have made a good contribution
in mediating many direct investment opportunities from the USA by arranging financing
commitment at the parent company level. Furthermore, the nature of export-oriented
economy on Taiwan has provided good business opportunities for trade finance which
was a good co-operation vehicle between US banks and Taiwanese banks, especially
during that period the US market accounted
for more than 50％ of Taiwan's total
export volume.
In the mid-80s, Citibank started to promote consumer banking business in view of
the growing personal income level and enhanced living standard of Taiwanese. Then,
other foreign banks, such as Standard Charter, HKSB, ABN-AMRO and BOA have also
devoted their resources to the field. Their involvement in retail banking has proved
successful, borne out by the fact that almost every new Taiwanese bank wants to get
involved in this field. Through innovation and creative thinking, there are many
different products that are being offered to individuals. We can foresee that this
sector will still have great potential to grow.
It is generally recognized that foreign banks, especially US banks contributed to
the economic development in Taiwan and also created good business opportunities for
themselves by bringing new ideas, new products and new financing expertise to the
banking industry in Taiwan.
III.
Current US Banks Status and Future Trend
Compared with the banking systems in the other developed countries, the US
banking industry is highly fragmented. In terms of pricing and service, thousands
of smaller banks have tried to compete on equal footing with industry leaders. Yet,
large banks often extended their reach into smaller communities; smaller banks with
limited resources and capability and capital have found it very difficult to compete,
even losing their customers to the large banks. Furthermore, with interstate banking
law being relaxed, US banking is now evolving into larger and more diversified
products lines that will be able to capture market leadership in numerous lines of
business.
In the past several years, the pace of consolidation in the banking sector has
accelerated. BONY, my bank, is in fact a pioneer in banking mergers. The merger
between BONY and Irving Trust in 1989 was the first merger of two money center banks.
Efforts to increase efficiency, servicing level and product depths are factors behind
many of the mergers. According to FDIC, the numbers of commercial banks operating
in the USA has dropped by 40％ since 1975--but this still leaves 8,774 banks as of
1998. Surely this is still far too many. Today, 6 of 10 top banks in USA have gained
their present status through multiple mergers and acquisitions. The M&A process will
benefit them by providing economies of scale, expanded retail franchises and a reason
to divest weak areas and concentrate on strength which can help to create a deeper
mix of business lines. I believe this trend for consolidation will remain intact in
the long run, benefiting market leaders. Consolidation also helps bankers to be more
alert to efficiency and expense control. In the early 90s, the efficiency ratio was
in the range of 65％, but has now been improved to approximately 60％ lately.
Nevertheless, efficiency should not come at the expense of customer satisfaction,
but via technological improvement to provide ever faster and better services.
Electronic banking via ATM, PCs, and telephones has been widely introduced offering
24 hours banking services at convenient locations.
The third quarter results for large-cap banks have showed moderate profit growth
attributable to improved productivity, expense control and modest increase in net
interest income, but offset by low trade revenues and the lack of securities trading
gains. Assets quality remains strong. The loan provision was more than adequate for
net charge-off. Consumer credit quality remains stable. Expenses should remain well
controlled at most banks.
The recent repeal of the Glass-Steagall Act allows commercial banks to engage
in security and insurance business. A likely result is that the repeal of
Glass-Steagall will encourage more consolidation among entities in the banking,
securities, and insurance industries. Such mergers will produce stronger companies
with broader, more diversified franchises. However, such combinations are likely
to present considerable cultural and managerial challenges for any merger partners.
Of course, we hope the bill will help the American financial service system play a
leading role in propelling US economy into the 21st century and will allow American
companies to better compete in the global economy.
Amid the fervent pursuit of e-business opportunities by Microsoft, Amazon and
IBM, enthusiastic players in the banking industry are also hot on their heels in
launching Internet-related products. With such innovation and creativity, we can
expect many proprietary Internet banking services will be provided by American banks.
In this respect, banks are evolving into technology companies, moving information
rather than hard currency. In the long run, it will be the lowest cost providers that
not only survive, but thrive.
IV. Current Financial Environment in Taiwan
Since the 1980s, Taiwan has eagerly focused on financial liberalization and
internationalization in order to achieve the goal of becoming Asia-Pacific Regional
Financial Center. In early 90s, new banks have been allowed to establish, totalling
16 new commercial banks and 8 converting from Business Bank and Trust Company. With
the already existing Taiwanese and foreign banks, commercial banks totaled 94 as of
the end of July, 1999. On average, one banking institution services 3,700 clients
among 22 million people in Taiwan. By comparison, one bank services 5,000 clients
among 126 million people in Japan. Therefore, Taiwan starts to face the severe
pressures of overbanking. The first credit evaluation agency--Taiwan Rating
Corporation, pointed out that local banks are facing severe competition with
declining ROE on a yearly basis. Prior to the entry of the new banks,
ROE average
about 20％; currently it is below 10％, perhaps lower after the recent earthquake.
The Council for Economic Planning and Development survey also indicated that the
efficiency leaders in Taiwan are the Foreign banks, followed by the Private banks.
Government controlled banks are the least efficient. Too many banks, applying too
many resources, competing in the same business line for the same customers represent
neither a recipe for success nor a path to the future.
To address this problem, the Ministry of Finance (MOF) is urging banking
institutions to seriously consider mergers as a way to improve efficiency and
strengthen the quality of assets. Meanwhile, MOF has also encouraged banks to develop
and design new products for the banking community to expand business scope for
supporting economic growth and creating new opportunities. It is expected that the
merger will emerge in the Taiwanese banking community in the future, though
overlapping branches network may prove an impediment.
An advanced banking environment will not be possible without active
involvement by the government itself to implement sound banking regulations, to
strengthen supervisory functions and to establish guidance for future development.
We have seen that Taiwan has shown great achievements in liberalization and
internationalization, but it is not enough and still has a long way to go to meet
the international standard. We believe Taiwanese government will continue to assist
local banking community to upgrade its overall operations and management.
V. New Business Opportunities
Merging process: Bank mergers seem to be an inevitable movement, in order to
expand customer base, rationalize the expenses and raise revenues.
Since 1995,
Taiwan has seen the first wave of mergers among financial institutions, with new banks
taking over cooperative associations. After Asian Financial Crisis, the negative
effect of the overly crowded Taiwan financial institutions and the ensuring fierce
competition have been apparent. Taiwan government is aware of this problem and is
implementing a guideline for bank mergers. They intend to form 2-3 large banks in
order to compete more effectively internationally. In the meantime, some large banks
are indeed actively studying the opportunity to merge with other banks. It is expected
that in the near future, there will be successful mergers in Taiwan.
Expanding new financial products: With diversified personal investment
opportunities and flexible corporate funding alternatives, financial institutions
need to progressively design and create new products to cope with the customers' needs.
The past involvement of American banks in introducing new banking products, I am
sure that they have further contributions to make, particularly in the areas of
project financing and asset securitization.
Developing universal banking: European and American countries are moving toward
universal banking which involve in other financial peripheral businesses,
international asset management, securities, insurance and venture capital. Banks
will want to increase their competitiveness, and client retention capabilities
through the cross-selling opportunities.
Applying electronic technology in financial market: In applying advanced
technology to financial processing, the traditional relationship between buyers and
sellers has gradually being changed, creating another new model of profit-making.
In the future, financial services are inextricably interwind with technology; the
key to success in this highly changed and competitive environment are speed,
adaptability, low cost, and scale. The Internet banking will play a major role in
all aspects of the business.
Taiwan excels in information technology manufacturing and product development.
I am sure, working together, we can find ways to exploit Net based, end-to-end global
solution for our clients.
Strengthening risk management: The variety of financial derivatives has created
a dynamic effect in financial business. In turn, risk management in banking is
becoming far more complicated. In this complex, the competitive and sometimes
volatile environment, to ensure profitability, banks are devoting significant
resources to market and operational risk management. This investment in risk policy,
procedure and technology will play dividends in the future, not only by enhancing
profitability but also by ensuring survivability. Risk management will become a core
competency of the financial institutions of the 21st century.
Enhancing the supervision system: A country will need an efficient financial and
banking system in order to mobilize capital resource for development. With many
government owned banks being privatized, there is a great necessity to strengthen
banking supervisory system and to strengthen transparency for the efficient working
of the market. Therefore, the creation of a well-structured legal framework that
enforces transparency in financial sector is in urgent need. US has gone through the
banking crisis in 80's and early 90's. In the wake of the banking crisis and subsequent
legislative reforms, changes in the supervisory process have attempted to ensure
improved monitoring of bank risk and more timely intervention in, and closure of
troubled banks. I am sure the American experience could be shared with Taiwan in
setting up a more constructive supervisory body for the financial industry.
Providing banking services to Taiwan MNCs; While many Taiwanese SME's have expanded
their operation to foreign countries, they are not being adequately serviced by
financial institutions in the resident countries. Although Taiwanese banks have
established foreign branches over the past ten years, there still are needs that are
not being locally met. A partnership between American and Taiwanese banks could
provide a solution to this issue. I feel the cooperation between US banks and local
Taiwanese banks in terms of credit enhancement, wrap-up services providing, and
innovative financial engineering can be beneficial to massive SMEs in Asia who need
effective banking support badly.
VI. Conclusion
American businessmen, particularly American banks, have played a very important role
in Taiwan' economic growth and development for the past 40 years. American companies
have brought new investments, new ideas, new products and expertise into Taiwan and
both have enjoyed fruitful results. We are all proud of what we have achieved.
With American banks intensive M&A experience over past 10 years, we should organize
a training seminar that will include M&A specialists, lawyers, CPAs and bankers. I
am sure, along the line, US banks could find more business opportunities to work with
local banks. Furthermore, US banks should continue to introduce new banking products
or to expand the existing products suitable to Taiwan market, such as NT options,
DRs, structured finance, and Internet Banking, etc. Combine with the massive customer
base that local banks have and new financial products provided by US banks, there
should be a perfect match to develop the new potential business.
Facing the new
century, there are tremendous challenges lying ahead of us in the global financial
industry. However, with information becoming more valuable, cross border merger
possible, deregulation foreseeable, and technology breaking down distance barriers,
globalization is a must for survival. Taiwanese banks are definitely at the crossroad
now. I would reemphasize that a glance to the past will be helpful as we look forward.
Therefore, let's work together hand in hand marching toward a bright 21st century.
* Speech delivered at the 23rd Joint Conference of ROC-USA & USA-ROC Business
Councils, San Antonio, Texas, U.S.A., on November 19, 1999.
** Vice President & General Manager, The Bank of New York, Taipei Branch.