Q+A-How will Taiwan banks change after fin MOU with China?

TAIPEI Mon Nov 16, 2009 7:32am EST

TAIPEI Nov 16 (Reuters) - Taiwan and China signed a financial deal, the Taiwan government said on Monday, allowing the island's financial firms to tap the mainland market and paving the way for banks on both sides to invest in each other.

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Officials in Taiwan, once at the brink of war with Beijing before a thaw in relations, are optimistic yet cautious about opening its financial sector to China due to concerns over national security and being squeezed by the mainland's super-sized banks.

Below are questions and answers about what the memorandum of understanding (MOU) means for the financial sectors on both sides:

WHAT DOES THE MOU MEAN FOR CHINA'S BANKS AND QDIIs, AS WELL AS TAIWANESE BANKS, INSURERS AND BROKERAGES?

The agreement will cover cross-border supervision and allow China's qualified domestic institutional investors (QDIIs) to invest up to 10 percent of their total assets in Taiwan stocks.

The MOU is an entry ticket for banks of Taiwan -- Asia's fourth-biggest banking market -- to expand into the fast-growing Chinese market.

For China, where some banks are the world's largest by market capitalisation with assets more than 100 times bigger those of Taiwanese rivals, the MOU marks an important part of its strategy to expand in the region.

It is also of symbolic significance politically for China to own part of the island's banking sector.

HOW WILL THE MOU CHANGE FOREIGN INVESTORS' VIEWS ON TAIWANESE FINANCIAL SHARES?

Taiwan's financial shares .TFNI have staged a 55 percent rally so far this year on hopes the MOU will boost earnings of banks, whose margins have been squeezed for years in the competitive home market.

The MOU, to be followed by a free trade pact, may trigger a re-rating in financial stocks as it alters the banking industry's prospects in the long term, said Nora Hou of Deutsche Securities.

But a pull-back -- some analysts say 20 percent in coming weeks -- is likely upon the MOU's signing as investors pocket profits in financial shares.

HOW WILL TAIWAN'S BANKS COMPETE WITH CHINESE AND GLOBAL GIANTS SUCH AS HSBC (0005.HK) (HSBA.L), STANCHART (STAN.L) AND CITIGROUP (C.N), WHICH HAVE BUILT BUSINESSES IN CHINA FOR YEARS?

Taiwanese and Chinese banks can open branches in each other's territory after the MOU is signed. However, they cannot buy stakes in each other, or deal in the Chinese currency -- two critical elements for Taiwan's lenders to tap the China market.

Taiwanese banks are targeting SMEs operating on the mainland, looking at credit card and wealth management businesses.

Taiwan's financial firms will become more of a threat to foreign giants after Taipei and Beijing seal a free trade pact, which would let banks on both sides invest in each other.

Taiwan's government has said it aims to sign the free trade pact, or the economic cooperation framework agreement (ECFA), with Beijing early in 2010. HOW SOON WILL TAIWANESE BANKS BE ABLE TO BOOK SUBSTANTIAL EARNINGS FROM THEIR OPERATIONS IN CHINA? It will take three to five years before Taiwan's banks post meaningful earnings in China amid stiff competition with powerful Chinese and foreign rivals, analysts said.

It could take even longer for the island's insurance firms to break even and make profits there. Cathay Financial (2882.TW), parent of Taiwan's top insurer, only managed to receive a meagre 1-2 percent of profit contribution from its tie-up with China Eastern Airlines (600115.SS) (0670.HK) after 10 years in the business, analysts said.

WHAT TO EXPECT NEXT AND WHO ARE THE POTENTIAL CANDIDATES FOR CHINESE BANKS TO ACQUIRE?

Once Taiwan and China sign the ECFA, Taiwanese and Chinese financial firms will be allowed to buy stakes in each other.

Cathay Financial, Fubon (2881.TW), Taishin (2887.TW) -- Taiwan's top three listed financial holding companies by assets -- and top credit card issuer Chinatrust (2891.TW) are seen as potential targets for China banks, analysts said.

China's top lenders, including Bank of China (3988.HK) (601988.SS), Industrial & Commercial Bank of China (1398.HK) and Bank of Communications (3328.HK), would be interested in investing in their Taiwanese counterparts, industry sources said. (Editing by Joseph Chaney and Lee Chyen Yee)

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