Global crisis derails Taiwan bank consolidation

TAIPEI (Reuters) - A wave of big financial mergers sparked by the global financial crisis is leaving Taiwan behind as key players wait for markets to calm rather than forcing lenders into shotgun weddings while company valuations and finances are unclear.

The decision to put consolidation on hold lies largely with the government and big influential families, which collectively control 80 percent of Taiwan's banks.

But analysts say that decision could cost Taiwan in the longer run, putting off badly need reform and consolidation that the industry needs to become a regional financial hub. Taiwan's banking sector is Asia's fourth largest.

"Banks in South Korea and elsewhere in Asia went through a dramatic consolidation during the 1997 Asia crisis, but Taiwan banks did not. This time, it won't happen either," said Simon Ozeng, an executive vice president of state-controlled Mega Financial (2886.TW), Taiwan's No.4 financial holding firm.

"Even with the current shock wave, no mergers between larger Taiwan lenders are in sight, though a few weak banks are under mounting pressure to put themselves up for sale," he said.

The global financial crisis has caused a spate of bank collapses, mergers and partial nationalizations in the United States and Europe in recent weeks as bankers and government policymakers try to stem damage from toxic debt, rising bad loans and slowing economic growth.

But the Taiwan government's reluctance to seize the moment and push for consolidation may come from a desire to please everyone, as families which control banks as well as minority shareholders might see forced takeovers as bad deals at their expense, industry watchers said.

"The financial meltdown is offering a great opportunity for the island's financial regulator to enforce mergers, just like governments in other countries have done," said analyst James Wu of BNP Paribas.

But he added that despite deteriorating capital bases at some banks and insurers, the government is not pushing for mergers in the overcrowded banking sector.

The delay is likely to hurt the true consolidation Taiwan needs to transform itself into a regional banking center, as part of that plan involves creating a handful of large banks capable of competing regionally with big Asia players.

"If you cannot consolidate the banking sector, how could you become a financial hub to compete with Hong Kong or Singapore?" said BNP's Wu.

MERGERS DERAILED

The financial chaos has not only discouraged new mergers, but also threatens to delay or derail ongoing ones as volatile stock prices create disagreement over valuations and concerns linger over assets whose prices have plunged.

Taiwan's stock market .TWII has fallen around 30 percent since the beginning of September alone, including a 40 percent drop in the banking and insurance sub-index .TFNI that has pushed it to a seven-year low.

At the same time, Taiwan financial holding companies have declared some $1.2 billion in exposure to bankrupt Lehman Brothers (LEHMQ.PK) alone, and most have seen the value of their sizable stock holdings plummet with the market's fall.

Major players such as Taishin Financial (2887.TW), Taiwan's No.3 player, and Shin Kong Financial (2888.TW) have been among the most vulnerable, prompting depositors to pull out their money as investment losses piled up, analysts said.

A plunge in shares of Taishin -- majority-owned by private equity fund Newbridge Capital NB.UL -- has fueled speculation that its long-planned merger with state-run Chang Hwa Bank (2801.TW) may be off.

Meantime, a plunge in Shin Kong shares to all-time lows has made it harder for the company to find a foreign strategic investor to pump in the US$250 million it needs to strengthen its capital.

HSBC Holdings Plc (HSBA.L), Standard Chartered Plc (STAN.L) and Citigroup Inc (C.N) have all acquired smaller Taiwan banks in the last few years.

However, the turbulent market and potential for further downturns have made it even more difficult for larger banks to acquire smaller rivals, said BNP's Wu.

"The recent sell-off left major players, including top name Cathay Financial (2882.TW), in a weak position to merge with rivals," he said. "Their capital ratios are not high."

While much major merger activity appears to be on ice, one group that has been pushed to merge is smaller banks that have seen an exodus of deposits as consumers move their money to larger, state-owned banks that they see as safer bets.

Some smaller players, including the banking arm of Jih Sun Financial (5820.TWO), King's Town Bank (2809.TW) and unlisted Bank of Panhsin, have come under immense pressure to look for buyers, analysts said.

(Editing by Doug Young & Kim Coghill)